Banks that use Ripple’s software for cross-border payments, including PNC Financial Services Group, Bank of America and Banco Santander, got some unwelcome news last week when the Securities and Exchange Commission slapped Ripple with a 71-page complaint. The complaint casts a harsh light on how the company raises money through the sale of digital tokens called XRP. According to the SEC, Ripple executives have sold 14.6 billion units of XRP for more than $1.38 billion to fund the company’s operations and acquire personal wealth without registering their offers and sales of XRP with the SEC. Those actions have broken several securities laws, the complaint says. The SEC seeks to permanently ban Ripple and its leaders from selling unregistered XRP, make defendants "disgorge all ill-gotten gains" from the transactions and impose unspecified civil money penalties. What does this mean for the banks that work with the San Francisco company? In the early days of Ripple and XRP, some banks were bullish on both. The capital markets division of Royal Bank of Canada, a former Ripple partner, enthusiastically endorsed Ripple and XRP in a 2018 report called “Imagine 2025.“ ATB Financial in Edmonton started piloting Ripple’s xCurrent software for cross-border payments in 2016. Tim Wan, who at the time was director of innovation at the $43 billion-asset ATB, saw Ripple as a software company that was trying to replace the current methods of international money movement (basically, Swift) with a more efficient and cheaper way — “which is respectable,” he said. “And I believe that there is a need.” But Wan, who is now a digital advisory board member to the technology company Box, had reservations about XRP even then. “At the time it was still a huge unknown,” Wan said. “I would argue that it's still a huge unknown.” The SEC case will affect Ripple’s relationships with banks, he said. “Banks are built on the notion of trust,” Wan said. “Banks are incredibly sensitive to a perceived lack of trust for any technology platform that is being used for money movement.” An ATB spokesperson said the bank has not engaged with Ripple since 2016. BBVA conducted a similar pilot with Ripple in 2017 but also did not push it forward. The bank declined to comment on the SEC’s case. Santander, a large Spanish bank, has been using Ripple’s xCurrent software for cross-border payments since 2018. The bank does not use XRP. PNC went live with xCurrent at the end of 2019. Bank of America has partnered with Ripple since 2016. All three declined requests for comment. Ripple did not respond to a request for comment. Jay Dubow, a partner at Troutman Pepper who formerly worked at the SEC, pointed out that Ripple’s software is separate from the company’s XRP sales. “So long as the company has the ability to handle support for the software, there shouldn't be any issues,” Dubow said. U.S. banks have steered clear of XRP Ripple has long urged banks to use XRP as a mechanism for moving money around the world. Using Ripple’s xRapid software, banks could use their own local currency (say, U.S. dollars) to buy XRP. Then they could buy the currency of the foreign country with that XRP and use that to make the payment, instead of using a network of correspondent banks. Euro Exim Bank, which is based in St. Lucia and London, said last year that it planned to start using XRP for cross-border payments. The company did not respond to a request for comment. No U.S. bank uses XRP in this way yet, at least not publicly. In an interview last year, Manish Kohli, global head of payments and receivables at Citi, predicted that very few banks will use cryptocurrencies like XRP in international payments because of the market risk that cryptocurrencies carry. The SEC’s complaint seems to bear out banks’ cautious stance on XRP. According to the complaint, Ripple has made its money not through selling software, but through the sale of XRP. In 2019, for example, Ripple earned $23 million through sales of its xCurrent and xVia software, but it raised $200 million by selling XRP to investors. “In other words, the overwhelming majority of Ripple’s revenue came from its sales of XRP, and Ripple relied on those sales to fund its operations,” the complaint states. In addition, according to the complaint, one of Ripple’s original founders, Chris Larsen, made $450 million from sales of XRP he gifted to himself when he and his co-founders created the initial 100 billion. From April 2017 through December 2019, Ripple CEO Brad Garlinghouse has sold more than 321 million of the XRP he was given when he joined the company and has netted $150 million. Ripple’s potential defense The accusations leveled by the SEC have been swirling around Ripple for years, in multiple class actions brought by investors and in off-the-record conversations among people who follow the business. Ripple and Brad Garlinghouse are likely to argue in court, as they have in public comments in the past, that XRP is a decentralized digital currency. In a blog posted last week, Garlinghouse argued that XRP is not a security because “XRP is not an ‘investment contract.’ XRP holders do not share in the profits of Ripple or receive dividends, nor do they have voting rights or other corporate rights. Purchasers receive nothing from their purchase of XRP except the asset. In fact the vast majority of XRP holders have no connection or relationship with Ripple whatsoever.” Brian Klein, a partner at Baker Marquart who has represented cryptocurrency companies in similar cases in the past but is not involved in this case, said the SEC’s allegations are untested. “There's obviously a complete other side of this story that hasn't been told yet and deserves to be heard,” he said. “The case could represent an existential threat to Ripple because of the penalties the SEC is seeking. Unfortunately, just the filing of this case could also permanently damage XRP. That mere allegations by the SEC could be the death blow to a cryptocurrency is very unfortunate.” The SEC has settled two cases similar to this one, Klein said. In June, the U.S. District Court for the Southern District of New York approved a settlement with the messaging software company Telegram, whose unregistered offering of digital tokens called Grams violated securities laws, according to the SEC. Telegram agreed to stop selling Grams, to return more than $1.2 billion to investors and to pay an $18.5 million civil penalty. In May, the company shut down its cryptocurrency operation. In October, a federal district court agreed with the SEC that Kik Interactive’s unregistered offering of digital tokens called Kins in 2017 violated federal securities laws. Kik was banned from offering unregistered tokens and will pay a $5 million penalty. “The SEC has been bringing a lot of actions against cryptocurrency companies for a number of years now,” Klein said. “I think the SEC has unfortunately chosen to use enforcement as a tool for regulating rather than issuing clear guidance." He would prefer to see regulators like the SEC work with Congress to create laws to govern cryptocurrency. "Cases can take years to work themselves through the courts," Klein said. "And even when the SEC notches wins, as it did with Telegram and Kik, the district court rulings are not binding on other circuits or even other courts in that same circuit. What you have is a tea-leaf-reading process instead of clear guidance."