Will the SEC’s Lawsuit Lead to Ripple Failing to Reach Its Potential?

When I last talked about Ripple (CCC:XRP) in November, the world’s fifth-largest cryptocurrency had yet to be slapped with a  lawsuit by the SEC. 

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On Dec. 22, 2020, the SEC filed a lawsuit against Ripple Labs, its co-founder and Executive Chairman Christian Larsen, and its CEO, Bradley Garlinghouse. 

The regulatory agency alleges that the company conducted a $1.3 billion unregistered securities offering. 

“We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system,” the SEC wrote in its December press release.

In a previous article, I wrote that it made sense to consider investing in Ripple shares if it decided to go public in 2021. This lawsuit filed by the SEC has me wondering if my endorsement of Ripple Labs was a little premature. 

What’s the Downside of an SEC Lawsuit?

InvestorPlace’columnist Josh Enomoto recently discussed the SEC’s lawsuit against Ripple.

As you’ve undoubtedly heard, the Securities and Exchange Commission (SEC) is suing Ripple Labs, alleging that it misled investors by selling over $1 billion of tokens without first registering with the regulatory agency. Even though format-wise, cryptocurrencies are not securities, Ripple skirted the spirit of securities law by passing off XRP as if they were,” Josh wrote on Jan. 5. 

“In other words, to the SEC, if it quacks like a duck and walks like a duck, it must be a duck.”

It’s important to note that Enomoto is long XRP. But the fact that he’s trotting out some of the negatives of Ripple’s grand experiment — the most important of which is that it marketed itself deceptively as a decentralized, independent asset — suggests that he’s willing to consider the downside to owning Ripple’s cryptocurrency. 

He concludes that conservative investors should “tread extremely carefully” with Ripple  That’s sage advice, in my opinion. 

Generally, it’s not a good look for companies to have the SEC breathing down their necks and into the depths of their businesses. It hardly ever works out in their favor. I guess we’ll see soon enough. 

Buying Ripple as a Cryptocurrency

Like Josh Enomoto, InvestorPlace contributor Chris Markoch is attracted to XRP and Ripple because of XRP’s ability to act as a payment service provider, rather than as a cryptocurrency. I spoke about that very concept in my November column, discussing how Ripple’s played an important role in Moneygram International’s (NASDAQ:MGI) digital transformation. 

However, as Markoch points out, XRP lacks many of the features investors look for in a cryptocurrency, such as the ability to be mined, etc. 

“As a cryptocurrency play, XRP doesn’t do much to excite me. After all, the fundamental premise behind cryptocurrency is to create a store of value that is independent from gold. XRP is not set up to deliver that kind of growth,” Markoch wrote in his column published on Jan. 11.

“Ripple Labs is not a public company. If it were, I’d find it to be a very intriguing investment. As it stands now, investors seem [to] be buying the coin because of the platform it facilitates. But with the coin serving as a neutral asset, that’s not a compelling investment for me.”

The problem, as American Banker contributor Penny Crosman highlighted at the end of December, is that Ripple and its insiders have made most of their money selling XRP and not its xCurrent software. According to Crosman, it generated $23 million from xCurrent sales in 2019 compared to $200 million from XRP.  Consequently, Ripple is less about software and more about cryptocurrency speculation. 

The Bottom Line

With Janet Yellen becoming Treasury Secretary, Gary Gensler poised to head up the SEC, and former Ripple adviser Michael Barr picked by President Biden to head the Office of the Controller of the Currency (OCC), the future of cryptocurrencies will get sorted out soon enough. 

As a fintech innovation, Ripple still holds up. As a cryptocurrency, I think the debate will continue to rage. 

If you’re looking to convert some of your U.S. greenbacks to crypto, at this point, I think Bitcoin (CCC:BTC) and Ethereum (CCC:ETH-USD) make far more sense. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.