Why is the SEC suing XRP?

5 min readDec 23, 2020

The SEC protects investors, promotes fairness in the securities markets, and shares information about companies and investment professionals to help investors make informed decisions and invest with confidence.

At the heart of what SEC does is to protect investors and consumers. So if I were to guess correctly on why this has occurred, the SEC is probably getting a lot of complaints from consumers or XRP is not being cooperative with the local regulators despite early warning signs from the regulators for example here / here.

It is also fundamentally wrong to misguide people into thinking that XRP is of the same asset class as BTC and ETH. Unless you are a tech person and understand how distributed ledger works, you won’t be able to know the difference.

In any case, XRP argues with the following:

The SEC is fundamentally wrong as a matter of law and fact. XRP is a currency and does not have to be registered as an investment contract. In fact, the Justice Department and the Treasury’s FinCEN already determined that XRP is a virtual currency in 2015 and other G20 regulators have done the same. No other country has classified XRP as a security.

But wait, why doesn’t the SEC goes after ETH or BTC? On this point, the SEC has clarified in the following article:

In the ICOs I have seen, overwhelmingly, promoters tout their ability to create an innovative application of blockchain technology … the investors are passive. … typically at the outset, the business model and very viability of the application is still uncertain. The purchaser usually has no choice but to rely on the efforts of the promoter to build the network and make the enterprise a success.

The purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network.

As an aside, you might ask, given that these token sales often look like securities offerings, why are the promoters choosing to package the investment as a coin or token offering? This is an especially good question if the network on which the token or coin will function is not yet operational. I think there can be a number of reasons. For a while, some believed such labelling might, by itself, remove the transaction from the securities laws.

The TLDR here is basically this: please don’t disguise your intention by calling it a token sale. We are not dumb.

And as for why they think BTC is ok:

And so, when I look at Bitcoin today, I do not see a central third party whose efforts are a key determining factor in the enterprise. The network on which Bitcoin functions is operational and appears to have been decentralized for some time, perhaps from inception.

Actually, in my personal point of view, how the heck are you going to sue BTC? Who do you sue? And that in my opinion is the fundamental difference between centralized blockchains and decentralized blockchains. Centralized blockchain sounds strange, but you can actually do it yourself now via AWS.

But of course, it's not like the SEC is hell-bent on destroying innovation. It’s possible for some cryptocurrencies to be “sufficiently decentralized” in the future, to the point where “regulating the tokens or coins that function on them as securities may not be required. In my own words, be nice and work with local authorities instead of trying to play punk.

So how is XRP different from ETH and BTC?

XRP differs from bitcoin and Ethereum in an important way. For those two cryptocurrencies, new coins are created through a “mining” process, which is ongoing. Ripple started XRP by creating 100 billion units all at once. Ripple owns about 6.4 billion XRP, and Garlinghouse and Larsen also own a good chunk of it. Another 48 billion XRP are held in reserve, for periodic sales. This difference may be why the SEC is claiming XRP is a security, not a currency.

https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf

Also, what sets XRP apart from its peers is the XRP Ledger. Unlike the blockchain protocols that support many other popular cryptocurrencies, the XRP Ledger does not reward network participants for validating transactions on the ledger with coins (a process known as mining). In the absence of mining, XRP cannot be generated by third parties.

Read again: XRP cannot be generated by third parties 😔

I still don’t understand, what is XRP?

In layman terms: a company one day decides to create cool little tokens, market it as something worth buying to create liquidity for themselves during the 2018 crypto bull run, claims that it is using distributed ledgers, with plenty of blockchain-related terminologies sprinkled everywhere but if you understand technology, you will realize that you can replicate the entire setup in your bedroom by spinning up a couple of AWS servers and MYSQL database (or a private blockchain if you wish, heck no one will know what you use, since its all centralized and controlled lol)

What will happen to XRP in the future?

If SEC wins, all exchanges in the US might be forced to delist it. Exchanges that continue listing XRP run the risk of being asked to register as securities exchanges by the SEC should the commission win its lawsuit. Otherwise, these exchanges might face penalties for allowing retail consumers to trade unregistered security.