\n<\/p>\n
On September 17, 2022, both the Securities and Exchange
Ripple is a privately-held financial technology company founded
The question of whether XRP is a security and therefore subject
The SEC’s Complaint in the Ripple matter asserts that XRP
The Complaint’s arguments are consistent with the position
In its summary judgment motion, Ripple pushed back, arguing that
In essence, Ripple claims that sales of XRP merely represent
As we have noted previously,19<\/sup> it has become
On the other hand, the Defendants raise significant questions
Perhaps a ruling on Ripple’s summary judgment motion will
Special thanks to visiting attorney Martin Fischer who
1. Complaint<\/a> at 1-2, SEC v. Ripple Labs<\/em>,
2. Id<\/em>.<\/small><\/p>\n 3. Defendants’ Memorandum of Law in Support of Their
4. Complaint at 1-2, SEC v. Ripple Labs<\/em>,
5. Coinbase, Petition for Rule-making\u2014Digital Asset
6. Chair Gary Gensler, Kennedy and Crypto<\/em><\/a>,<\/em> U.S. SEC
7. Id<\/em>.<\/small><\/p>\n 8. Complaint at 6-7, SEC v. Ripple Labs<\/em>,
9. Plaintiff’s Memorandum of Law in Support of Its
10. Id<\/em>.<\/small><\/p>\n 11. SEC Charges Former Coinbase Manager, Two Others
12. Id<\/em>.<\/small><\/p>\n 13. Id<\/em>.<\/small><\/p>\n 14. Defendants’ Memorandum of Law in Support of Their
15. Id<\/em>. at 2.<\/small><\/p>\n 16. Id<\/em>.<\/small><\/p>\n 17. Id<\/em>. at 3.<\/small><\/p>\n
\nCommission and Ripple Labs, Inc. (with its Executive Chairman and
\nCEO) filed motions for summary judgment in the SEC’s suit
\nalleging that Defendants sold billions of units of a virtual
\ncurrency called XRP, which in the SEC’s view should be
\nconsidered a “digital asset security.”1<\/sup>
\nAccording to the SEC’s Complaint, the sale of XRP would
\nconstitute an unregistered sale of securities in violation of the
\nregistration and disclosure requirements of federal securities
\nlaws.2<\/sup><\/p>\n
\nin 2012, with a particular focus on facilitating cross-border
\npayments. The Company’s products generally rely on the
\nopen-source blockchain created by Ripple, called the “XRP
\nLedger,” and the associated XRP native virtual currency. When
\nthe XRP Ledger was created in 2012, a fixed supply of 100 billion
\nunits of XRP was created, 20% of which was retained by the founders
\nand the remaining 80% was given to Ripple.3<\/sup> Over the
\nyears the Defendants have sold and distributed some XRP currency,
\ntransactions which are being challenged by the SEC as unregistered
\nsecurities sales.4<\/sup><\/p>\n
\nto the requirements of the federal securities law is a significant
\none for the digital asset industry, which has repeatedly asked for
\nfurther guidance from the SEC on the application of securities law
\nto these novel assets and technologies.5<\/sup> SEC Chairman
\nGary Gensler has been aggressive about claiming jurisdiction over
\ndigital assets,6<\/sup> claiming that the law is clear and
\nrecently stating that “nothing about the crypto market is
\nincompatible with securities laws.” He advised that digital
\nasset companies should “come in, talk to us, and
\nregister.”7<\/sup><\/p>\nThe SEC’s Position<\/h3>\n
\ncurrency should be considered a “digital asset security”
\nbecause it qualifies as an “investment contract” under
\nthe traditional Howey securities test: “an instrument through
\nwhich a person invests money in a common enterprise and reasonably
\nexpects profits or returns derived from the entrepreneurial or
\nmanagerial efforts of others.”8<\/sup> In particular, the
\nSEC argues the economic reality shows “a purchase of XRP is an
\ninvestment in a common enterprise with other XRP holders and with
