Banks that use Ripple’s software for cross-border payments, including PNC Financial Services Group, Bank of America and Banco Santander, received unwanted news last week when the Securities and Exchange Commission struck Ripple with a complaint of 71 pages.
The complaint sheds some light on how the company raises money by selling digital tokens called XRP.
According to the SEC, Ripple executives have sold 14.6 billion units of XRP for more than $ 1.38 billion to fund the company’s operations and acquire personal wealth without registering its XRP offers and sales to the SEC. These actions have violated several securities laws, according to the complaint. The SEC is trying to permanently ban Ripple and its leaders from selling unregistered XRPs, cause defendants to “eliminate all ill-gotten gains” from transactions and impose unspecified civil money penalties.
What does this mean for banks working with the San Francisco company?
In the early days of Ripple and XRP, some banks were bullish on both.
The capital markets division of Royal Bank of Canada, a former Ripple partner, enthusiastically backed Ripple and XRP in a 2018 report called “Imagine 2025”.
ATB Financial in Edmonton began piloting Ripple’s xCurrent software for cross-border payments in 2016. Tim Wan, who at the time was ATB’s director of innovation for $ 43 billion in assets, saw Ripple as a software company that was trying to replace the current methods of the international money movement (basically, Swift) with a more efficient and cheaper way – “which is respectable,” he said. “And I think there’s a need.”
But Wan, who is now a member of the technology advisory board of technology company Box, still had reservations about XRP.
“At the time it was still a huge unknown,” Wan said. “I’d say she’s still a huge stranger.”
The SEC case will affect Ripple’s relationships with banks, he said.
“Banks are based on the notion of trust,” Wan said. “Banks are incredibly sensitive to the perception of a lack of trust for any technology platform used for money movement.”
An ATB spokesman said the bank has not committed to Ripple since 2016.
BBVA carried out a similar pilot with Ripple in 2017, but did not overtake it either. The bank declined to comment on the SEC case.
Santander, a large Spanish bank, uses Ripple’s xCurrent software for cross-border payments since 2018. The bank does not use XRP. PNC began operating with xCurrent in late 2019. Bank of America has partnered with Ripple since 2016. All three feedback requests were rejected. Ripple did not respond to any requests for comment.
Jay Dubow, a partner at Troutman Pepper, who previously worked for the SEC, noted that Ripple’s software is separate from the company’s XRP sales.
“As long as the company has the capacity to manage the support the software, there should be no problem, ”Dubow said.
US banks have moved away from XRP
Ripple has long urged banks to use XRP as a mechanism to move money around the world.
Using Ripple’s xRapid software, banks could use their own local currency (e.g., US dollars) to buy XRP. They could then buy the foreign currency with this XRP and use it to make the payment, instead of using a network of correspondent banks.
Euro Exim Bank, based in St. Lucia and London, said last year that it planned to start using XRP for cross-border payments. The company did not respond to any requests for comment.
No American bank still uses XRP this way, at least not publicly.
In an interview last year, Manish Kohli, head of payments and receivables at Citi, predicted that very few banks will use cryptocurrencies as XRP in international payments because of the market risk that cryptocurrencies entail.
The SEC’s complaint appears to confirm the banks ’cautious stance on XRP.
According to the complaint, Ripple has earned his money not by selling software, but by selling XRP.
In 2019, for example, Ripple earned $ 23 million from sales of its xCurrent and xVia software, but raised $ 200 million by selling XRP to investors.
“In other words, the vast majority of Ripple’s revenue came from its XRP sales and Ripple relied on those sales to fund its operations,” the complaint states.
In addition, according to the lawsuit, one of Ripple’s original founders, Chris Larsen, earned $ 450 million with XRP sales that were given away when he and his co-founders created the initial $ 100 million. From April 2017 to December 2019, Ripple CEO Brad Garlinghouse has sold more than $ 321 million of the XRP they gave him when he joined the company and raised $ 150 million.
Ripple’s potential defense
The allegations made by the SEC have been revolving around Ripple for years, in multiple class actions filed by investors and in off-record conversations between people who follow the business.
Ripple and Brad Garlinghouse are likely to argue in court, as they have done in public comments in the past, that XRP is a decentralized digital currency.
In a block published last week, Garlinghouse argued that XRP is not a security because XRP is not an “investment agreement.” XRP holders do not share in Ripple’s profits or receive dividends, nor do they have voting rights or other corporate rights. “Buyers receive nothing from the purchase of XRP except the asset. In fact, the vast majority of XRP holders have no relationship or relationship with Ripple.”
Brian Klein, a partner at Baker Marquart, which has represented cryptocurrency companies in similar cases in the past but is not involved in the case, said the SEC’s allegations are unproven.
“Clearly there is another complete face of this story that has not yet been told and that deserves to be heard,” he said. “The case could pose an existential threat to Ripple because of the sanctions the SEC is seeking. Unfortunately, just filing this case could also permanently damage XRP. It is very unfortunate that mere SEC allegations could be the blow of death of a cryptocurrency “.
The SEC has resolved two similar cases, Klein said.
In June, the U.S. District Court for the Southern District of New York approved an agreement with messaging software company Telegram, the unregistered supply of digital tokens called Grams violated securities laws, according to the SEC . Telegram agreed to stop selling Grams, return more than $ 1.2 billion to investors and pay a $ 18.5 million civil penalty. In May, the company closed its cryptocurrency operation.
In October, a federal district court agreed with the SEC that Kik Interactive’s unregistered supply of digital tokens called Kins in 2017 violated federal securities laws. Kik was banned from offering unregistered tokens and will pay a $ 5 million fine.
“For the past few years, the SEC has been taking a lot of action against cryptocurrency companies,” Klein said. “I think the SEC has unfortunately chosen to use the app as a tool to regulate rather than to issue clear guidelines.”
I would prefer regulators like the SEC to work with Congress to create laws to govern cryptocurrency.
“Cases can take years to work on themselves through the courts,” Klein said. “And even when the SEC wins, as it did with Telegram and Kik, district court rulings are not binding on other circuits or even other courts on the same circuit. What you have is a process of reading tea leaves instead of clear orientation “.