- A new argumentation could prove that the American securities authority, the SEC, could classify Ripple’s XRP token as a security.
- However, there are critical voices from the crypto-community who do not believe that the SEC is going to take legal action against Ripple.
There is currently a collection of documents and evidence circulating on the Internet as to why Ripple’s XRP token could be classified as a security. For more than two years, there has been a broad discussion about how Ripple’s XRP token is connected to the company. Ripple argues that the XRP token is an open source technology that exists independently of the company. In addition, the company says that it cannot influence the price of XRP.
However, this opinion is shared by few. As early as July 2018, a class action lawsuit was filed against Ripple by former investors for misleading and selling an unregistered security. Ripple is said to have blurred the differences between Ripple’s and XRP’s corporate solutions to further increase demand and “paid exchanges to list XRP” to boost the XRP price.
However, the American Securities and Exchange Commission (SEC), which is responsible for the decision, is still holding back.
Previous arguments of the SEC contradict Ripple
As the new argumentation of the researchr Mike Dudas shows, the previous statements of the SEC (independent of Ripple) could argue, however, that XRP is to be classified as a security. William Hinman, director of the SEC’s Division of Corporation Finance, explained that there are several components to determine whether it is a security. The main factor is whether a “third party drives the expected return”. Hinman wrote:
Has the promoter raised an amount of funds in excess of what may be needed to establish a functional network, and, if so, has it indicated how those funds may be used to support the value of the tokens or to increase the value of the enterprise? Does the promoter continue to expend funds from proceeds or operations to enhance the functionality and/or value of the system within which the tokens operate?
Based on Hinman’s perspective, it appears that XRP meets all the characteristics. Ripple Labs has raised more funds than was needed to build the functional network. In addition, it is argued that Ripple derives much of its profit from the programmatic sale of XRP rather than from the software licenses for the various payment technologies. The funds generated through the sale of XRP are used to increase the value of Ripple Labs.
Dudas cited a statement by Ripple CTO David Schwartz, who once said
A million dollars worth of XRP will always cost a million dollars. But the higher the price of XRP, the more money Ripple makes by selling XRP, the more money Ripple is worth, the more power Ripple has to incentivize partners, and soon.
To date, Ripple Labs has sold XRP worth $617 million, $230 million to private institutions and over $387 million XRP in public markets programmatically to private investors. In addition, Ripple Labs founders and executives have a proven track record of selling large amounts of XRP on exchanges to private investors for their own benefit, Dudas said.
Too big for a lawsuit by the SEC?
In a blog post published in December, Ryan Selkis, CEO of Messari, wrote that Ripple’s XRP is a “too-big-too-jail” coin. Selkis does not believe that the SEC will be able to uphold a lawsuit against XRP.
If the SEC was willing to settle for a mere $24 million with Block.One over their year long $4 billion EOS crowdsale, then I don’t think we should expect to see a case against Ripple, whose advisory ranks are best in the industry (ex-regulators Mary Jo White (SEC), Ben Lawsky (NYDFS), Gene Sperling (White House) are advisors or directors).
As CNF reported, Ripple has strong ties to Washington politics. For example, Ripple hired Ron Hammond, among others, as Manager of Government Relations in September 2019. Hammond previously served under Republican Congressman Warren Davidson, where he led the drafting of the Token Taxonomy Act. At the end of October, Ripple joined the Alliance for Innovative Regulation (AIR). The initiative aims to bring together regulators, fintech executives, policymakers and financial institutions to jointly discuss the use of new breakthrough technologies.