Ripple claims XRP is a virtual currency, not a security, and the SEC has no authority to regulate it as one.

Ripple Labs on Thursday filed its answer to the complaint by the US Securities and Exchange Commission that ripples distributions of XRP constituted investment contracts and were subject to registration under the Securities Act of 1933.

The SEC charged last December that Ripple and two of its executives, Chris Larsen and CEO Brad Garlinghouse, violated US securities laws by selling about $1.3 billion worth of XRP since 2013.

In a 100-page reply, Ripple vehemently stressed that XRP was a virtual currency and not a security. Here are the key points from Ripple’s response:

Virtual currency

• XRP is a virtual currency used in international and domestic transactions as a medium of exchange. It cannot be deemed to be a security. Nor does the SEC have the authority to regulate it as one.
• Were XRP to be registered as a security, it would cease to serve its main objective of providing liquidity and its functionality for real-time and seamless settlement low-cost transactions.
• The SEC’s regulatory peers, namely the US Department of Justice and US Department of the Treasury’s Financial Crimes Enforcement Network, determined in 2015 and again in 2020, that XRP was a lawful virtual currency. The SEC did not dispute or challenge those determinations.
• Internationally, regulators in the UK, Japan, and Singapore have deemed XRP to be a virtual currency.

SEC did not act for eight years

• For eight years after XRP was created, the SEC allowed Ripple to continue to distribute XRP and let millions of market participants transact in the XRP market. During this period the SEC also met with many entities that traded or facilitated activity in the virtual currency, including as recently as 2019. “The SEC did not tell those companies that XRP was a security or that transactions in XRP were subject to federal securities law.”
• The SEC has not been evenhanded in its determinations because it exempted bitcoin and ether from similar regulation.
• The SEC’s complaint, coming eight years after XRP’s creation, has caused immense harm to XRP holders by cutting the value of their holdings.

XRP is not an investment contract

• Ripple did not sell or distribute XRP as an investment contract.
• XRP is a digital asset that is ideal for payment processing and is transacted on the cryptographic XRP Ledger, which works independently from Ripple.
• Ripple is a privately held payments technology company using the blockchain to enhance money transmission globally.
• Though Ripple holds a large percentage of XRP, that fact cannot characterize it as an investment contract.
• XRP’s price is not and has not been determined by Ripple’s activities. Instead, the crypto markets have priced XRP for many years with reference to other virtual currencies such as bitcoin and ether (which the SEC has publicly stated are not investment contracts).
• Referring to SEC v. W.J. Howey Co., 328 U.S. 293 (1946): “Every other case in which courts have ruled that transactions involving a digital asset were investment contracts involved an issuer’s ICO or other promises of future tokens to raise money to develop a digital-asset product, as well as a contractual relationship between the issuer and asset purchasers.”
• Ripple never held an ICO, never offered tokens to raise money, and has no contracts with the vast majority of XRP holders.
• The SEC’s complaint has caused irreparable damage to Ripple, millions of XRP holders, and innumerable non-parties that integrate XRP into products or offerings or otherwise support XRP.

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