XRP (XRP-USD), the world’s third biggest cryptocurrency, lost almost a third of its value on Wednesday as investors responded to official charges from the US Securities and Exchange Commission (SEC) alleging the token is an unlicensed security.
The SEC on Tuesday filed charges against US company Ripple, whose founders created XRP. Two Ripple executives also faces charges.
The SEC claimed Ripple and its executives sold unlicensed securities, violating investors’ rights in the process. The watchdog said the group had illegally raised $1.3bn (£968m) since 2013 by selling XRP tokens without authorisation from the SEC.
“We allege that Ripple, [Chris] Larsen, and [Brad] Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system,” Stephanie Avakian, director of the SEC's enforcement division, said in a statement.
The price of XRP sunk almost 30% against the dollar on Wednesday morning. The slump wiped around $5bn off the token’s market value.
The SEC’s complaint has been filed in Manhattan federal court and is seeking “injunctive relief, disgorgement with prejudgment interest, and civil penalties.”
Ripple and its chief executive Brad Garlinghouse preemptively dismissed the charges on Tuesday. Garlinghouse said the charges were “fundamentally wrong as a matter of law and fact,” and vowed to fight them in court.
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XRP was created in 2012 as a cryptocurrency that could be used for cross border payments. Its creators founded Ripple to help seed an ecosystem using the token. Ripple owns the majority of XRP tokens in existence and periodically sells chunks of its holding. Garlinghouse and Larsen, who helped found XRP and Ripple, have also sold hundreds of million of dollars-worth of XRP over the years, the SEC said.
Ripple’s close links to the XRP token have led the SEC to conclude that XRP is an unregistered security, akin to a share in Ripple itself. Ripple has long argued that XRP is actually a currency, not a security, and functions independently of Ripple.
“The question of whether XRP is a security has been dangling over the heads of early investors for a very long time now, and the fact that we will finally get some clarity on this matter can only be a good thing,” said Mati Greenspan, the founder of Quantum Economics, which specialises in cryptocurrencies.
“Unless of course, it is deemed as a security, in which case it will be very difficult for anyone to use it for its intended purpose of settling transactions.”
The action against Ripple is the latest enforcement by the SEC against cryptocurrency companies for illegal fundraising activities. Ripple and XRP are by far the biggest targets the watchdog has gone after. Ripple was valued at $10bn in a fundraising last year and XRP is the world’s third biggest cryptocurrency, with a market value of over $20bn prior to this week’s action.
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