\nRipple.”9<\/sup> The SEC also points to multiple public
\nrepresentations in which Ripple “publicly tied the potential
\nfor profit to its promised entrepreneurial and managerial
\nefforts.”10<\/sup><\/p>\n
\nthe SEC has taken in other recent enforcement actions and in its
\npublic pronouncements.11<\/sup> Chairman Gensler has publicly
\nquestioned the digital asset industry’s calls for greater
\nguidance, arguing that the agency has “spoken with a pretty
\nclear voice”12<\/sup> and concluding that “most
\ncrypto tokens are investment contracts under the Howey Test”
\nand thus subject to the securities laws and SEC
\njurisdiction.13<\/sup><\/p>\nRipple’s Response<\/h3>\n
\ndistribution of XRP by the Defendants lacks the “essential
\ningredients” to be considered “investment contracts”
\nunder the Howey Test.14<\/sup> First, Ripple notes that in many
\nof the transactions covered by the Complaint there was no actual
\ncontract between a promoter and an investor (for example, donations
\nand giveaways).15<\/sup> Second, the Brief argues that when
\ncontracts were present, they established no post-sale obligations
\nfor Ripple or rights for the purchaser of XRP to share in profits
\nfrom the Company’s efforts.16<\/sup> Third, the Defendants
\npoint to the absence of a “‘common enterprise’ in
\nwhich those who purchase XRP invest,” arguing that the
\n“XRP ecosystem,” comprised by multiple third parties who
\ninteract with the XRP Ledger or own XRP currency, cannot be
\ncharacterized as a “common enterprise” under
\nHowey.17<\/sup><\/p>\n
\nsales of assets, not securities. The Defendants assert that the
\nSEC’s theory represents an “open-ended assertion of
\njurisdiction over any transfer of an asset (for consideration or
\nnot) that the SEC thinks may benefit from the registration and
\ndisclosure requirements of securities law.”18<\/sup> As
\nsuch, Ripple contends that accepting the SEC’s position could
\nhave unintended effects, converting sales of ordinary
\nassets\u2014such as gold and soybeans\u2014into sales of
\nsecurities.<\/p>\nAnalysis<\/h3>\n
\nabundantly clear that the SEC will continue to take an aggressive
\nposition in asserting its authority over digital assets.<\/p>\n
\nabout the wisdom of applying an orange grove case from 1946 to a
\nclass of assets developed only in the last ten years. While the SEC
\nhas historically favored at least in some area’s flexibility
\nover certainty in application of the securities laws\u2014see
\ninsider trading for example\u2014the regulation of digital assets
\nwould seem to be a place in which certainty would assist all
\nparties in making informed decisions.20<\/sup><\/p>\n
\nhelp. It may also shed light on the potential consequences of the
\nSEC’s current approach to regulating digital assets through
\npiecemeal enforcement actions.<\/p>\n
\nco-authored this publication<\/em><\/p>\nFootnotes<\/h3>\n
\n20-cv-10832 (S.D.N.Y. Dec. 22, 2020).<\/small><\/p>\n
\nMotion for Summary Judgment at 1, SEC v. Ripple Labs<\/em>,
\n20-cv-10832 (S.D.N.Y. Dec. 22, 2020).<\/small><\/p>\n
\n20-cv-10832 (S.D.N.Y. Dec 22, 2020).<\/small><\/p>\n
\nSecurities Regulation<\/em><\/a>, (Jul. 21, 2022).<\/small><\/p>\n
\n(Sept. 8, 2022).<\/small><\/p>\n
\n20-cv-10832 (S.D.N.Y. Dec. 22, 2020).<\/small><\/p>\n
\n[confirm?] Motion for Summary Judgment at 2, SEC v. Ripple
\nLabs<\/em>, 20-cv-10832 (S.D.N.Y. Dec. 22, 2020).<\/small><\/p>\n
\nin Crypto Asset Insider Trading Action<\/em><\/a>, U.S. SEC (Jul. 21,
\n2022).<\/small><\/p>\n
\nMotion for Summary Judgement at 1-2, SEC v. Ripple Labs<\/em>,
\n20-cv-10832 (S.D.N.Y. Dec. 22, 2020).<\/small><\/p>\n