{"id":2520,"date":"2021-03-21T18:10:48","date_gmt":"2021-03-21T17:10:48","guid":{"rendered":"https:\/\/thecryptowolf.net\/2021\/03\/21\/xrp-purchasers-back-ripple-arguing-that-it-is-not-a-security\/"},"modified":"2021-03-21T18:10:48","modified_gmt":"2021-03-21T17:10:48","slug":"xrp-purchasers-back-ripple-arguing-that-it-is-not-a-security","status":"publish","type":"post","link":"https:\/\/thecryptowolf.net\/2021\/03\/21\/xrp-purchasers-back-ripple-arguing-that-it-is-not-a-security\/","title":{"rendered":"XRP purchasers back Ripple, arguing that it is not a security"},"content":{"rendered":"
\"XRP<\/div>

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On Dec. 22, 2020, the United States Securities and Exchange Commission filed a complaint against Ripple Labs<\/a>. The complaint essentially alleged<\/a> that Ripple had engaged in a multi-year, sustained practice of illegally selling unregistered, non-exempt securities in the form of its XRP<\/a> tokens.\u00a0<\/p>\n

This complaint, having been filed<\/a> on the last day of former SEC Chairman Jay Clayton\u2019s tenure at the commission, led to a considerable volume of public commentary, as is not unusual for SEC litigation against major players in the crypto space. What is unusual about SEC versus Ripple is the reaction from a sizable segment of XRP purchasers.<\/p>\n

Related: <\/em><\/strong>SEC vs. Ripple: A predictable but undesirable development<\/em><\/strong><\/a><\/p>\n

On Jan. 1, 2021, a group of XRP purchasers led by attorney John Deaton filed<\/a> a petition seeking a writ of mandamus in the District of Rhode Island, asking the court to force the SEC to exclude their XRP tokens from the pending litigation against Ripple on the grounds that the plaintiffs had not purchased investment contracts. The petition argues that the SEC, under the leadership of then-chairman Clayton, abused its authority on a politically-motivated vendetta against Ripple. Regardless of Clayton\u2019s motivations, the petition deserves closer analysis.<\/p>\n

Public response to the petition<\/h2>\n

The public reaction to the SEC\u2019s lawsuit was swift and powerful. Within days after the action was announced, the market capitalization for XRP had fallen an astounding 63%, losing<\/a> about $15 billion in value. While a review of pricing data maintained by CoinMarketCap indicates<\/a> that much of that value has recovered as the crypto market has exploded, as of this writing, XRP has not reached the price it was trading at before the litigation was initiated \u2014 as has been the case for the other top cryptocurrencies, such as Bitcoin (BTC<\/a>) or Ether (ETH<\/a>), which were up from $19,500 on Dec. 15, 2020, to more than $60,000 on March 14; and from $589 on Dec. 15, 2020, to more than $1,924 on March 13, 2021, respectively.<\/p>\n

A large part of the problem, from the XRP purchasers\u2019 perspective, is the completely understandable decision of a large number of crypto exchanges and platforms to delist XRP or to halt sales to U.S.-based customers. Binance.US<\/a>, Bittrex<\/a>, Blockchain.com<\/a>, Coinbase<\/a>, Crypto.com, eToro<\/a>, OKCoin<\/a> and Wirex (a crypto payments enterprise) are among more than 50 businesses that have suspended trading in XRP<\/a>. Since regulated exchanges are not allowed to trade in unregistered securities, this is a rational decision for these businesses, but the consequence of these changes is likely to be devastating to Ripple and persons holding XRP tokens.<\/p>\n

Unfortunately, the bad news just keeps coming. The drop in price and delisting of XRP has also been accompanied by the liquidation of XRP holdings by U.S.-based investment firms such as Grayscale<\/a> and Bitwise Asset Management<\/a>. Regardless of what happens, this is likely to make major investors cautious about XRP for the foreseeable future.<\/p>\n

Deaton\u2019s claims, and is XRP a security?<\/h2>\n

As mentioned above, on Jan. 1, 2021, a petition was filed in Rhode Island seeking to halt the SEC\u2019s claims as to XRP owned by a group of purchases. John Deaton, an attorney with class action experience, claims in the petition that he and others like him did not buy XRP as an investment or consider it to be a security. Paragraph 45 of the complaint suggests that XRP is a currency, virtual currency or commodity, or utility token, and, therefore, not a security. In support of this conclusion, Deaton argues that XRP has a number of uses that essentially preclude it from being classified as a security.<\/p>\n

The memorandum in support of the petition suggests that XRP has a range of legitimate functions, such as increasing the speed of international payments, acting as an alternative payment or a currency substitute, and serving as a medium for foreign exchanges. The petition claims that these use cases prove that XRP is not a security. Unfortunately, the SEC has never accepted the notion that utility by itself means that an asset is not a security. According to the SEC, the question is how the asset is marketed and the reasonable expectations of purchasers.<\/p>\n

The SEC\u2019s position in this regard is not unique to digital assets. For example, the SEC issued a release in 1969 explaining<\/a> that while whiskey has utility as an alcoholic drink, a share of whiskey receipts can still be an investment contract:<\/p>\n

\u201cThe purchaser of the whisky warehouse receipt is not being offered or sold such receipts with a view to acquiring and taking possession of the whisky. Rather, the purchaser in these cases is making an investment under an arrangement which contemplates that others will perform services which will increase the value of the whisky and will also eventually sell the whisky under circumstances which are expected to result in a profit to the purchaser-investor.\u201d<\/p><\/blockquote>\n

This analysis applies even if the warehouse receipt gives the purchaser the right to acquire the whiskey. Similarly, rare coins have all kinds of utility. They can be a collector\u2019s item, as well as a store of value or even a medium of exchange. However, the sale of coins, especially when combined with services such as assistance in selecting and reselling when desired, can also be an investment contract<\/a>, again without regard to whether the purchaser actually takes possession of the asset and could display or otherwise use it.<\/p>\n

In the case of the XRP token, the utility that is available is not, in and of itself, sufficient to ensure that the token falls outside the definition of an investment contract. Instead, if you parse through the annoyingly complicated Howey Test<\/a>, there is an argument to be made that these assets are indeed securities notwithstanding Deaton\u2019s allegations.<\/p>\n

Does XRP fall within the Howey investment contract test?<\/h2>\n

The Howey Test requires that there be a payment of money or something of value, in a common enterprise, where the purchaser is expecting a profit, based on the essential managerial or entrepreneurial efforts of others. Most of those elements are indisputably present in the case of XRP, and the last is at least arguably present.<\/p>\n

Purchasers buy XRP for fiat or other convertible digital assets or sometimes acquire them by providing services. All of these are things of value that satisfy the first element of the test. Moreover, the fortunes of the company and all of the purchasers rise and fall together, as the success of the XRP token itself rises and falls. <\/p>\n

Paragraph 56 of Deaton\u2019s complaint, in fact, bemoans the fact the drop in price caused by the SEC\u2019s action resulted in \u201cmulti-billion-dollar losses of innocent third parties.\u201d This is only possible because the fortunes of everyone are tied together along with the successful development of XRP. Finally, the profitability and success of XRP are clearly due to Ripple\u2019s efforts. Even an examination of the use cases suggested by Deaton points to this.<\/p>\n

XRP\u2019s numerous use cases<\/h2>\n

In the memorandum in support of the petition, there are numerous allegations about use cases for XRP that explicitly depend on the efforts of Ripple and individuals associated with the company:<\/p>\n