Ripple Gets The Documents It Wants; Maybe Not The Ones It Needs

Ripple Labs may have won a hard-fought battle in wresting documents from the Securities and Exchange Commission that it says supports its case against the agency, but that does not mean it will prevail in a $1.3 billion suit against it for selling the XRP
XRP
cryptocurrency as an unregistered security.

The company, which uses the XRP token to facilitate cross-border payments, seems to think it scored big after SEC complied with a court order to cough up documents related to a 2018 speech by William Hinman, a former director of finance at the agency, in which he declared that the ether cryptocurrency was not a security. Stuart Alderoty, Ripple’s general counsel, took to Twitter on Friday to crow that after “18 months and 6 court orders” the company has finally obtained the documents.

“While they remain confidential for now (at the SEC’s insistence),” he added, “I can say that it was well worth the fight to get them.”

But was it?

Carol Vancleef, who chairs the digital-assets legal practice at the Washington office of the Bradley law firm, wants to know more.

She points out that the Ripple team has not shared what they’re looking for in the paperwork nor indicated how it might help their cause. “It’s great they have the documents, but what is it they’re trying to extract from those documents to support their case?” she asks.

No matter what a former SEC official thought four years ago, the ultimate arbiter of whether cryptocurrencies are legally securities is the U.S. Supreme Court, which makes its decision independently of the agency, according to Stephen Diamond, a securities law professor at Santa Clara Law School.

The high court “has spoken dozens of times on this issue over the last 70 years, and they have never strayed from the very simple framework that they established in the Howey Case,” says Diamond. “I don’t think XRP or Ripple is going to make a dent in that in this instance.”

The XRP debate centers on whether the token passes the Howey Test, established in 1946, which defines when financial transactions qualify as investment contracts. If they are, then they are securities under U.S. law. The key is if there is an investment of money in a common enterprise with a reasonable expectation of profit to be derived from the efforts of others.

The SEC charged Ripple with conducting a $1.3 billion unregistered securities offering when the company sold XRP to raise capital for its business. In a lengthy response to the SEC’s complaint last year, Ripple stated that XRP is not a security. “The functionality and liquidity of XRP are wholly incompatible with securities regulation,” the statement said.

“The crypto world likes to claim that there is no regulation, that somehow we need regulatory clarity,” Diamond says. “Apparently they don’t like the simplicity of a very straightforward, four-part test that has been used probably thousands of times at this point by the SEC and has been supported consistently by the courts.”

But crypto did not exist in 1946.

Joseph Hall and Jai Massari, partners at legal firm David Polk, contend that the Howey Test is outdated and was never imagined to be used on assets like cryptocurrencies. “Many tokens represent no ownership of a business and no claim on the revenues, income or assets of an economic enterprise,” Hall and Massari write.

Hinman said at the time he made them that his comments were a personal statement and did not reflect the stance of the SEC. Gary Gensler, the agency’s chairman, has stated several times his view that most cryptocurrencies are securities, with the exception of bitcoin which could be classified as a commodity.

In recent weeks, XRP has traded roughly in line with public perceptions of Ripple’s prospects in the suit. It was up about 4% late Friday at just over 45 cents. That’s higher than its August close around 33 cents, according to data from Nomics, but down from more than $1.80 in April 2021.

The debate over whether cryptocurrencies constitute securities has landed more companies than Ripple in hot water. In July, the SEC declared nine crypto assets securities in a civil lawsuit against a former Coinbase
COIN
employee. Earlier this year, BlockFi paid a $100 million settlement to the SEC for an unregistered crypto lending platform offering what the regulator deemed to be securities. The ongoing debate has left a huge gap between regulators and the crypto industry.

“The Ripple case raises several issues that are relevant potentially to a number of other cases involving tokens and depending on how they’re resolved in the Ripple case, they may impact the final resolution of the other cases,” Vancleef says.