The cryptocurrency market was shaken this week as Ripple’s native token, XRP, plunged over 40% in value following a major regulatory action by the U.S. Securities and Exchange Commission (SEC). The sharp decline came after the SEC filed a lawsuit against Ripple Labs, alleging that XRP is an unregistered security. Compounding the downward pressure, Bitwise Asset Management, a prominent crypto investment firm, announced it had fully liquidated its XRP holdings from its flagship index fund.
This sequence of events has reignited debates over digital asset classification, regulatory clarity, and the long-term viability of major cryptocurrencies under U.S. financial law.
SEC Lawsuit Targets Ripple: A Watershed Moment
On December 22, 2020, the U.S. Securities and Exchange Commission filed a civil lawsuit in the U.S. District Court for the Southern District of New York. The complaint alleges that Ripple Labs, along with its executives Brad Garlinghouse and Chris Larsen, conducted an unregistered securities offering by distributing XRP to investors.
According to the SEC, Ripple raised over $1.3 billion through the sale of XRP since 2013, violating federal securities laws. The agency argues that XRP meets the criteria of an investment contract under the Howey Test, making it a security that should have been registered with regulators.
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This case stands out from previous SEC actions due to Ripple’s prominence in the global financial technology space. Unlike earlier targets—mostly small startups—Ripple has built strategic partnerships with banks and financial institutions worldwide, positioning XRP as a tool for fast, low-cost cross-border payments. With a market capitalization exceeding $20 billion at the time, XRP ranked among the top digital assets by value.
The lawsuit marks one of the most significant regulatory challenges yet faced by a leading blockchain company, raising concerns about how similar rulings could impact other major cryptocurrencies like Ethereum or Cardano.
Bitwise Exits XRP: A Strategic Compliance Move
In response to the legal developments, Bitwise Asset Management announced it had completely exited its position in XRP from the Bitwise 10 Crypto Index Fund (BITW). Prior to the sale, XRP represented approximately 3.8% of the fund’s total holdings.
In a press release, Bitwise stated that its investment policy explicitly avoids assets that may be classified as securities under federal or state law. The decision to sell was based on newly disclosed information in the SEC’s litigation documents, which heightened regulatory risk.
“We continuously monitor regulatory and legal developments affecting our portfolio assets. Given the SEC’s allegations and the potential classification of XRP as a security, we determined it no longer met our investment criteria,” said a Bitwise spokesperson.
Proceeds from the sale were reinvested into other qualifying digital assets within the fund, maintaining diversification while adhering to compliance standards. This move underscores growing caution among institutional investors when navigating unclear regulatory landscapes.
Market Reaction: XRP Crashes Amid FUD
Following the news of both the SEC lawsuit and Bitwise’s exit, XRP’s price collapsed by more than 40% in intraday trading on Wednesday. The sharp drop reflected widespread fear, uncertainty, and doubt (FUD) across investor communities.
Several major exchanges, including Coinbase and Kraken, paused XRP trading temporarily or delisted the token amid compliance concerns. This further isolated liquidity and deepened the sell-off.
However, Ripple has maintained a defiant stance. CEO Brad Garlinghouse emphasized that the company had sought clarity from regulators for years and believed in its legal position. Ripple argued that XRP functions as a digital currency, not a security, and is used primarily for payments and remittances—not as an investment vehicle.
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Frequently Asked Questions (FAQ)
Why did XRP drop 40%?
XRP dropped sharply after the U.S. SEC filed a lawsuit alleging that Ripple conducted an unregistered securities offering using XRP. The legal action created panic among investors and triggered massive selling pressure across exchanges.
Did Bitwise really sell all its XRP?
Yes. Bitwise Asset Management confirmed it fully liquidated its XRP holdings from the Bitwise 10 Crypto Index Fund due to increased regulatory risk following the SEC lawsuit. Before the sale, XRP made up about 3.8% of the fund.
Is XRP considered a security?
The SEC claims XRP is a security under U.S. law, but Ripple disputes this. The final determination will likely come from court rulings. Currently, there is no definitive legal classification—only allegations.
Could other cryptocurrencies face similar lawsuits?
Yes. The outcome of the Ripple case may set a precedent for how other tokens like Ethereum or Solana are treated under securities law. Regulators have previously scrutinized several projects for potential violations.
What does this mean for crypto investors?
It highlights the importance of regulatory risk in digital asset investing. Assets tied to ongoing litigation or unclear legal status can experience extreme volatility. Diversification and staying informed are critical.
Will XRP recover from this?
Recovery depends on multiple factors: court outcomes, exchange support, adoption trends, and broader market conditions. While short-term sentiment is negative, long-term recovery is possible if Ripple prevails legally and rebuilds trust.
Conclusion: Regulatory Clarity Remains Elusive
The SEC’s lawsuit against Ripple and Bitwise’s subsequent exit from XRP underscore a persistent challenge in the crypto industry: regulatory uncertainty. Without clear guidelines from U.S. authorities on what constitutes a security versus a commodity in digital form, institutional participation remains constrained.
While Ripple continues to defend its position—and has won some early procedural victories—the broader implications for innovation, investor protection, and global competitiveness in blockchain technology remain unresolved.
For investors, this event serves as a stark reminder: in crypto markets, technological promise must be balanced with legal compliance. As regulators sharpen their focus, only those projects operating transparently and proactively engaging with oversight bodies may survive long-term scrutiny.
Staying informed, monitoring legal developments, and aligning portfolios with compliant assets will be essential strategies moving forward in an increasingly regulated digital economy.