The US Securities and Exchange Commission is gearing up to take enforcement action against Ripple and its digital asset XRP.
Ripple has long faced allegations that XRP - the foundationaly cryptocurrency used to grease the wheels of it blokchcain-based remittance network - is in fact a security owned and controlled by the firm.
With cryptocurrencies riding a wave of interest from institutional investors, XRP witnessed a 152% market cap increase this year, with the figure growing from $9.4bn in December 2019 to $23.7bn this week.
Ripple is currently in a legal battle with investors who say it is selling unregistered securities and making misleading statements about XRP.
If XRP is labelled a security, it would be subject to strict rules that would impact Ripple, which still owns more than half of all the cryptocurrency.
Ripple has pre-empted the SEC enforcement action with a string of rebuttals on its website and twitter, amid hints that it is prepared to move its business to a more amenable country such as the UK or Japan, where the FSA has already ruled on XRP's status as a cryptocurrency.
The firm contends the SEC’s theory, that XRP is an investment contract, "is wrong on the facts, the law and the equities.
"To prove its case amounts to an unprecedented and ill-conceived expansion of the Howey test and the SEC’s enforcement authority against digital assets."
Ripple points out that since 2017, around 90% of its XRP holdings have been held in an inaccessible escrow, which cannot be unilaterally terminated. The escrow is intended to standardize the supply of XRP that could come from Ripple, even during times when the price andvolumes of XRP have increased.
Ripple chief Brad garlinghouse contends that departing SEC chairman Jay Clayton is "taking notes from the Grinch this holiday season". Whatever the outcome, the spat is likely to put downward pressure on XRP as investors cash out their holdings in favour of less contentious assets.
Update: The Securities and Exchange Commission announced Wednesday that it has filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they "raised over $1.3 billion through an unregistered, ongoing digital asset securities offering".
According to the SEC's complaint, Ripple; Christian Larsen, the company's co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company's current CEO, raised capital to finance the company's business.
The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.
"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," says Stephanie Avakian, director of the SEC's Enforcement Division. "We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system."
The SEC's complaint, filed in federal district court in Manhattan, charges defendants with violating the registration provisions of the Securities Act of 1933, and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties.