• The SEC will sue Ripple over the unregistered sale of XRP as a security.
• CEO Brad Garlinghouse said Ripple intends to fight the lawsuit.

Ripple CEO Brad Garlinghouse told Fortune Magazine a few hours ago that he expects the U.S. Securities and Exchange Commission (SEC) to file a lawsuit against Ripple soon. The charge will be the unregistered sale of XRP, which the SEC is seeking to classify as a security.

Thus, after years of back and forth and various lawsuits against Ripple to classify XRP as a security, there will likely be an answer in 2021. As Garlinghouse told Fortune Magazine, the SEC will sue Ripple Labs, as well as co-founder Chris Larsen and himself. The lawsuit is expected to be filed in federal district court.

Ripple will fight the lawsuit

As Garlinghouse stated, Ripple will defend itself against the impending lawsuit. In a prepared statement on the official website, Ripple Labs’ CEO said that the Department of Justice and FinCEN have already determined in 2015 that XRP is a virtual currency. Other G20 regulators have done the same, with no other country classifying XRP as a security.

Moreover, Garlinghouse called the decision “an attack against the entire crypto industry and American innovation.” He also questioned the motivation of the SEC and its outgoing chairman Jay Clayton to bring the action just days before a change in the U.S. administration. Along those lines, Ripple’s CEO wrote in a several tweets:

Today, the SEC voted to attack crypto. Chairman Jay Clayton – in his final act – is picking winners and trying to limit US innovation in the crypto industry to BTC and ETH.

The SEC – out of step with other G20 countries & the rest of the US govt – should not be able to cherry-pick what innovation looks like (especially when their decision directly benefits China). Make no mistake, we are ready to fight and win – this battle is just beginning.

Howey test not applicable to XRP

Ripple issued the cryptocurrency XRP in 2012. Unlike Bitcoin and Ethereum, which received confirmation of not being a security during Jay Clayton’s tenure, the SEC has been reluctant to classify other cryptocurrencies.

In the case of Ripple, however, the large amounts of XRP held by Ripple Labs should be a thorn in its side. The company holds about 6.4 billion XRP. It also regularly sells the cryptocurrency to the public from an escrow account that holds another 48 billion XRP. In this respect, the controversial “Howey Test” and its applicability to cryptocurrencies is likely to be the focus of the lawsuit.

However, Ripple’s legal notion states that the Howey test cannot be applied to XRP at all, as there is no “contract” equivalent to an “investment contract.”

We are not aware of a single case in the more than 70 years since Howey that has found an investment contract absent a contract or privity between the buyer and seller. Here, the vast majority of XRP trading has taken place on the secondary market, wholly independent of Ripple, with no contract or privity with Ripple.

In addition to Garlinghouse, who asserted that the lawsuit will have no impact on the “flourishing XRP ecosystem,” Yoshitaka Kitao also spoke out. The chairman at Japanese financial giant SBI and board member at Ripple stated that the joint expansion in Asia will continue:

Japan’s FSA has already made it clear that XRP is not a security. I’m optimistic that Ripple will prevail in the final ruling in the US. SBI Holdings remains a steadfast partner to Ripple, and looks forward to expanding together in Asia.

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