Crypto firm Ripple has filed its response to U.S. Security and Exchange Commission charges claiming that Ripple and two execs conducted a $1.3 billion illegal security offering. Ripple made the filing public on Friday. And its general counsel was tweeting about it. 

San Francisco-based Ripple, which launched its XRP token in 2012, looks to be taking the ineffective Kik route in effectively arguing, “Hey, people use our token like real money; therefore XRP doesn’t satisfy the Howey test for being a security. And also, we are decentralized, so…”

Canadian messenger app Kik initially said it would fight the SEC tooth and nail after the regulator claimed its kin token was a security. But after a lot of bluff and bluster, Kik ended up settling for $5 million in October.

Stephen Palley, a lawyer in the cryptocurrency space, calls Ripple’s response to the SEC “delusional.”

Ripple’s 93-page letter does sound like the long-winded rant of someone with a loose grip on reality. But keep in mind, you need a certain level of hubris to pull something like Ripple off. According to the SEC, Ripple’s Brad Garlinghouse and Chris Larson personally pocketed $600 million off the sale of XRP.

And it’s not like they didn’t know they might run into problems down the road. Lawyers warned Ripple early on that there was some risk XRP would be considered an investment contract, the SEC said.

‘Ill-conceived legal theory’

Ripple calls the SEC complaint “unprecedented and ill-conceived legal theory.” It goes on to state that XRP functions as a “medium of exchange,” therefore, the SEC has no authority to regulate it as a security.

Similar to Kik, Ripple will likely have a tough time convincing anyone its token works like money. What can you buy with it? XRP is mainly bought by traders in the hopes “number go up.”

Sometimes it goes up, and sometimes it goes down. In 2017, XRP hit an all-time high of $2.7. It currently trades at $0.27, down from $0.68 in November after several regulated exchanges, including Coinbase, suspended trading of XRP after the SEC filed charges in December.

Ripple also argues that in the eight years that XRP has existed, no securities regulator anywhere has claimed XRP is a security. So what?

That is not an effective defense, said Edmund Schuster, a professor of corporate law at the London School of Economics. He wrote on Twitter: “Regulators operate under resource constraints, so they tend to start paying attention once people lose enough money. In new areas, they take time to pick strong cases and then sequence [enforcement] action strategically.”

What about Ethereum?

Ripple also points to the case of Ethereum, which held an initial coin offering for its ether (ETH) token in 2015. ETH is the second most popular cryptocurrency next to Bitcoin. For a long time, XRP held third place, but recently it slipped to number five.

In its current form, ETH has not been deemed a security. In 2018, SEC official Bill Hinman famously stated that although ETH started out as a security, it is now “sufficiently decentralized,” like Bitcoin so that it no longer is one. (Hinman stepped down from the SEC last year.)

Ripple, on the other hand, started off completely centralized. When it initially created its 100 billion fixed supply of XRP, 80 billion went straight to Ripple and the other 20 billion to Ripple execs. To this day, Ripple still holds a vast quantity of XRP.

But Ripple apparently feels that any rule that applies to Ethereum should also apply to Ripple—and that XRP could also be deemed “sufficiently decentralized.” 

Along with the court filing, the company has submitted a Freedom of Information Act request with the SEC asking how the regulator determined ETH evolved from a-security to not-a-security. The FOIA is a law that requires the disclosure of previously unreleased information controlled by the U.S. government upon request.

“We’re simply asking for the rules to be 1. stated clearly 2. applied consistently,” Ripple general counsel Stuart Alderoty said in a Twitter thread.

Assuming they’re sure that the SEC won’t go after Ethereum, this isn’t that unusual, Schuster said. “Lawyers often say ‘but then X is also A’ when they know X≠A to bring the other side to distinguish and thereby narrow down the attack surface. Unlikely to be of value here IMO, but [I] may be wrong.”

You’ll hurt all our users

Ripple also argues in its letter that calling XRP a security will harm everyone who uses the token. (Probably most especially, Garlinghouse and Larson.)

“To require XRP’s registration as a security is to impair its main utility. That utility depends on XRP’s near-instantaneous and seamless settlement in low-cost transactions. Treating XRP as a security, by contrast, would subject thousands of exchanges, market-makers, and other actors in the gigantic virtual currency market to lengthy, complex and costly regulatory requirements never intended to govern virtual currencies.”

Lawyers for Ripple also claim that XRP is a “store of value,” not a share of Ripple’s profits. The “store of value” narrative stems from Bitcoin. In reality, you can’t call anything a store of value if it loses 60% of its value in two months.

At one point in its letter, Ripple asserts that holding massive amounts of XRP does not, in and of itself, qualify the token as a security.

“Many entities own large amounts of commodities and participate heavily in the commodities markets—Exxon holds large quantities of oil, De Beers owns large quantities of diamonds, Bitmain and other Chinese miners own a large percentage of outstanding bitcoin. Such large commodity owners inevitably have interests aligned with some purchasers of the underlying asset. But there is no credible argument that substantial holdings convert those commodities or currencies into securities, nor has any case so held.”

It’s important to point out that Exxon did not create oil out of thin air, nor did De Beers create diamonds out of thin air. XRP, on the other hand, is a number in a database, and Ripple made up 100 billion of them.

The rest of Ripple’s response consists of going through every one of the 400 paragraphs of the SEC’s complaint and offering a denial or some sort of rebuttal to every claim.

I don’t see how Ripple is going to get anywhere fighting the SEC. The case for XRP being a security is a strong one. And as the saying goes, if it walks like a duck, quacks like a duck, looks like a duck, it likely is one.

The best Ripple can do at this point is buy time. But ultimately, it will probably wind up settling with the SEC to avoid going to trial, and for a lot more than Kik’s $5 million.   

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