Ripple Labs recently upped the stakes in its ongoing dialogue with U.S. regulators. On May 27, the company sent a compelling legal memorandum to the SEC’s Crypto Task Force, addressing Commissioner Hester Peirce’s inquiry regarding the separation of non-security crypto assets from their initial investment contracts. Stuart Alderoty, Ripple’s chief legal officer, shared this update, indicating that the communication directly responds to Peirce’s “New Paradigm” discourse, shedding light on when a crypto asset might transition from being linked to an original investment contract.

Ripple Advocates for Regulatory Clarity on XRP

Introduction to Ripple’s Legal Position

Ripple’s memorandum not only acknowledges the productive discussion with SEC representatives on May 20 but also delves into the legal intricacies highlighted in Peirce’s remarks. Inspired by the 2022 scholarly work “The Ineluctable Modality of Securities Law” by Lewis Cohen and associates, Ripple argues that current laws do not support classifying numerous fungible crypto assets as securities when they are traded in secondary markets. The document posits that Cohen’s analysis is still the most accurate interpretation of existing securities law.

Ripple’s Proposed Criteria for Asset Classification

The company introduces a structured test for determining when a cryptocurrency has entirely separated from its initial investment contract. The two main criteria include: (i) the absence of any unmet material promises made to the original buyer and (ii) the lack of enforceable rights for subsequent holders based on those promises. Commitments such as developing a functioning blockchain or providing dividends are cited as examples of such binding promises, while general assertions or promotional statements are deemed insufficient.

Ripple’s position aligns with a favorable July 2023 decision by Judge Analisa Torres, which ruled that XRP in itself is not a security, although certain institutional sales were classified as investment contracts. Ripple underscores this decision, pointing out that the judicial system has already validated secondary-market XRP transactions, particularly those conducted through blind order books, as non-securities trades.

Regulatory Implications and Recommendations

Acknowledging the SEC’s concerns about potential exploitation of legal ambiguities by bad actors, Ripple asserts that any substantive policy gaps should be addressed by Congress, not the SEC. While the company supports the idea of a “well-designed safe harbor,” it warns that terms like “fully functional” or “sufficiently decentralized” lack the rigidity required for regulatory precision.

Peirce’s acknowledgment in her speech that the majority of currently circulating crypto assets are not securities forms the backdrop for Ripple’s argument. She called attention to the complexities in delineating when a crypto asset detaches from its original investment contract, proposing provisional safe harbor measures. Ripple capitalizes on this perspective, arguing that its bright-line test offers a more reliable framework than decentralization metrics, facilitating token circulation in a transparent, open manner without unnecessary regulatory encumbrances.

Current Status of Ripple’s Legal Challenges

This submission is part of the broader SEC v. Ripple legal saga, now nearing a critical phase. The SEC recently proposed a settlement to limit Ripple’s institutional-sale liabilities and remove barriers against XRP distributions, though the court’s approval is still pending.

The market’s response has been cautious, with XRP’s price hovering around $2.30. Despite the legal back-and-forth, Ripple remains committed to forging a clear regulatory path for XRP and similar crypto assets, bolstering investor confidence and market stability.

Frequently Asked Questions

What is the primary focus of Ripple’s legal argument against the SEC?

Ripple’s legal memorandum primarily argues that many cryptocurrency transactions in secondary markets should not be classified as securities. It emphasizes a framework that identifies when a digital asset is no longer connected to its original investment contract, advocating for clearer regulatory guidelines.

How does Ripple’s proposal align with previous court rulings?

Ripple references Judge Analisa Torres’s 2023 ruling, which determined XRP itself is not a security. This judicial acknowledgment supports Ripple’s stance that secondary-market trades, particularly those within blind order books, should not be considered securities activities.

Why does Ripple advocate for congressional intervention in crypto regulation?

Ripple believes that comprehensive policy changes to address genuine legal gaps in crypto regulation should be managed by Congress rather than the SEC. The company argues that legislative clarity is crucial to prevent misuse of legal ambiguities and to establish a stable regulatory environment for cryptocurrencies.

What impact has the SEC v. Ripple case had on XRP’s market performance?

The ongoing legal challenges have kept market reactions subdued, with XRP trading steadily around $2.30. Despite the uncertainties, Ripple’s efforts aim to instill investor confidence by advocating for clearer legal standards and by trying to settle disputes that impact the cryptocurrency’s market dynamics.