UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff,

v. 20-cv-10832 (AT)

RIPPLE LABS, INC., BRADLEY GARLINGHOUSE, and

Defendants.

ANSWER OF DEFENDANT RIPPLE LABS, INC. TO PLAINTIFF’S COMPLAINT

Defendant Ripple Labs, Inc. (“Ripple”), by and through its undersigned counsel, hereby

answers and asserts affirmative defenses to Plaintiff’s Complaint (the “Complaint”) and reserves

its rights to request dismissal of the Complaint on any and all grounds. Unless expressly admitted,

all allegations set forth in the Complaint are denied.1

PRELIMINARY STATEMENT

1. The Complaint filed by the SEC advances an unprecedented and ill-conceived

legal theory — with neither statutory mandate nor congressional authorization — that Ripple’s

distributions of the virtual currency XRP constitute “investment contract[s]” and thus

“securit[ies]” subject to registration under Section 5 of the Securities Act of 1933. 15 U.S.C.

§ 77b(a)(1). That theory ignores, among many other things, that XRP performs a number of

functions that are distinct from the functions of “securities” as the law has understood that term

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Ripple denies all titles, headings, footnotes, subheadings, and any other material not contained in numbered
paragraphs unless otherwise noted. Ripple also does not admit to the propriety of the various pseudonyms set forth
in the Complaint. When a document (or statements, conclusions, or other material references therefrom) is
referenced in this Answer or the Complaint, it speaks for itself and Ripple denies any allegations or characterizations
based on the document. Ripple reserves all rights with regard to the existence, authenticity, accuracy, and
admissibility of such documents.

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for decades. For example, XRP functions as a medium of exchange — a virtual currency used

today in international and domestic transactions — moving value between jurisdictions and

facilitating transactions. It is not a security and the SEC has no authority to regulate it as one.

2. Before this case, no securities regulator in the world has claimed that transactions

in XRP must also be registered as securities, and for good reason. 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. That utility depends on XRP’s near instantaneous and

seamless settlement, in low-cost transactions. Treating XRP as a security, by contrast, would

subject thousands of exchanges, market-makers, and other actors in the gigantic virtual currency

market to lengthy, complex and costly regulatory requirements never intended to govern virtual

currencies.

3. In 2015 and again in 2020, the U.S. Department of Justice and U.S. Department

of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) determined that XRP is

lawfully used and traded in the marketplace as a virtual currency. Those determinations are

consistent with the economic reality that XRP functions as a store of value, a medium of

exchange, and a unit of account — not a share in Ripple’s profits. While the Department of

Justice and FinCEN reached those determinations in 2015, the SEC said not a word. Foreign

securities regulators in the United Kingdom, Japan, and Singapore have likewise concluded that

XRP is a virtual currency not subject to securities regulation. As the U.K. Treasury recently

explained, “widely known cryptoassets such as Bitcoin, Ether and XRP” are not securities, but

“[e]xchange tokens” that “are primarily used as a means of exchange.”2

2
HM Treasury, UK regulatory approach to cryptoassets and stablecoins: Consultation and call for evidence (Jan.
2021), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/
950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf.

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4. The SEC filed this Complaint 8 years after XRP was created, 5 years after the

DOJ and FinCEN had characterized XRP as a virtual currency, and after more than 2 ½ years of

investigation during which they allowed Defendants to continue to distribute XRP, to allow the

XRP open market to grow, and to allow millions of market participants to rely on the free and

efficient functioning of that market. The SEC’s filing, based on an overreaching legal theory,

amounts to picking virtual currency winners and losers as the SEC has exempted bitcoin and

ether from similar regulation. It asks the Court to contradict the findings of the agency’s peers in

the United States and internationally and subject what has been a global virtual currency to

conflicting regulatory regimes on a nation-by-nation basis. It also threatens to damage U.S.

competitiveness and innovation, at a time when the United States has national security concerns

about China’s efforts to control bitcoin and ether mining pools and seize control of the global

payments market. And the Complaint’s mere filing has caused immense harm to XRP holders,

cutting the value of their holdings substantially and causing numerous exchanges, market

makers, and other market participants to cease activities in XRP. In bringing a case that alleges

an unregistered offering of just over $1.3 billion “from at least 2013,” the SEC has already

caused more than an estimated $15 billion in damage to those it purports to protect.

