Why the SEC May Charge Ripple With Fraud

Blockchain Regulation Dec 22, 2020

So the moment that many in this space have been waiting for has finally come.

The SEC will be charging Ripple (the company) with...something. We don't quite know what at the time of publication, all we do know is that there is impending action coming down the pipeline very soon.

According to Fortune Magazine, the New York Times and several other prominent publications, Brad Garlinghouse (Ripple CEO) has confirmed that the SEC contacted the company earlier this week to inform them that they would be the subject of litigious action by the agency.

Brief Summary of the Report

Apparently Garlinghouse announced earlier today (12/21/2020), that the SEC would be filing a lawsuit against them "over the alleged sale of unlicensed securities."

According to Fortune reporting:

"The lawsuit will also name Ripple CEO Brad Garlinghouse and cofounder Chris Larsen as defendants, according to Garlinghouse, who told Fortune the agency will file the case in the near future."

The article by Fortune goes on to state that they were unable to corroborate the story with the SEC but given how negative this news is for Ripple, its safe to say that there's no incentive for Garlinghouse to lie about impending punitive action against the Foundation by the SEC.

According to Fortune, Garlinghouse is on record as stating, "It's not just Grinch-worthy, it's shocking" and "It's an attack on the entire crypto industry and American innovation."

To date, Garlinghouse and the Ripple Foundation have made over $1 billion since 2017 as a result of their programmatic sell offs.

Timing of the SEC action is Interesting

As the Fortune article notes, the entire crypto space at large have deliberated over Ripple's supposed status as a security for a number of years. In fact, this very idea is at the heart of a number of lawsuits that have been filed against the Ripple Foundation over the past few years.

One such example (filed in 2018) can be found below:

Coffey v. Ripple Labs Complaint | Securities (Finance) | Financial Markets
Lawsuit alleging that XRP is a security.

There are a few other examples, but we won't take the time to list them all in this article (a brief Google search will provide that information for readers).

SEC May Not Be Charging Ripple With Securities Fraud

The obvious first conclusion to come to when hearing that Ripple will be charged by the SEC is to assume that they're going to have the currency's status as a security questioned.

But if we take a step back and seriously examine the facts surrounding this situation, it doesn't seem likely that this would be the case.

Here are a few reasons why:

  1. There have been multiple lawsuits, letters written to the SEC, etc., about Ripple being a security. It seems highly unlikely that the SEC would have spontaneously decided to chase after Ripple for being an unregistered security over 7 years after the project's initial launch. Especially when considering the prominence of Ripple as a cryptocurrency, the SEC's heavy involvement in the space already as well as the frequency with which this topic is debated in the community (hard to even discuss Ripple without the question of it being a security or not coming up at some point)
  2. There's a theory going around in the blockchain space at the time of writing that argues that the SEC always knew that Ripple was a security and that they merely waited to charge them with securities fraud because Jay Clayton wanted to leave them with one last "f*** you" before departing as the SEC commissioner. While this theory is interesting, it simply doens't hold up to scrutiny. To begin with, Jay Clayton is not responsible for enforcement actions against digital currencies. There is a division in the SEC that handles those matters and its called the 'Cyber Division'. The formation of this subset of the SEC was announced back in 2017 on their website through official press release: https://www.sec.gov/news/press-release/2017-176 ; thus, it is unlikely that the timing of this action had anything to do with Jay Clayton's departure. Also, to be clear - federal agencies in the United States tend to be most active in the Fall, specifically between Thanksgiving and Christmas (that's their 'bonus round' time where they end up getting everyone they were investigating all year for the crimes / violations they allegedly committed)
  3. Another theory is that this action was prompted by the impending change in the United States' presidential administration. Current the Trump administration is in the White House. However, in late January / early Feburary, president-elect Joe Biden will be inaugrated, thus signaling the beginning of the Biden administration. Since this transition is less than two months away, there have been theories that this action by the SEC is correlated somehow. This theory is also compelling, but it fails to hold weight when considering the fact that Ripple was created in 2013 during the Obama administration's term in office. Thus, if a transition in presidential administrations were really the trigger for SEC action against Ripple, then the SEC would have acted in December 2016 in the weeks leading up to the White House's transition to the Trump administration. But that did not happen.

