Ripple Cites SEC’s Stance on Bitcoin, Ethereum in Lawsuit Defense

Crypto payments firm Ripple today filed its response to the billion-dollar lawsuit it faces from the U.S. Securities and Exchange Commission. And it’s asking the court to look to the regulator’s position on Bitcoin and Ethereum as part of its plea.

The SEC filed charges against Ripple, the company behind what was once the third-most capitalized cryptocurrency in the market in XRP, late last year. The Commission alleges that the firm illegally raised $1.3 billion through the unregistered sale of XRP. The Commission also charged co-founder Chris Larsen and current CEO Brad Garlinghouse.

Today, in a 93-page response filed in a Manhattan court, Ripple meticulously countered each of the Commission’s allegations, establishing what will be its defense should the lawsuit proceed to trial.

As part of its defense, Ripple asserts that the SEC has failed to establish its claim and that, chiefly, XRP is not a security or an “investment contract” under US federal law.

Notably, Ripple also claims a “lack of due process and fair notice” in its defense. It reasons that the SEC could have and should have brought these allegations forward in 2015, when Ripple settled a claim with FinCEN. The settlement, according to firm, describes XRP as a “convertible virtual currency.”

In this vein, Ripple states that XRP should be considered a virtual currency in the same way that the SEC apparently views Bitcoin and Ethereum, citing statements made by former SEC Director of Corporation Finance William Hinman in June 2018.

Hinman’s now famous “sufficiently decentralized” statements indicated that he, and presumably the SEC as a whole, did not view Bitcoin and Ethereum as securities. This despite the fact that Ethereum launched through what would be today considered an ICO and therefore an illegal offering of securities by the SEC’s standard.

Hinman “told virtual currency purchasers that the agency did not consider the virtual currencies bitcoin or ether to be securities and would ‘put aside the fundraising that accompanied the creation of [Ethereum]’ and look instead at the ‘present state of [Ethereum],’” Ripple said in its defense.

The company also today filed a Freedom of Information Act request seeking clarity as to how Director Hinman and the SEC arrived at its conclusions regarding the way in which blockchain-based assets are able to morph from securities to non-securities as the native network matures.

"The SEC has clearly picked two winners and ignored a growing and robust industry that is much larger than Bitcoin and Ether," a Ripple spokesperson said in a statement. The spokesperson added that, to date, the SEC has "offered no guidance" for how it determined that ETH, specifically, is likely not a security.

Whether XRP falls within the still dubious parameters of “sufficiently decentralized” may ultimately be for a court to decide.

Editor's note: This story was updated after publication to include comments from Ripple and provide additional details regarding the company's FOIA request.