An investor in Ripple Labs’ XRP Cryptocurrency filed a lawsuit in California against the platform under California’s Corporate code. The lawsuit was for securities fraud and it is the third one within a span of two weeks. The two prior suits were filed in the same counted and one of them has been removed to federal court in the Northern District of California.
All three lawsuits have named Ripple’s subsidiary XRP II LLC and its CEO Bardley Garlinghouse as defendants. Further, the complaints allege that due to the centralized method for management and distribution of XRP and the way the platform conflates the cryptocurrency with its own product offerings, XRP should be classified as a security and accordingly, the platform violated securities laws.
One of the lawsuits, which is a class action, features a complaint that provides in-depth explanations as to how the platform allegedly influences XRP to increase prices. This is significant, because the complaint may show that the Howey Test for the definition of as security has been met. The test was identified in SEC v. Howey.
The complaint also alleges that the platform’s actions were performed to “drive price appreciation” and to “maximize profits from XRP sales.” It was also determined that XRP’s prices increased over 1,000 percent.
Additionally, XRP is managed in a manner that is different from other cryptocurrencies. For instance, while Ether and bitcoin are mined on a blockchain by individual users to become actualized property, XRP has 100 million units in existence, 61 million of them which are owned by Ripple Labs.
Counsel for Ripple Labs has successfully petitioned the court to dismiss the allegations of fraud, arguing that only the U.S Securities and Exchange Commission can decide whether XRP is a security and the XRP is solely a cryptocurrency. Ripple’s chief cryptographer argued that XRP cannot be as security because Treasury’s Financial Crimes Enforcement Network stated that CRP is a cryptocurrency and approved its sale.
Even with the above circumstances, there is still a question as to whether a previous settlement impacts present case. According to a partner at Loeb and Loeb,
“A contrary finding by a court of the SEC would arguably contradict the FinCen determination, and no one could also surmise the SEC would not be quick [to contradict FinCen]. But that is all speculation.”
If the court or regulators do determine that XRP a cryptocurrency and is subject to federal securities law, the consequences could set precedent in California. XRP would need to stop trading and individual owners of the currency will be granted the right of recession, so Ripple would have to refund initial purchases.