Another Lawsuit Claims Ripple Is a Security

Ripple Labs Inc. has been hit with a third lawsuit for securities violation in the state of California, court documents show, adding to the growing debate over XRP’s status.

New Lawsuit Filed Against Ripple

The lawsuit was filed June 27 by private XRP investor David Oconer alleging that Ripple and its CEO Brad Garlinghouse have illegally profited from the token’s price increase. California’s Superior Court sitting in San Mateo County has named Garlinghouse, Ripple Labs and XRP II LLC, the company’s money service unit, as defendants.

According to the lawsuit, Ripple has conflated XRP with its proprietary technology, thereby rendering the token a security. By selling it on the open market, Ripple is violating federal securities laws.

Although XRP is not classified as a security, its centralized distribution model has essentially allowed Ripple to promote an ongoing ICO period. Using this model, Ripple Labs has been selling itself hundreds of millions of dollars of its own currency. For example, in Q4 2017, the company sold itself nearly $100 million worth of XRP. The sale of XRP is by far Ripple’s biggest source of revenue.

The lawsuit also claims that Ripple is pumping the value of its token by promoting the fact that some 55 billion units of XRP are being held in an escrow account. In a December tweet, Garlinghouse said the escrow account is “good for supply predictability,” which is another way of assuring investors that there is plenty of tokens held by the parent company.

According to the lawsuit: “Ripple’s public commitment to limit the supply of XRP had its intended effect. In the weeks that followed, the price of XRP rapidly increased, from approximately $0.22 per token on December 7, 2017 to $3.38 per token on January 7, 2018.”

The Debate Continues

Ripple’s status as a security continues to be a contentious debate within the cryptocurrency community. Back in April, the former head of the Commodity Futures Trading Commission (CFTC) called XRP a likely candidate to be labelled a “non-compliant security.” Gary Gensler singled out Ripple and Ethereum, but said XRP is more likely to fall under the purview of federal securities regulators.

Since then, Ethereum has been vindicated by the Securities and Exchange Commission (SEC), whose proponents argue that it is too centralized to fall under their jurisdiction. At this time, the same cannot be said for Ripple.

Garlinghouse has vehemently denied allegations that Ripple is a security, and has given some pretty compelling reasons why that is the case. At a recent fintech conference in New York, Garlinghouse cited the following three reasons why XRP should be free of the securities label:

  1. “If Ripple as a company shut down tomorrow, the XRP ledger would continue to operate.”
  2. “If you buy XRP, you’re not buying shares of Ripple.” Similarly, “Saudi Arabia owns a lot of oil, but they do not have control of oil.”
  3. “XRP is solving a problem. There’s no security in a utility.”

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Author:
Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi

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