Ripple - security or currency? We may know sooner than you think.
On 13 September 2022, Ripple and the US Securities and Exchange Commission (SEC) filed counter applications for summary judgment in relation to their on-going dispute as to whether Ripple’s token - XRP - should be classified as a security.
The litigation was commenced in 2020 when the SEC brought a claim against Ripple for the sale of “unregistered securities”. In broad terms the SEC allege that Ripple’s XRP token is a security that falls under the US Securities Act and, as such, Ripple should have complied with the Securities Act before it was sold.
This dispute has brought into sharp focus the confusion that various US agencies have sown in relation to the sale of crypto currencies. That there isn’t a consensus between US government agencies is bad enough (the US Department of Justice and FinCEN have long had the view that XRP is a currency). This situation has been compounded by the fact that the SEC’s allegations seem to run contrary to public comments senior SEC appointees have made in the past (see the former SEC Director of Corporation Finance’s comments in 2018).
In its filings, Ripple’s primary contention is that XRP simply doesn’t meet the definition of a “security”. The “Howey” test has long been adopted to determine whether something is a security. The test is whether:
There is an investment of money.
In a common enterprise.
With the expectation of a profit.
To be derived from the efforts of others.
Before Ripple even get to the Howey test they contend there was no “contract for investment” which is required for the Securities Act. Even if the SEC overcome that hurdle, Ripple say there’s no element of “common enterprise” (XRP is a tool used by a community not a “common enterprise”) and there’s no expectation of profit (XRP isn’t designed to return a profit - it’s designed to facilitate cross border payments with its “On Demand Liquidity” product).
So things may be turning in Ripple’s favor but remember that the SEC has deep pockets, the weight of authority and, as most people involved in law tend to have, a big ego. The SEC contend that the absence of a written contract of investment isn’t fatal to their case - a contract can easily be implied - and, perhaps fairly, who are Ripple trying to kid when they claim the XRP token wasn’t designed to turn a profit? You don’t buy an XRP token unless you expect its value to go up.
The good news for the wider community is that this may throw some certainty on an issue which the US legislature has long failed to grapple with.