Ripple, the innovative blockchain company known for its digital asset XRP, has recently made waves with its firm assertion that fungible cryptocurrencies should not be classified as securities when exchanged in secondary transactions. This argument was articulated in a letter addressed to the U.S. Securities and Exchange Commission (SEC), dated May 27. In this letter, Ripple references insights from esteemed attorney and crypto law specialist, Lewis Cohen, bolstering its position.
Cohen’s widely discussed paper from 2022, titled “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities,” serves as a crucial part of Ripple’s argument. He states, “[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.” This assertion underscores the premise that, during secondary exchanges, an investment contract—which is fundamental to the definition of a security—does not exist.
In addition to citing Cohen, Ripple highlights SEC Commissioner Hester Peirce’s remarks from her speech on May 19, where she introduced the idea of a “new paradigm” for the SEC’s approach to cryptocurrency regulation. Peirce has expressed her concerns about the current regulatory practices regarding cryptocurrencies, emphasizing the need for a coherent regulatory path forward. She noted that economic realities must be considered, stating, “most currently existing crypto assets in the market are not [securities].” Peirce’s insights add weight to Ripple’s claims about the nuanced nature of crypto asset classification.
The Ongoing Legal Battle with the SEC
Ripple’s relationship with the SEC has been contentious, marked by a prolonged legal struggle that first emerged at the end of 2020. The SEC accused Ripple and its executives of conducting unregistered security offerings through XRP sales. Former SEC chair Gary Gensler’s declarations in 2023, asserting that most of the crypto market falls under the securities category, intensified this legal confrontation.
However, changes in governmental stances and recent court rulings have seemingly favored Ripple. Notably, a recent court ruling determined that while some of Ripple’s historical institutional sales of XRP might qualify as investment contracts, secondary sales do not. In a significant development, the judge ruled that XRP itself is not classified as a security, a ruling that was met with applause from the crypto community.
As Ripple navigates these complex legal waters, its argument that fungible cryptocurrencies should not be viewed as securities stands as a critical point of discussion within the broader context of cryptocurrency regulation. Given the ongoing evolution in regulatory perspectives, the dialogue surrounding the classification of digital assets will undoubtedly continue to unfold, influencing the future of the entire crypto industry.
