On Tuesday, May 6, 2015 it was revealed that Ripple Labs and its subsidiary, XRP ll, was fined $700k by the Financial Crimes Enforcement Network (FinCEN) for selling its native digital currency (XRP) before the entity was registered as a money services business (MSB). Ripple Labs is the company that builds and maintains the Ripple Protocol.
Ripple violated the Bank Secrecy Act in the period between March 6, 2013 and April 29, 2013 when it sold XRP before it was registered as an MSB with FinCEN. Ripple was also in violation by failing to enact an effect AML program and hire a compliance officer.
Additionally, it is alleged that XRP II acted unlawfully when it sold XRP before having an effective AML program as outlined in an addendum summary from FinCEN.
Since 2013 Ripple Labs has taken appropriate measures to ensure financial compliance with the government. In 2014 Rippled hired Karen Gifford as Chief Compliance Officer and has enacted extensive AML and Know-Your-Customer (KYC) programs.
As a settlement deal with the Department of Justice and FinCEN to not receive criminal charges, Ripple agreed to make enhancements to the protocol to "appropriately monitor all future transactions".
XRP II was created as a subsidiary to sell and transfer XRP to various third parties on a wholesale basis. XRP II failed to have an AML program in place and failed to report suspicious transactions by submitting a suspicious activity report (or SAR).
XRP II specifically failed to enact proper KYC measures when it sold roughly $250,000 worth of XRP to Bitcoin investor Roger Ver.
What is Ripple?
Ripple is a quasi-cryptocurrency protocol that allows the transfer of value through the use of its native currency, XRP. Unlike Bitcoin, Ripple is secured by a Proof-of-Stake algorithm and is controlled by a central entity.
Additionally, Ripple's native currency XRP is heavily pre-mined, meaning that around 90% of all XRP was created before anyone outside of the Ripple project could purchase XRP.
While it has achieved minor success in getting some smaller banks to use it's protocol, some argue that Ripple's core components seem ineffective in making Ripple an effective transaction settlement system and value transfer protocol compared to Bitcoin.