March 17, 2021
by Daniel M. Payne

On March 14, 2021, a group of XRP holders filed a motion to intervene in SEC v. Ripple Labs, Case No. 20-cv-10832 (S.D.N.Y.), arguing that the SEC is not adequately protecting their interests in the action.  Their claim is premised on the multi-billion dollar losses suffered by XRP holders in the wake of the SEC filing the lawsuit.  Their motion comes after the SEC resisted a Writ of Mandamus filed by the same XRP holders in Rhode Island asking the SEC to limit its Complaint only to the initial purchasers of XRP from Ripple.

This is a new front in the SEC's years-long campaign of preventing the issuance of unregistered digital assets.  The SEC's early strategy was filing enforcement actions against initial coin offering (so-called ICO) issuers who allegedly committed fraud and adding claims for unregistered securities offerings to the settlements or complaints.  See , e.g.PlexCorpsCentraTech; etc.  The SEC then brought enforcement actions against companies for offering unregistered securities without alleging fraud, demonstrating its willingness to enforce registration requirements, which are a bedrock of U.S. securities regulation.  See, e.g.Blockchain of Things Inc.  The SEC has also intervened to stop issuers from offering digital assets in the first place when the SEC believes the digital assets are securities.  See, e.g.Telegram.  Freezing token offerings before they close protects both the issuer and purchasers from the costs of unwinding an unregistered securities offering, even though companies (and presumably some purchasers) would disagree that they were issuing securities.

Although Kik holders helped to raised money for Kik's defense of the SEC's action, the SEC has yet to directly contend with the holders of a digital asset opposing an enforcement action against the issuer of that asset.  

The holders' motion raises some interesting points that the SEC will have to address.  First, a number of current XRP holders argue that they "have never heard of Ripple," and therefore could not be relying on it to increase the value of their XRP.  Second, the holders argue that XRP’s value is not necessarily a function of Ripple’s efforts.  They note that Ripple itself is unaware of many current XRP use cases, and that XRP's value could increase based on their efforts, not Ripple's.  The holders advance other important arguments, too, like the amount of time the SEC has allowed XRP to trade and the decentralization of XRP, that the SEC did not have to face in many of their earlier cases.

The SEC will now have to contend with these arguments being made not by a defendant accused of wrongdoing, but by the very investors that the SEC purports to protect.

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.