The legal battle between the U.S. Securities and Exchange Commission (SEC) and blockchain payments company Ripple over the classification of XRP as a security has been the talk of the town in the cryptocurrency industry. The crux of the case lies in whether XRP should be deemed a security, a question that remains unanswered as the case drags on. In this article, we will explore the analysis provided by CryptoLaw founder John Deaton, who has explained in-depth why XRP cannot be classified as a security, even if Ripple sold it to the public as an investment contract.
In a detailed Twitter thread, Deaton asserted that XRP “remains a digital code” even if Ripple sold it as an investment contract (read: security) in the past or is still selling it now. He noted that just because someone used Bitcoin (BTC) as a security, it didn’t turn it into a security. Similarly, in the LBRY Credits (LBC) case, the judge ruled that LBRY sold LBC as an investment contract when it made direct sales. In the lawyer’s view, LBC remains a software code and nothing else. The SEC even admitted on record that the sale of LBC tokens in the secondary market did not constitute a security. This means LBC itself does not qualify as a security. If it did, the court’s ruling would apply to all of its sales.
The same applies to Ripple’s XRP. However, Deaton notes that the SEC has previously implied that the XRP token itself is a security. “This novel and dangerous embodiment theory is how the SEC is attempting to expand its jurisdictional reach into secondary market transactions. The theory stretches Howey beyond recognition,” he added.
The underlying asset is never the security in an investment contract case, and the novel Howey test requires a Howey analysis at the time of each offer or sale. This is why Deaton is quite confident that District Judge Analisa Torres will reject the SEC’s summary judgment motion in the XRP suit.
Deaton also cited Bitcoin as he explored the XRP security issue. He notes that the digital asset was once “packaged, marketed, offered and sold” as an investment contract, but that doesn’t mean it turned into a security. The SEC took action against Ripple in December 2020, contending that it had sold an unregistered security since 2013. Two years later, the high-profile case drags on, with a ruling expected in the first half of 2023 — barring an unlikely settlement. Most XRP loyalists believe Ripple has the upper hand in the case, and they are convinced the company will ultimately prevail.
It is important to note that the regulatory clarity the crypto industry has long clamoured for is most likely to come in the form of a decision in the SEC v. Ripple lawsuit. The outcome of the case will not only provide clarity on the classification of XRP as a security but will also set a precedent for future cases and help define the boundaries of the SEC’