Just hours before Security and Exchange Commission (SEC) Chairman Jay Clayton left the building on December 23 at the end of his tenure, the SEC filed a lawsuit against Ripple Labs Inc., alleging that it raised over $1.3 billion through the sale and distribution of the digital assets of XRP without registering. Ripple, founded in San Francisco in 2012, operates the RippleNet and the XRP payment protocol, considered superior to bitcoin with its improved ledger, faster settlement speed, and digital wallet for international transactions across 55 countries. Ripple is one of the titans of the new crypto industry in the U.S., developing real-economy products from revolutionary technology.
Ripple’s blockchain-like exchange network is claimed to be an efficient, inclusive, and low-cost supplement (some say alternative) to traditional payment networks like the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and others. The SEC suit does not allege fraud but seeks unspecified damages and to ban Ripple’s executives from participation in digital asset market trades. The case appears to impugn one of the few positive aspects of Clayton’s 2017 Statement on Cryptocurrencies and Initial Coin Offerings noting that these “disruptive, transformative and efficiency enhancing” technologies could “facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.” More largely the case reaffirms Clayton’s statement in which he claimed supreme SEC authority to regulate every digital asset imaginable, regardless of its design, intention or use.
Following the suit, the price of XRP plummeted by 25 percent, and some trading has been halted. Ripple launched a vigorous response, calling the suit an attack on the emergent cryptocurrency industry at large. The case has interesting parallels to telecommunications in which regulators use obsolete laws to regulate new technologies, undermining U.S. competitiveness in innovation. Clayton’s parting shot was his most audacious swipe against an innovative industry he spent four years trying to dominate with authority claimed from a 1934 statute. With potentially sweeping implications, the case is shaping up to be the crypto trial of the century. Here are the some of the key issues.