SEC v. Ripple

What Was the SEC v. Ripple Lawsuit?

SEC v. Ripple was a court case in the United States Southern District Court of New York. In 2020, the U.S. Securities and Exchange Commission (SEC) alleged that Ripple, the blockchain developer and creator of the XRP cryptocurrency token, raised more than $1.3 billion in 2013 by selling XRP in an unregistered security offering to investors. Ripple, relying on the previous comments of an SEC director to support its case, argued that XRP should not be treated as a security.

Why Is the SEC v. Ripple Case Important?

The SEC v. Ripple case sent shockwaves through the cryptocurrency sector when blockchain projects had been operating with little regulatory oversight. There had been fears of future regulatory action, but this was the most high-profile example of a securities regulator targeting an initial coin offering (ICO).

Both parties were partially victorious—the SEC emerged with authority over sales to institutions, and exchanges can allow cryptocurrency trades as the decision supports the view that cryptocurrency transactions on exchanges are not securities transactions.

Institutional investors generally have vast amounts of capital that cryptocurrency and blockchain developers can tap into during a sale. However, the judgment regarding sales to these investors now requires that any entity attempting to raise funds through institutional sales register with the SEC. This can be a time-consuming and costly process, which is why many were attempting to avoid it through unregistered sales.

This case sets a precedent for how cryptocurrency and blockchain developers can legally raise funding for their projects and how they can compensate themselves for their work.

Understanding the SEC’s Ripple Lawsuit

The SEC charged Ripple—and two of its executives, Brad Garlinghouse and Christian Larsen—with selling unregulated securities valued at more than $1.3 billion to the public over the years via their company-offered XRP.

The SEC said Ripple never filed a registration document, which is a requirement for companies when they are seeking to raise capital from the public. The regulator complained in the lawsuit that Ripple had "created an information vacuum" and only shared information that it felt necessary.

On July 13, 2023, the court found that XRP (and thus all cryptocurrencies) was not a security when sold to the public on an exchange, but it is when sold to institutional investors.

In October 2023, the SEC dropped all charges against Garlinghouse and Larsen but continued seeking remedies for the purported sale of unregistered securities. In May 2024, the SEC filed its final response regarding the remedies it seeks from Ripple, stating that Ripple's gains were ill-gotten and that its arguments do not contradict the evidence against it.

What Are Ripple and XRP?

Ripple is a technology and blockchain solutions company founded in 2012 as OpenCoin but quickly changed its name (to NewCoin, then Ripple Labs, then Ripple). Its founders were also the developers who created the XRP Ledger and XRP token. They "gifted" XRP to the company, which releases it occasionally to influence price stability.

However, the company continues to claim it has no ownership of the blockchain and cryptocurrency other than contributing to it by running several trusted nodes and owning XRP.

The XRP Ledger and XRP are open-source projects maintained by the XRP Ledger Foundation.

The Bottom Line

The result of the SEC v. Ripple lawsuit could still change the regulatory outlook for the entire crypto industry because there is a chance for it to appeal the decision. It is clear that the SEC is looking out for individual investors by bringing cases against organizations that offer crypto as investment contracts—what isn't yet clear is whether the judgment will stick and how future complaints against cryptocurrency companies will pan out.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.