The Business Litigation Blog

Ripple is Being Sued for Marketing Itself as a Security

What is Ripple exactly? Ripple is often times lumped in with Bitcoin and other cryptocurrencies, but it is not the same and offers more than a traditional cryptocurrency can at face value. Ripple is a currency exchange, real-time gross settlement system, and remittance network. Ripple can handle 1500 transactions per second (tps) and can scale to handle 50,000 tps to compete with Visa. Ripple was never created to be primarily used by consumers. Ripple uses shared public databases that use a consensus process between validating servers to ensure integrity. This is where the confusion comes in and the comparison to all other block-chain based technologies begin. The servers used could be owned by anyone, including individuals or banks. The Ripple protocol (represented by XRP and colloquially known as ripple) can enable the near instant and direct transfer of money between two parties. Any and all currencies can be exchanged through the Ripple protocol. Users could even exchange something like airline miles. Ripple advertises that users can avoid the wait times of traditional banking and cryptocurrency exchanges when using their services.

A class action lawsuit has been filed against Ripple Labs and CEO, Brad Garlinghouse. Ripple Labs is accused of selling unregistered securities, with XRP being the allegedly-unregistered security. Ripple is advertised as something that will increase in value over time, like a security. Ripple is also advertised as something from which profit can be derived. Ripple is not advertised solely as an alternative currency. Ripple has been accused of participating in a “never-ending ICO” as well. An ICO is an initial coin offering. This is when the cryptocurrency is first offered to the public. It is similar to an Initial Public Offering (IPO) with a stock and is occasionally referred to as an Initial Public Coin Offering (IPCO).  This allegation states that Ripple hasn’t been mining for any sort of currency, but generation the currency out of nowhere without actual value. It also alleges that Ripple has been accepting money for coins that are also potentially valueless.

The Securities and Exchange Chairman commented on XRP, calling it a “noncompliant security.” Ripple maintains that they are not a security, but will let the SEC decide what they are. If Ripple is deemed to be a security, certain information will have to be released to investors. Investors have claimed Ripple is breaking both federal as well as state security laws and misleading the public regarding their service. People are furious about their losses in the crypto markets.

Cryptocurrency litigation is a newly developing field. On a frontier there will always be naysayers and scam artists. It is important for individuals purchasing cryptocurrency, for companies offering cryptocurrency and attorneys representing those involved in the industry to understand the unique challenges and risks that cryptocurrency poses, not just its potential advantages.

 

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