Ripple’s XRP could end up like EOS: SEC took $24m, class action took $27.5m

Block.one has reached a settlement with the Crypto Assets Opportunity Fund, which had filed a class action lawsuit related to the company’s initial coin offering that took place between June 2017 and June 2018.

Block.one is the firm behind EOSIO, an open-sourced blockchain software, and the cryptocurrency EOS: ranking #26 on coinmarketcap.com with a $4.8 billion market capitalization.

The $27.5 million settlement will close the lawsuit and will allow the firm to focus on its most recently launched venture: the EOS-powered exchange Bullish.

“Block.one believes this lawsuit was without merit and filled with numerous inaccuracies. However, accepting this settlement allows us to focus more time and energy on running our business and delivering new products”, said Block.one in an official statement.

The Securities and Exchange Commission had also pressed charged against Block.one for its unregistered ICO that raised $4 billion dollars in the course of a year. The firm settled charges with the SEC by paying a $24 million civil penalty in 2019.

At the time, the order found that Block.one would use the capital raised in the ICO for general expenses, and also to develop software and promote blockchains based on that software.

Block.one’s offer and sale of 900 million tokens began shortly before the SEC released the DAO Report of Investigation and continued for nearly a year after the report’s publication, eventually raising several billion dollars worth of digital assets globally, including a portion from US investors.

Block.one did not register its ICO as a securities offering pursuant to the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements, according to the SEC.

What does this have to do with the SEC v. Ripple?

The SEC charged Ripple Labs and co-founders Brad Garlinghouse and Chris Larsen with conducting a $1.3 billion unregistered securities offering for selling XRP since 2013.

“Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies,” said Stephanie Avakian, Director of the SEC’s Enforcement Division, at the time of the complaint (December 2020), which states the XRP sales were used to finance the company’s business.

In its turn, Ripple claimed it never held an ICO. “Ripple denies it engaged in any offering of securities; denies the inaccurate characterization of the legal advice Ripple received regarding XRP; and denies that it engaged in a single ‘offering’ of XRP.”

“The functionality and liquidity of XRP are wholly incompatible with securities regulation. To require XRP’s registration as a security is to impair its main utility”, the blockchain firm stated, adding that it never attempted to raise money on the promise of profits, which is the premise that gives the SEC authority to supervise the cryptocurrency ecosystem.

At the time of the filed complaint, Adam Cochran, Partner at Cinneamhain Ventures, tweeted how the XRP case is worse than the cases against EOS and KIN.

“They’ve got multiple document points of proof of centralization, acknowledgment of securities issues, and selling practices in writing. They’ve personally named the executives as liable, which the SEC does when they go for a kill shot. This is much more common in fraud action than general securities action.

“EOS got lucky with a settlement, ambiguity, and the fact it was no longer found to be a security. Same with Kin […] And this case will likely drag out for 2+ years before there is clarity. Crypto projects have a chance to settle and resolve if the SEC thinks they were only previously centralized. Centralized payment databases have no path to safety”, Mr. Cochran explained.

The SEC has argues that, unlike Bitcoin and Ethereum, XRP is a security due to its centralized nature – there is a company in control – and Ripple has consistently marketed the token as an investment opportunity.

While true, Ripple holders were never promised a stake in the firm not to benefit directly from the business. It is said the firm and its co-founders’ statements on future value promises are not legally enforceable.

The SEC v. Ripple will most likely reach a settlement deal. The firm’s Achilles heel is that the lawsuit is hampering its business growth and plans to go public. The regulator will use that to its advantage and stall as much as possible. You can read the highlights of the case here.

The abovementioned class action lawsuit against block.one for the unregistered securities offering of EOS followed the firm’s settlement with the SEC. Ripple could face a similar outcome for the class-action lawsuit brought forth against the blockchain firm.