5. Ripple. Founded in 2012, Ripple is a San Francisco-based, privately-held

payments technology company that uses blockchain innovation3 (including XRP) to allow

money to be sent around the world instantly, reliably, and more cheaply than traditional avenues

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“Blockchain” technology offers an innovative alternative to traditional ledgers for recording economic
transactions. Whereas traditional ledgers are maintained by one entity or individual, a blockchain is a
decentralized peer-to-peer database spread across a network of computers that publicly and permanently
records all transactions in theoretically unchangeable way, utilizing cryptographic techniques to securely
record transactions. Blockchains use a mechanism to validate transactions, which, among other things,
aims to achieve agreement among all participants on the contents of the ledger, including the ownership
of each unit of the distributed ledger’s native digital asset.

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of money transmission. Ripple is a global company, with nearly 500 employees in 10 offices in

the U.S. and around the world, that has worked steadily towards its vision of realizing an

“Internet of Value” — a world in which blockchain enables value to move as seamlessly as

information.

6. XRP and the XRP Ledger. XRP is a fast, efficient and scalable digital asset,

making it ideal for payment processing. XRP is transacted on the cryptographic XRP Ledger

(“XRPL”). XRP was originally designed to be a “better Bitcoin”: more secure, because control

over the XRPL is more distributed. The XRPL has, over eight years, processed hundreds of

millions of payments without dispute. It works independently from Ripple. No one party owns

or controls the network of peer-to-peer servers that powers XRPL. Nor does Ripple — or

anyone else — control a majority of the third-party validators that adjudicate XRPL transactions.

7. XRP is also significantly more environmentally friendly than bitcoin and ether

because it avoids an energy-intensive “mining” process. Bitcoin mining has been estimated to

produce approximately 48.5 billion pounds of CO2 emissions per year, whereas XRP validators

produce less than 1 million pounds. The computational power needed to mine and validate

bitcoin transactions leaves an enormous carbon footprint, as compared to vastly smaller amount

of energy consumed by XRP transactions.

8. Ripple did not sell or distribute XRP as an investment contract. Ripple has

never offered or sold XRP as an investment. XRP holders do not acquire any claim to the assets

of Ripple, hold any ownership interest in Ripple, or have any entitlement to share in Ripple’s

future profits. Ripple never held an “ICO” (initial coin offering);4 never offered or contracted to

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An “Initial Coin Offering” or “ICO” commonly describes a fundraising mechanism where an entity sells directly to
investors a digital asset that has no functionality or utility yet, as a means of raising funds for the operations of the
entity. An ICO typically involves the release of a white paper by the token issuer to prospective investors
describing, among other issues, how the token and the system would function in the future; how the funds raised will

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sell future tokens as a way to raise money to build an ecosystem; never explicitly or implicitly

promised profits to any XRP holder; and has no relationship at all with the vast majority of XRP

holders today, nearly all of whom purchased XRP from third parties on the open market.

9. What limited contracts Ripple did enter into with sophisticated, institutional

counterparties were not investment contracts, but standard purchase and sale agreements with no

promise of efforts by Ripple or future profits. Ripple has no explicit or implicit obligation to any

counterparty to expend efforts on their behalf; proceeds of XRP sales are not pooled in a

common enterprise; and holders of XRP cannot objectively rely on Ripple’s efforts. And Ripple

could cease to function tomorrow, but XRP would continue to survive and trade in its fully

developed ecosystem.

