Ripple CEO says SEC has lost sight of mission to protect investors

The CEO of blockchain company Ripple has some strong words for the US Securities and Exchange Commission.

Brad Garlinghouse told CNBC’s Dan Murphy at the company’s Ripple Swell conference in Dubai that he thinks the agency has lost sight of one of its most important roles as a regulator.

“I think the SEC, in my opinion, has lost sight of their mission to protect investors. And the question is, who are they protecting on this journey?” Garlinghouse said Thursday. The SEC was not immediately available for comment when contacted by CNBC.

The SEC accused Ripple and its executives in 2020 of committing $1.3 billion in securities fraud through the sale of XRP to retail investors. Ripple, the regulator alleged, failed to register an ongoing offer and sale of billions of XRP tokens to investors, depriving them of adequate disclosures about XRP and Ripple’s activities.

In July, Ripple scored a crucial victory when a judge ruled that XRP itself is not a security. Following this, the SEC denied a request for a preliminary appeal. Then in October, the SEC dropped securities law violations charges against Garlinghouse and Ripple CEO Chris Larsen.

The next important step in the case is the remedy discovery process. The SEC will have 90 days beginning Nov. 9 to investigate remedies, according to a proposed schedule filed by the SEC.

“I think it’s a positive step for the industry, not just for Ripple, not just for Chris and Brad, but for the entire industry, that the SEC has been brought under control in the United States. And I am hopeful that this will happen. It could be a thawing of the permafrost in the United States, because we really see an amazing industry with enormous potential thriving in the largest economy in the world,” Garlinghouse told CNBC.

Garlinghouse hopes that the US will move beyond a situation where crypto regulation is dictated by a constant stream of lawsuits, to a point where federal digital currency laws are introduced by Congress.

“One of the things people talk about is that one of the definitions of insanity is doing the same thing over and over again, and thinking you’re going to get a different outcome, while the SEC does the same thing over and over again. And they think, I think, that at some point they’re going to have a different outcome,” Garlinghouse continued.

“[Digital asset manager] Grayscale also had, I think, an important victory in the United States over the bitcoin ETF, where the judge had to come, a federal judge who talked about a federal agency, the SEC, and said that the SEC is arbitrary and capricious,” added he added., referring to an appeals court ruling that said the SEC was wrong to reject an application by Grayscale to create a bitcoin ETF.

“In general, judges tend to be quite in the middle and try not to be dramatic – those are damning words. So I think at some point the SEC has to step back and realize that their approach to regulation through enforcement, let’s just file lawsuits, that has to be broken.”

Ripple is a payments company that specializes in cross-border money transfers via the blockchain, a distributed database that records transactions on multiple computers. The company’s RippleNet network is used by financial institutions to send money from one country to another.

Ripple also uses XRP, a cryptocurrency, to make cross-border payments. The

Let’s say you want to send money from the US to Mexico. Ripple’s technology allows you to do that by… U.S. dollars in XRP, with the XRP being transferred to Mexico and then converted into Mexican pesos on the other side.

By doing this, Ripple says, you don’t have to have pre-funded accounts on the other side of a cross-border transaction to get that money.

That’s the business case for XRP from Ripple’s perspective. But XRP in its most common use is ultimately a token that investors speculate on. And when its price dropped like a stone – like other cryptocurrencies – during the 2018 crypto bear market, regulators worried about the impact of this digital currency on retail investors.

In the case of Ripple, unlike bitcoin, the cryptocurrency is primarily owned by Ripple, which holds a massive amount of XRP in an escrow account and releases tokens on a quarterly basis to a mix of institutional investors and retail investors through sales on cryptocurrency exchanges. This is a big part of how Ripple makes money.

That has been a major point of contention for the SEC as it continues its case against Ripple. Ripple, in turn, claims that XRP should not be considered a security and is more akin to a currency or commodity. If appointed as collateral, Ripple will have to file a lot of paperwork and disclosures with regulators, a process that could be costly.