Ripple is on the naughty list this year, and they’ve already received their first lump of coal. The Securities and Exchange Commission has announced a lawsuit against the company and two of its executives, alleging that their sales of the XRP token constitute an unregistered security sale.
XRP is a cryptocurrency, but very different from Bitcoin. Instead of mining, Ripple’s founders simply poofed a hundred billion tokens into existence, and started selling them on the market. The company still controls some sixty percent of the total supply, and can sell up to a billion tokens every month.
Part of Ripple’s defense is entrenched in a curious bit of wordplay. In a letter addressed to employees, CEO Brad Garlinghouse reminded them “that XRP is a currency, and not a security,” as if these were two distinct categories. The point was further buttressed in the company’s legal response: “Other major branches of the U.S. government, including the Justice Department and the Treasury Department’s FinCen, have already determined that XRP is a currency. Transactions in XRP thus fall outside the scope of the federal securities laws.”
If this defense sounds familiar, it’s because you’ve probably already heard it once this month. This is the same legal theory presented in Miracle On 34th Street, when the defense counsel empties his client’s mailbags on the Court’s desk. “The Post Office department — A branch of the Federal Government — recognizes this man, Kris Kringle, to be the one and only Santa Claus,” defense attorney Fred Gailey announces in the climactic scene, and the argument is so compelling that the judge dismisses the case on the spot.
This isn’t the only point on which the defense rests on legal obfuscation. Elsewhere in his letter, Garlinghouse states that “XRP holders do not share in the profits of Ripple or receive dividends, nor do they have voting rights or other corporate rights.” This is an argument he has made before — XRP cannot possibly be a security, because it does not come with the rights of a shareholder.
Now, Garlinghouse is presumably aware (and if he isn’t, his lawyers should have told him by now) that there’s no legal definition of a “currency” that precludes it from being a security. He should also know that securities do not need dividends or voting — only an expectation of profit. And he definitely shouldn’t need the SEC to explain the Howey Test — according to the SEC’s filing, Ripple’s own lawyers already did so in 2012.
Ripple has been trying to distance themselves from XRP from some time. Somewhere in the depths of my inbox, I still have an email from one of their press agents, warning journalists to stop referring to the token as “Ripple.” Apparently, referring to the cryptocurrency by its original name “is incorrect and an improper use of Ripple’s wordmark and intellectual property.”
The #XRPArmy are doing their part to help, flooding Twitter with the equivalent of children’s letters to Santa. Starting yesterday, XRP-linked Twitter accounts began posting the same message:
Admittedly, it’s less dramatic than emptying sacks of letters on a judge’s desk, but perhaps the defense could print them out for a similar effect.
I don’t expect this defense to be particularly firm. But ’tis The Season, and miracles have happened in the courtroom before. Block.One somehow escaped with a fine of $24 million, after a $4.1 billion dollar tokensale, and Kik Interactive paid a $5 million dollar fine after raising twenty times that amount. Given the amount of money Ripple has raised — and the fact that they have no path to survival if they lose — it’s entirely possible that they might bargain Santa down to a few slaps on the wrist.