The US Securities and Exchange Commission (SEC) has brought a case against the digital asset company Ripple and its two top executives, CEO Brad Garlinghouse and Chairman Chris Larsen, alleging that Ripple conducted unregistered securities sales amounting to $1.3 billion while the two executives together sold $600 million worth of the cryptocurrency XRP unregistered and in violation of securities laws.

Ripple’s cryptocurrency, XRP, is the third-largest cryptocurrency by market cap globally, after Bitcoin and Ethereum, and Ripple has sold $1.3 billion worth of them to investors. The company has now run into headwinds with the SEC, which is asserting that XRP is a security and not a cryptocurrency given its centralized control by the company behind it.

If XRP is taken to be a security, then Ripple will be in violation of US securities laws by offering them to investors without the due registration required for securities and not providing investors with the proper information required to assess its risk.

Notably, another branch of the US government, the Justice Department, treated XRP as a currency when it settled a case with the company in 2015. Now, the US Securities and Exchange Commission is asserting otherwise, treating XRP as a security and not a currency.

With that, Ripple and its two indicted executives will have to battle in the courts on if XRP is legally a security or a cryptocurrency. Notably, unlike other mainstream currencies like Bitcoin and Ethereum, XRP is not created by a “mining” process but all comes from its issuer, Ripple, which created 100 billion units all at once at its start. 

Given that Ripple controls the supply of XRP, the digital asset appears to be centralized and gives the SEC an opening to defend its assertion that it should be considered a security and not a digital currency. 

The SEC has filed a case against Ripple in a federal district court in Manhattan and will fight it out with the company in the court of law. If declared to be a security and found in violation of securities laws, Ripple itself and its two executives who have been charged by the SEC may be facing big monetary penalties.

Photo: Ripple CEO Brad Garlinghouse by Fortune Live Media is licensed under CC BY-NC-ND 2.0

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