Ripple Inc. said it will defend itself against a lawsuit by the Securities and Exchange Commission alleging that the company violated investor protection laws when it sold a bitcoin-like digital asset called XRP.
The lawsuit, which has not yet been filed, is said to be one of the most high-profile SEC actions against a cryptocurrency pioneer, just as the chair of the regulator is leaving at the end of the Trump administration. The SEC has filed and largely won civil lawsuits in recent years, alleging that startups trampled securities laws when they raised money by selling cryptocurrencies.
However, none of those companies were as big as Ripple and XRP. Ripple had a valuation of $ 10 billion in the most recent round of funding in 2019, and XRP is the third largest cryptocurrency by market value.
A SEC representative was not immediately available for comment.
Ripple said on Monday that it had been informed by the committee that regulators plan to sue the company, Chief Executive Brad Garlinghouse and co-founder Chris Larsen, in federal civil court soon. The company and the officers say they intend to fight the claims.
“They are right,” said Mr. Garlinghouse.
The lawsuit revolves around whether XRP, a digital asset the company launched in 2012, is actually a safeguard that should have been registered with the SEC. Registration involves providing information to the SEC and the public about a company’s business model, risks and financial condition. The SEC reviews the disclosures and provides feedback to improve them for investors.
It is not known what the SEC is pursuing with its lawsuit, although in similar cases it has faced financial penalties and a requirement for digital asset sponsors to provide ongoing information to investors, much like the periodic information public companies provide.
XRP is similar to bitcoin and other cryptocurrencies, but also differs in significant ways that sparked the SEC’s investigation. Bitcoin was an open software project launched by a pseudonymous creator calling itself Satoshi Nakamoto.
XRP, initially called Ripple, was created, initially sold and supported by Ripple, the company.
Ripple has significantly changed its relationship with XRP, transferring control of its development to an open-source network of independent developers. But the company still owns about 6.4 billion XRP directly and has an additional 48 billion in bail that it periodically sells to the public.
It has distributed 45 billion XRP since its inception. That is different from the ways in which bitcoin is created and distributed.
The SEC has said that neither bitcoin nor ether, another well-known cryptocurrency, are securities. But the agency has been cautious about granting other digital assets to bypass federal oversight.
Mr. Garlinghouse, who has criticized what he believes is a lack of regulatory clarity for many digital assets, wondered why the committee, and in particular the bureau’s chairman, Jay Clayton, now chose to create a take a stand on XRP.
“That makes no sense,” he said. “It’s pretty ridiculous.”
Mr. Clayton has said he will be leaving the SEC by the end of the year. He usually has a skeptical view of cryptocurrencies and says many of them seem to fall within the legal definition of a security.
Write to Paul Vigna at [email protected] and Dave Michaels at [email protected]
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