10. Ripple holds a large percentage of XRP, but that alone does not and cannot render

it an investment contract. Many entities own large amounts of commodities and participate

heavily in the commodities markets—Exxon holds large quantities of oil, De Beers owns large

quantities of diamonds, Bitmain and other Chinese miners own a large percentage of outstanding

bitcoin. Such large commodity owners inevitably have interests aligned with some purchasers of

the underlying asset. But there is no credible argument that substantial holdings convert those

commodities or currencies into securities, nor has any case so held.

11. The Complaint. The Complaint is a sprawling and convoluted effort to allege

that Ripple’s distributions of XRP (through numerous and varied methods) over a near eight-year

period constitute a single, unbroken distribution of “investment contracts” subject to registration

under Section 5 of the Securities Act.

be allocated; and what future efforts will be undertaken by the issuer to develop the system and drive returns on the
token’s price.

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12. To that end the Complaint mischaracterizes, misunderstands or ignores the

economic realities of XRP, including: (i) that the XRP Ledger is entirely open-source and

decentralized, and operates on an enormous scale (more than 1.4 billion transactions globally

since 2013) outside of Ripple’s control; (ii) that XRP is and long has been a digital asset with a

fully functional ecosystem and utility as a bridge currency and other types of currency uses; and

(iii) that XRP’s price is not and has not been determined by Ripple’s activities — instead, the

market has for many years priced XRP in correlation with other virtual currencies, most notably

bitcoin and ether (which the SEC has publicly stated are not investment contracts). Indeed, as

the Complaint admits, Ripple has its own equity shareholders who purchased shares in traditional

venture capital funding rounds who – unlike purchasers of XRP – did contribute capital to fund

Ripple’s operations, do have a claim on its future profits, and obtained their shares through a

lawful (and unchallenged) exempt private offering.

13. The SEC’s theory in the Complaint would read the word “contract” out of

“investment contract,” and stretch beyond all sensible recognition the Supreme Court’s test for

determining investment contracts in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). As a matter

of economic substance, XRP categorically differs from the various instruments and business

arrangements that Congress authorized the SEC to regulate — all of which, unlike Ripple,

involve “schemes devised by those who seek the use of the money of others on the promise of

profits.” Howey, 328 U.S. at 299. Every other case in which courts have ruled that transactions

involving a digital asset were investment contracts involved an issuer’s ICO or other promise of

future tokens to raise money to develop a digital-asset product, as well as a contractual

relationship between the issuer and asset purchasers. Ripple never held an ICO, never offered

future tokens to raise money, and has no contracts with the vast majority of XRP holders.

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14. The SEC’s Complaint tries to overcome these legal obstacles by

mischaracterizing the record. For example:

a. The Complaint characterizes all of Ripple’s business transactions

involving XRP over eight years, regardless of their nature, purpose, or manner of

execution, as a single “Offering” — a claim contradicted by the Complaint’s own

allegations of Ripple’s evolving business strategy and different types of sales and

distributions of XRP over time.

b. The Complaint alleges information asymmetries as between Ripple and

XRP holders in vague non-specific terms, but it fails to identify any material information

asymmetries and omits Ripple’s detailed quarterly reports about Ripple’s activities in the

XRP market. Nor could any such purported information asymmetries, even if present,

transform the sale of a digital asset into a securities offering.

c. The Complaint mischaracterizes advice that Ripple received in 2012, from

which a reasonable reader actually would have concluded that Ripple Credits (a past

name for XRP) were not a security.

d. The Complaint also misleadingly suggests that Ripple’s sales of XRP

constituted a significant part of the XRP market, but leaves out that in nearly all periods,

such sales constituted less than 0.4% of total XRP transaction volume.

15. The Complaint’s overreaching allegations have caused harm not only to Ripple,

but also to hundreds of non-parties that integrate XRP into products or offerings or otherwise

support XRP and to millions of XRP holders. It is especially important that the Court rapidly

determine the most consequential and overarching issue: whether Ripple’s current distributions

of XRP are “investment contracts” under existing U.S. securities laws. The answer is a

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resounding no, and reaching that determination quickly is urgently needed to provide clarity to

the market.