Exploring the Possibility That the SEC Will Charge Ripple With Outright Fraud

Before there are any strong reactions here, it is worth acknowledging that despite the SEC's title as the "Securities and Exchange Commission", their realm of enforcement spans much further than litigating instances of unregistered securities.

That fact alone means that we can't rule out the very real possibility that the SEC is planning to pursue action against Ripple for something entirely different than securities fraud.

What Specific Fraud Could the SEC Accuse Ripple of Committing?

Ripple's marketing tactics may be what ultimately put them in the crosshairs of the SEC.

Specifically, revelations such as the ones made in this piece here have proven detrimental to the image and reputation of the company (Ripple Foundation):

Ripple (XRP) dump by MoneyGram? – Payment provider sells XRP worth $9 million
Ripple CEO Brad Garlinghouse has constantly dealt with the criticism of XRP, the third largest cryptocurrency measured by market capitalization. That is mainly because the company holds a high percentage of XRPs. MoneyGram recently announced its quarterly figures and stated that it had received a to…

Questionable Market Practices Between Ripple and Moneygram

The article above covers the curious relationship between Ripple and Moneygram.

Specifically, it notes:

"On October 29th, MoneyGram released its latest quarterly figures for Q3 2020, indicating that the company had received a total of $9.3 million from Ripple. Through transactional spending, the company remains a net benefit, i.e., a net profit, of $8.9 million from Ripple."

Okay, no problem thus far. But let's continue.

"However, instead of speaking of profit, the positions are listed as a 'market development fee.'"

Wait, what? Why would Moneygram state that the XRP that it received from Ripple was a "market development fee"?

In light of the fact that Moneygram reported nearly all of the Ripple that it received from the company to be pure profit, it would appear that at least some of the "institutional sales" that Ripple has been reporting are not actually real sales at all.

In other words, the revelation above means that Ripple has been misrepresenting their delivery of XRP to "financial institutions" and clients as part of the revenue that it has accrued from the sale of XRP when, in reality, these XRP may simply be given to these entities in exchange for announcing integrations / benefits / etc., with Ripple.

source: https://ripple.com/insights/q1-2019-xrp-markets-report/

The Plot Thickens for Ripple

It doesn't stop there though - the story gets worse.

The article goes on to state:

"However, anyone who now thinks that the payment service provider would keep XRP is wrong. In an exclusive interview with TheBlock, a MoneyGram executive revealed that the XRPs will be sold directly as soon as the company receives the cryptocurrency."

This strongly implies that there was never a genuine relationship between Ripple and Moneygram, which would be counter to the impression most in the cryptospace had of Moneygram being an independent financial entity genuinely interested in exploring potential opportunities to enhance their financial services with Ripple's technology.

Below are examples of some of the announcements that were made when it was first announced that Ripple was entering into an engagement with 'Moneygram':

source: https://www.ledgerinsights.com/ripple-moneygram-blockchain-payments/

Some reading this article may look at the screenshot above and think to themselves, "Meh, Ripple can't really control how 3rd party outlets perceive Ripple's relationship with various entities", which is a fair statement to make.

However, Ripple can control the information that they publish on their own website.

Let's take a look at the following press release that was published on ripple.com, January 11th, 2018:

source = https://ripple.com/ripple_press/ripple-and-moneygram-partner-to-modernize-payments/
archive = https://archive.vn/2qPZZ

The press release published above on Ripple's website is damning to say the least.

We know from Moneygram's CEO that they never had any intention on using Ripple for anything meaningful and that - in reality - they were essentially paid for "marketing", which strongly implies that Ripple was merely paying Moneygram to make it appear as though there's a potential for genuine adoption and growth when, in reality, this was never going to happen.

Brad Garlinghouse Deserves a Considerable Amount of Blame in This Whole Ordeal

Perhaps the worst part about the screenshots above (excerpted from ripple.com's website) are the direct statements from Brad Garlinghouse perpetuating this false narrative.

To reiterate, Garlinghouse stated in that press release:

"We are excited about this pilot and a long-term strategic partnership with MoneyGram. By using a digital asset like XRP that settles in three seconds or less, they can now move money as quickly as information."

