Earlier this month, a class action lawsuit was brought against Ripple Labs, Inc. (“Ripple Labs”) and XRP II, LLC (“XRP LLC”) for violating U.S. securities laws through the unregistered sale of XRP tokens.  The Complaint filed in California state court alleges that Ripple Labs led the public to believe that the value of XRP was dependent on the success of the company such that investors of XRP had a reasonable expectation of profits from the efforts of the company.  Plaintiffs allege that by “blurring” and “conflating” the distinction between the company and the token, the company created an expectation of profits that rendered XRP a security subject to the regulations of the Securities Exchange Act.

Ripple Labs is a company that seeks to instantly settle cross-border payments through blockchain technology.  In July 2013, Ripple Labs created the subsidiary XRP LLC for the purpose of distributing its virtual currency, XRP.  However, the nature of the connection between the XRP tokens and the technological solutions Ripple Labs offer is disputed.  Recently, Ripple Labs’ director of regulatory relations Ryan Zagone commented that XRP is an “open source technology” that was pre-mined by open-source developers and gifted to the company, but “there’s not a direct connection between Ripple the company and XRP.”  Other commentators have noted that regardless of the uncertainty of the exact function of XRP, its “close relationship [to the company] might still lead regulators to deem XRP a security.” 

This lawsuit should shed additional light on the relationship between Ripple Labs and XRP and, more generally, how virtual tokens are treated under U.S. securities laws.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.