Ripple, the blockchain firm associated with XRP, contended that fungible cryptocurrencies should not be classified as securities during secondary transactions in a recent communication addressed to the US Securities and Exchange Commission (SEC).
In its May 27 correspondence, Ripple referred to US attorney and crypto law expert Lewis Cohen to bolster its assertion. In his frequently referenced 2022 study, “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities,” he articulated:
“[T]here is no present foundation in the law regarding ‘investment contracts’ to categorize the majority of fungible crypto assets as ‘securities’ when exchanged in secondary transactions.”
In his study, Cohen clarified that in secondary transactions, an investment contract exchange is typically not involved. Additionally, he argued that fungible cryptocurrencies “neither establish nor symbolize the essential recognizable legal connection between” a legal entity and the holder, which is the “defining characteristic of a security.”
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SEC’s “new paradigm”
Ripple additionally mentioned SEC Commissioner Hester Peirce’s May 19 “new paradigm” address. She noted her dissent regarding the regulator’s methodology towards crypto, stating:
“Having emerged from the crypto dissent years, I am pleased to be able to address you today as the leader of the Commission’s Crypto Task Force regarding a logical and cohesive direction forward and a new paradigm at the SEC.”
Peirce acknowledged that the SEC’s “treatment of crypto in recent times has sidestepped proper regulatory practices and requires rectification.” She further asserted that the majority of cryptocurrencies do not qualify as securities, adding:
“Most existing crypto assets in the market are not [securities]. My additional response is that economic realities are significant and non-security crypto assets may be distributed as part of an investment contract, which is a form of security.”
Ripple’s prolonged conflict with the SEC
The SEC has regarded a substantial portion of digital assets as securities, with the former chair, Gary Gensler, declaring in 2023 that most of the cryptocurrency market falls under the securities category. This position incited an extended legal conflict between the SEC and Ripple.
The litigation initially commenced at the close of 2020, when the SEC initiated action against Ripple and its executives, asserting that XRP sales constituted unregistered security offerings. Nevertheless, after the government’s perspective on crypto shifted with the election of the current US President Donald Trump, Ripple has largely triumphed in the dispute, with the SEC recently abandoning its appeal against a ruling favorable to the company.
In its latest letter to the SEC, Ripple also referenced a ruling noting that “the court determined that certain of Ripple’s historical institutional sales of XRP were investment contracts,” while the secondary sales were not. Further, the judge “concluded that XRP itself is not a security.”
Magazine: XRP victory leaves Ripple and the industry without established legal precedence for crypto
