Ripple, the blockchain company behind XRP, argued that fungible cryptocurrencies are not securities when transferred in secondary transactions in a recent letter sent to the US Securities and Exchange Commission (SEC).
In its May 27 letter, Ripple cited US attorney and crypto law thought leader Lewis Cohen to support its claim. In his widely cited 2022 paper, “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities,” he wrote:
“[T]here is no current basis in the law relating to ‘investment contracts’ to classify most fungible crypto assets as ‘securities’ when transferred in secondary transactions.”
In his paper, Cohen explained that in secondary transactions, an investment contract transaction is generally not present. He further claimed that fungible cryptocurrencies “neither create nor represent the necessary cognizable legal relationship between” a legal entity and the holder that is the “hallmark of a security.”
SEC’s “new paradigm”
Ripple also referenced SEC Commissioner Hester Peirce’s May 19 “new paradigm” speech. She said she’d been voicing her dissent with the regulator’s approach to crypto, adding:
“Having emerged from the crypto dissent years, I am glad to be able speak to you today as the head of the Commission’s Crypto Task Force about a rational and coherent path forward and a new paradigm at the SEC.”
Peirce said that the SEC’s “approach to crypto in recent years has evaded sound regulatory practice and must be corrected.” She also said that most cryptocurrencies are not securities, adding:
“Most currently existing crypto assets in the market are not [securities]. My supplemental answer is that economic realities matter and non-security crypto assets may be distributed as part of an investment contract, which is a type of security.”
Ripple’s long fight with the SEC
The SEC had viewed a large portion of digital assets as securities, with the regulator’s former chair, Gary Gensler, stating in 2023 that most of the crypto market falls under the securities bracket. This stance led to a protracted legal battle between the SEC and Ripple.
The lawsuit first began at the end of 2020, when the SEC took action against Ripple and its executives, claiming that XRP sales constituted unregistered security offerings. Still, after the government’s stance on crypto changed with the election of current US President Donald Trump, Ripple has mostly won the battle, with the SEC recently dropping its appeal against a ruling favorable to the company.
In its recent letter to the SEC, Ripple also cited a ruling in the case noting that “the court held that certain of Ripple’s historical institutional sales of XRP were investment contracts,” while the secondary sales were not. Furthermore, the judge “determined that XRP itself is not a security.”
Quick Summary of the News:
- Ripple argues that fungible cryptocurrencies are not securities when traded in secondary markets.
- The argument is based on the lack of an ‘investment contract’ in secondary transactions.
- Ripple cites legal expert Lewis Cohen’s paper supporting this view.
- SEC Commissioner Hester Peirce is quoted expressing concerns about the SEC’s current approach to crypto regulation.
- Ripple references its ongoing legal battle with the SEC, highlighting a previous ruling favorable to the company regarding secondary sales of XRP.
Why It Matters
This development is significant because the classification of cryptocurrencies as securities has far-reaching implications for regulation, taxation, and overall market participation. If the SEC were to accept Ripple’s argument, it could lead to a more relaxed regulatory environment for secondary crypto trading, potentially boosting market liquidity and attracting more institutional investors. Conversely, a continued hard-line stance by the SEC could stifle innovation and push crypto activity overseas.
Market Impact
While it’s difficult to quantify the exact market impact, previous positive rulings in the Ripple case have led to short-term price surges for XRP. More broadly, clarity on regulatory status tends to reduce uncertainty, which is generally positive for market sentiment. Conversely, increased SEC scrutiny often leads to price corrections as investors anticipate stricter compliance requirements and potential enforcement actions.
Expert Take & Personal Insight
Ripple’s persistent challenge to the SEC’s approach highlights a fundamental tension in crypto regulation. The SEC aims to protect investors, but its broad application of securities laws to digital assets may be overly restrictive and hinder the development of the industry. Hester Peirce’s comments suggest a growing recognition within the SEC that a more nuanced approach is needed. It’s unlikely that this single letter will drastically alter the SEC’s stance, but it contributes to a growing body of legal and academic arguments that challenge the prevailing regulatory paradigm. I believe that in the long run, a clearer and more tailored regulatory framework will be essential for the sustainable growth of the crypto market.
Actionable Insight
Traders and investors should closely monitor the SEC’s response to Ripple’s letter and any further developments in the ongoing legal battle. Keep an eye on statements from SEC officials and court rulings related to crypto asset classification. Also, diversify your portfolio and be prepared for potential regulatory shifts that could impact the value of your crypto holdings. Consider consulting with a qualified financial advisor to assess your individual risk tolerance and investment strategy.
Conclusion
Ripple’s latest move is another chapter in the ongoing saga of crypto regulation. The debate over whether fungible cryptocurrencies should be treated as securities in secondary sales is far from over, and the SEC’s ultimate decision will have a profound impact on the future of the industry. Expect continued legal challenges and policy discussions as the crypto market strives for greater regulatory clarity.