The Securities and Exchange Commission sued the company behind one of the most valuable cryptocurrencies on Tuesday, raising fundamental questions about the viability of the token.
The S.E.C. accused the San Francisco company, Ripple, of selling unregistered securities when it sold the digital token XRP to investors around the world.
The suit, filed in federal court in New York, also names Ripple’s current chief executive, Brad Garlinghouse, and its former chief executive, Chris Larsen. The agency accused both men of selling the XRP token to enrich themselves despite knowing it had little actual use.
“Ripple sold XRP widely into the market, specifically to individuals who had no ‘use’ for XRP as Ripple has described such potential ‘uses’ and for the most part when no such uses even existed,” the complaint said.
Ripple had marketed XRP as a new kind of currency that would make it easier for banks and financial institutions to transfer money around the world.
But the lawsuit says financial companies that tried XRP told Ripple that it was more expensive than the available alternatives. A few companies continued to use XRP because Ripple paid them to do so, the suit says.
XRP, like Bitcoin and many other cryptocurrencies, has been skyrocketing in value recently. On Monday, XRP tokens were worth around $22 billion, making it the third most valuable cryptocurrency after Bitcoin and Ether. The token had turned Mr. Larsen and Mr. Garlinghouse into billionaires.
But within hours of the lawsuit’s filing, the value of outstanding Ripple had fallen by over $3 billion.
The suit says that to lock in their fortunes, Mr. Larsen and Mr. Garlinghouse previously sold nearly two billion units of XRP that the company had given them.
XRP, which has been traded since 2012, has long been dogged by questions about how it is different from other cryptocurrencies. Unlike Bitcoin, which was released through a decentralized network of computers, XRP tokens were created and distributed by the founders of Ripple and the company they created.
The lawsuit argues that this corporate setup means XRP, unlike Bitcoin, should be categorized as a security rather than a currency. The suit says that because Ripple did not register XRP as a security, the company violated laws against selling unregistered securities.
If the S.E.C. prevails in its case and establishes that XRP is a security, using it as a currency will become essentially impossible.
Mr. Garlinghouse, anticipating the lawsuit, said on Monday that Ripple would fight it. “It’s frankly preposterous and not grounded in fact,” he said.