America's investment watchdog announced plans this week to sue digital asset developer Ripple, which it alleges raised $1.3 billion in an unregistered securities offering tied to the XRP cryptocurrency.
XRP, launched in 2012 as a faster method for cross-border payments, is the world's third most valued digital asset with a $23 billion market cap and markets itself as a currency - which is the crux of the problem.
The U.S. Securities and Exchange Commission considers XRP to be a security - which, like shares in a company must be regulated with transactions involving the cryptocurrency disclosed and reported to authorities.
"The SEC is doing the opposite of "fostering innovation" here in the US," Ripple CEO Brad Garlinghouse posted to Twitter in the early hours of Wednesday Hong Kong-time. "It's not just XRP they're attacking."
If the regulator comes out on top, Ripple warned that creative output in the block chain and cryptocurrency industries will be "fully ceded to China" because other cryptocurrencies are "highly susceptible to Chinese control," the company wrote in its response to the regulator.
"We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors," said the director of the SEC's Enforcement Division, Stephanie Avakian, in a press release.
"[This] 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."
While cryptocurrencies are ostensibly currencies, most holders use them to speculate - leading to massive fluctuations in prices and adding weight to regulatory fears of undisclosed securities trading.
The SEC also believes that Ripple co-founder Christian Larsen and CEO Brad Garlinghouse were involved in unregistered sales of XRP totaling $600 million.
In a written response to the allegations, the company pointed out that XRP is a currency similar to Bitcoin and Ethereum - two cryptocurrencies that the SEC previously determined are not securities.
"XRP as a security also means other assets will meet the same fate," wrote cryptocurrency analyst Ryan Selkis on Twitter. "At least Ripple has the money to fight [the charge]."
The company, backed by venture capital firms including Peter Thiel's Founders Fund and Andreessen Horowitz as well as Spanish bank Santander, was valued at more than $10 billion during its most recent funding round in 2019.
