Ripple’s relationship to the cryptocurrency XRP has always been a little controversial.
That argument might be about to spill over into federal court.
Ripple is batting a high-profile and controversial lawsuit over its relationship to XRP, but what exactly are the charges?
In this piece, we’ll untangle the Ripple lawsuit, examine the reasons behind the legal action, and discuss what it means for the future.
Ripple and XRP: Clearing up the Terms
Before we get deeper into this topic, you need to know that Ripple and XRP are two separate things. The terms are often used interchangeably to refer to the cryptocurrency, but that’s not accurate.
Ripple – is a company that aims to speed up international money transfers with blockchain technology.
XRP – is the cryptocurrency created by the same people behind Ripple.
The distinction is important to understanding the lawsuit going on behind the scenes.
Ripple Lawsuits: the Short Version
In the simplest possible terms, XRP holders are suing Ripple because they lost money when the price dropped.
They believe Ripple mislead them into believing the price would go up. When it didn’t, they turned to legal action.
One plaintiff is Ryan Coffey, who bought 650 XRP on January 6th, 2018 at $2.60. He sold two weeks later at $1.70.
But if it were that simple, wouldn’t there be lawsuits all over the cryptoverse since January 2018 after prices dropped 80% across the board?
What’s so different about Ripple that attracts legal action?
Ripple Is Accused of Creating and Controlling XRP
The grounds for this legal action is Ripple’s alleged control and command over XRP. The accusers say XRP is more like company stock (a security) than a traditional cryptocurrency.
As we all know, cryptocurrencies like bitcoin and ethereum are mined into existence slowly by its users.
XRP is totally different. All 100 billion XRP tokens were created at once by the same organization that founded Ripple.
Ripple now holds more than half of all XRP tokens (stored in escrow and released slowly to the company month-by-month).
As such, the plaintiffs argue, XRP acts like company stock. They claim that Ripple created XRP and used the money it generated to fund its operations.
XRP should, they argue, be classified as a security.
The Lawsuit Wording
To explain further, let’s take a look at the exact wording filed by those attacking Ripple.
In a lawsuit filed in July, it reads:
“The XRP offered and sold by the defendants had all the traditional hallmarks of a security, yet defendants failed to register them as such… XRP purchasers reasonably expected to derive profits from their ownership of XRP, and [Ripple] themselves have frequently highlighted this profit motive.”
In other words, they claim Ripple created XRP, sold the tokens to raise money, and then mislead buyers to believe the price would rise.
Is XRP a Security?
This is the crux of the lawsuit.
A security is an investment vehicle, like stocks or bonds, and they are subject to much more rigorous regulation.
But what does it matter if XRP is a security?
If XRP is considered a security issued by Ripple, then it means that holding XRP would denote ownership in the Ripple company.
If that happened, Ripple could, theoretically, be held responsible for the price drops.
Ripple could also then be in trouble for not registering XRP as a security in the first place.
Ripple CEO, Brad Garlinghouse, has repeatedly explained that XRP is not a security.
In June, he said: “I think it is very clear that XRP is not a security. It exists independently of Ripple the company. If Ripple, the company shut down tomorrow, XRP will continue to exist.”
Doubling down in September, he said: “when you buy XRP, that doesn’t give you any rights to the profits or ownership of Ripple the company.”
Ripple and XRP don’t appear to satisfy the “Howey Test,” the most widely used criteria for classifying a security. However, a court may see it differently.
Ripple in Court: A Brief History
A number of individual lawsuits have been brought against Ripple in 2018, but they have since been rolled into one large class action.
In response, Ripple is now trying to move the case from state courts to federal courts. It’s a high-profile move, but one lawyer familiar with the situation called it “tactical brilliance.”
Ripple's legal team showing some tactical brilliance here.
It's hard to explain the procedural maneuver in one tweet & I'm not going to thread this, but suffice to say it's a *seriously* crafty attempt to go federal. Might not work, but slick regardless.https://t.co/DuR5kWNJwy
— Jake Chervinsky (@jchervinsky) November 9, 2018
The reason being that a class action lawsuit is more suited to the bigger courts with plaintiffs from different locations. However, there’s also a suggestion that federal courts look more favorably on corporate rulings. In other words, it gives Ripple a better chance of winning.
The debate about XRP and Ripple has raged for years, but it may now spill out into the biggest courts in the country. While the court may finally provide some guidance on XRP as a security, the ultimate decision rests with the Securities and Exchange Commision (SEC). And the SEC remains quiet.
Block Explorer will bring you more information as the lawsuit unfolds.
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