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SEC Replace — Preliminary Ripple Response

01/29/2021

Right here’s the be aware I despatched to Ripple staff as we speak concerning Ripple’s preliminary authorized response to the SEC’s grievance.

Hello Ripple workforce,

For the reason that SEC filed its grievance on the finish of December, its facet of the story has been the one one shared publicly. Our preliminary response was lastly filed as we speak. The “Reply” is a authorized doc (filed publicly) which, because the identify suggests, is our official reply to the allegations within the SEC’s grievance. Though it doesn’t absolutely define our technique (extra to return because it performs out in court docket) it’s our first alternative to begin to set the report straight.

Though the authorized course of is sluggish, we’re working to get this resolved as rapidly as potential to convey readability to the broader market. Shifting rapidly is necessary as a result of, as you understand, for the reason that SEC filed its grievance, XRP misplaced nearly half of its market worth, inflicting retail holders of XRP with no connection to Ripple– the very individuals the SEC purports to guard – to undergo billions of {dollars} in losses. What’s extra, a part of the SEC’s mission is to keep up orderly markets… and but their overreach created havoc out there.

The “Reply” is an extended authorized doc, however I’ll summarize the details under. It appears to be like much like the abstract of our Wells Submission, which a few of you may have in all probability learn. 

XRP Is Not an Funding Contract

The one query on this case is a technical one: whether or not or not Ripple’s restricted distributions of XRP had been an funding contract. To be clear, there aren’t any allegations of fraud, misrepresentation, and so forth. Whereas we’ve seen some Twitter commentators counsel it is a non-fraud/fraud case, a primary 12 months regulation pupil can inform you that there is no such thing as a such factor. It’s deceptive and irresponsible (to not point out foolish) to even counsel in any other case. Turning to what issues…. 

In our “Reply,” we clarify why there is no such thing as a “funding contract” :

  1. XRP is a digital forex and thus, outdoors the SEC’s jurisdiction.
  2. Ripple has by no means entered a contract for an funding with any holders of XRP. 
  3. Ripple by no means held an ICO, by no means provided future tokens to boost cash and has no relationship with the overwhelming majority of XRP holders.
  4. Holding XRP doesn’t imply an individual receives a portion of Ripple’s income or earnings.
  5. Ripple’s XRP gross sales amounted to far lower than 1% of the large XRP market that has grown during the last 8 years. 
  6. The XRP Ledger, on which XRP truly strikes, is totally decentralized. The SEC ignores the financial actuality of an XRP transaction. 
  7. Ripple’s XRP holdings don’t create an funding contract any greater than DeBeers holdings convert diamonds into securities.  

The SEC Is Out of Step Domestically and Globally

Earlier than this case, no securities regulator on this planet has claimed that transactions in XRP should even be registered as securities, and accurately so. The performance and liquidity of XRP are wholly incompatible with securities regulation. Requiring XRP’s registration as a safety would impair its predominant utility.

The truth is, regulators within the US authorities (the Division of Justice and FinCEN) decided in 2015 and 2020 that XRP is a digital forex and have since regulated it as such. Principally, on its manner out, the Trump administration sought to undo the dedication that XRP was a digital forex made throughout the Obama administration.

Globally, the identical is true of regulators – the UK’s Monetary Conduct Authority, and regulators in Singapore and Japan have concluded XRP is a digital forex or a crypto asset, and never a safety. With its grievance, the SEC is asking the Court docket to contradict the findings of the company’s friends within the US and worldwide. 

The SEC Is Choosing Winners and Losers

Though XRP is probably the most environment friendly digital asset for world funds benefiting customers world wide (and is probably the most environmentally sustainable crypto), there is no such thing as a principled distinction between XRP’s present operate and that of BTC or ETH. How does the SEC clarify telling the general public that BTC and ETH will not be securities, then turning round and saying the other is true for XRP?

What’s significantly fascinating right here is that at one level, the SEC claimed that ETH may need been born a safety, however finally advanced right into a non-security, providing no steering or framework for this dedication. We’re simply asking for the principles to be said clearly and for these guidelines to be utilized constantly throughout the board. We despatched a FOIA request to the SEC asking for extra details about how the dedication was made, in hopes of gaining extra readability on how they got here to the preliminary conclusion about ETH.

Moreover, XRP is a superb deal extra environmentally pleasant than BTC and ETH, contemplating it avoids the mining course of. The facility wanted to mine and validate BTC transactions leaves an infinite carbon footprint, in comparison with the modest quantity of power consumed by XRP transactions. That should matter from a coverage perspective. 

The SEC Has Distorted the Information

The grievance filed by the SEC is filled with cherry-picked quotes taken out of context, and attracts conclusions which can be unsupported by each the info and the regulation. By way of our response we begin to make clear the report. Whereas we will’t get into the entire specifics on this format (that can occur because the case progresses), you’ll see we denied most of the SEC’s  allegations. In time you will note why.

I’ll share a quote from considered one of our outdoors counsel together with his analysis of the case – I feel summarizes the scenario fairly nicely:

“The SEC’s case is unprecedented and ill-conceived. The SEC has ignored XRP’s clear standing as a digital forex, contradicting not solely the findings of different U.S. regulatory companies, but additionally worldwide regulatory regimes. Over the past eight years, the XRP market, impartial of Ripple’s actions, had grown to an enormous scale- buying and selling on over 200 exchanges worldwide. The SEC is now stretching the idea of an “funding contract” past its breaking level. We sit up for presenting our case in Court docket.” Andrew Ceresney, Debevoise & Plimpton

I wish to thank Workforce Authorized for all of their exhausting work on this – and, on behalf of Brad, acknowledge the broader Ripple workforce for staying targeted on executing in opposition to our imaginative and prescient whereas we take this case to the courts. 

Finest,

Stu

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