But that's not what MoneyGram was doing with the XRP they received. As noted above, MoneyGram made it clear that not only were they selling all of the XRP they received from Ripple ASAP but that they planned on continuing to do so for the foreseeable future (for however long their arrangement is supposed to last).

Playing Devil's Advocate

Perhaps one could argue:

'Hey, maybe Ripple truly did think that MoneyGram was going to attempt to integrate XRP with the financial services they already provide. But then, to their dismay, the later found out that MoneyGram had reneged on their commitment, instead choosing to sell off all of the XRP they reeceived from Ripple - unbeknownst t4o the Foundation at the time'

This is a reasonable position for one to take after digesting all of the information presented in this write-up, up to this point.

Unfortunately, there are a few more critical details that render the hypothesis above implausible at best.

Ripple's Price Skyrocketed in Response to Ripple's Misrepresentations

This is the part where Ripple's tacit misrepresentations of their relationship with various financial entities (Moneygram being just one example), starts appearing perverse.

While the press release regarding the supposed 'partnership' with Moneygram was published on January 11th, 2018, there were plenty of other hyperbolic / tacitly untrue statements made by Brad Garlinghouse in the days / weeks leading up to that point that helped fuel the frenzied purchases of XRP.

Below is one such example - a tweet from the Ripple Twitter (verified), affirming Brad Garlinghouse's exaggerated claims in a quote tweet stating, "3 of the top 5 global money transfer companies plan to use XRP in payment flows in 2018. Even more in the pipeline" (currently, in 2020, none are and none ever have):

source and archive

The tweet that the Ripple Twitter account had 'quoted' was this one by Brad Garlinghouse (in response to NYT reporter, Nathaniel Popper):

source and archive (fun fact, this tweet was already archived by someone over two years ago - so it appears we weren't the only ones that felt this claim was dubious!)

The tweet by Brad Garlinghouse was prompted by this Twitter thread by Nathaniel Popper, which includes a link to an article he published examining the misconceptions fueling Ripple's meteoric price increase:

The article notes how:

  • Ripple's valuation had appreciated by over 30,000 in the past year
  • Garlinghouse briefly became the 5th richest man on planet earth as a result of Ripple's valuation
  • "Ripple has said it has signed up more than 100 banks to use the company's technology, including American Express and Banco Santander. But banks do not need to use Ripple tokens for Ripple's software to transfer dollars, euros and yen. That point appears to be lost on many small time investors who are buying Ripple tokens."

That last bullet point alludes to the shifty game of semantics that Ripple was playing by naming an adjacent product of theirs, 'Ripple' (which is what their cryptocurrency is called, too).

This enabled the company to forge agreements with other financial institutions to use their network (called Ripple), but not the currency while still reaping the same benefits in the market (in terms of the currency's price increasing), as a result of headlines announcing that there had been another agreement inked by the Ripple Foundation with a financial institution to use Ripple.

While it can't be proven that Ripple orchestrated this on purpose, they certain did benefit from the semantic ambiguity of such announcements since they led to the false impression that these agreements with financial institutions were premised around the use of 'XRP' (the currency) rather than Ripple (the network; which has nothing to do with XRP and doesn't use / integrate it in any capacity).

The Overall Impact on XRP's Price

The gains that Ripple experienced as a result of the false hype generated by Brad Garlinghouse were significant (to say the least).

Below is a look at the total price appreciation for Ripple between December 7th to January 5th (under a month):

As we can see above, Ripple's price appreciated by over 1200%+ in under a month.

To put that in perspective, the gains that Ripple made in that month alone actually outpace the gains Bitcoin made in 2017 from May all the way to its peak in December at $20k (and Bitcoin went nuts that year):


There are a few additional things that are worth covering here, but we're going to leave this where its at for the time being - at least until the SEC formally publishes their press release detailing the nature of the charges being brought against Ripple (+ Chris Larsen & Brad Garlinghouse).

If this hypothesis ends up being correct, then we'll see if we can't take a deeper look at the initial court filing by the SEC and assess what served as the "flash point" moment for them (i.e., event that prompted them to spring into action),and what exactly it was that Ripple did to trigger SEC action this long after the project's inception (nearly 8 years).



Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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