Earlier in June, William Hinman, the Director of the Division of Corporate Finance in the SEC, declared that Ethereum is not a security. The announcement came as a reprieve to crypto investors. Speaking on Ethereum, Hinman noted that it operates on a decentralized network, rather than a typical centralized platform that usually offers securities. For this reason, the SEC could not regulate the digital currency.
Additionally, Hinman mentioned that the SEC did not gain any significant value form treating Ethereum as a security. This further reiterated that the oversight authority has no intentions of regulating Ethereum, at least for the near future. Before this, Jay Clayton, the chairperson of SEC, affirmed that Bitcoin is not a security. Clayton said that Bitcoin is an alternative to fiat currencies, meaning that it cannot be classified as a security.
The confirmations by the SEC regarding the classification of Bitcoin and Ethereum were received warmly by the crypto community. Hover, many were left wondering the classification of the other digital currencies. Below is an analysis of Ripple, the third most valuable cryptocurrency in terms of market capitalization.
Over the years, Ripple has maintained that their digital currency, XRP, is not a security. Brad Garlinghouse, the project’s CEO, has talked on this matter on several occasions. Recently, a group of former XRP holders filed a case against Ripple claiming that the token is a security. Concerning this, Garlinghouse stated that it is the role of the SEC to determine whether an asset is a security or not. He further added that XRP is not a security because it is autonomous from the Ripple Company. This means that if Ripple collapses, XRP would still exist.
Cory Johnson, the chief market strategist at Ripple, concurred with the sentiments made by Garlinghouse. When asked whether XRP is a security, Cory responded by saying that the digital currency does not match the description of a security.
Typically, investment assets are subjected to ‘The Howey Test‘ to determine whether they are a security or not. This test was established by the US Supreme Court to ascertain if certain transactions can be classified as investment contracts. If the transactions pass the test, they qualify to be securities, meaning that their owners are obliged to disclose and register them.
XRP Token Howey Test
Is XRP an Investment of Money?
Ripple has continuously stated that XRP is not an investment tool. Therefore, owning XRP does not equate to shares within the Ripple company. Essentially, XRP is a digital asset developed by Ripple and has its designated functions.
Do XRP Owners Expect Profits from Their Investment?
Ripple does not guarantee investors that the value of XRP will soar after they acquire the coin.
Are Assets Invested in a Common Enterprise?
A common enterprise is where investors collectively invest their funds on a single project. In this regard, Ripple maintains that they do not have a common enterprise. However, a majority of XRP tokens are controlled by Ripple, its parent company. The company is working this SEC to fix this matter.
Where Do Profits Come From?
Lastly, the Howey Test seeks to establish the origin of the profits generated by an asset. If the profits are not a result of the actions taken by the investor, the asset might be a security. On the other hand, if the investor’s actions affect the profitability of the asset, it might not be a security. Since the price of XRP is influenced by supply and demand created by investors, it cannot be considered as a security.
The Effects of Classifying XRP as a Security
If XRP is classified as a security, Ripple would have to provide to the token’ holders as they would have a share of the company. Also, the coin would find it difficult to realize its intended goal of facilitating seamless cross-border transactions. This is because various jurisdictions have different regulations concerning securities.
However, the situation mentioned above is different from securitizing futures contracts and backing them with XRP. For example, futures contracts can be backed by an underlying asset such as wheat. When you buy the wheat, it does not main that you own the farm where the wheat was grown.
The best way of classifying XRP is as a digital asset. This would enable the token to fulfil its objective of bridging the gap between fiat money and cryptocurrencies.
The main difference has been XRP and securities is that the former is a digital asset with a use case while the latter can only be held and traded. The XRP blockchain before the establishment of Ripple. The company used the XRP blockchain to develop solutions for the financial services industry. Thus, buying XRP does not equate to owning shares in Ripple.
Most of the people who perceive XRP as a security do so because of its high centralization. A majority of XRP tokens are owned by Ripple. To comply with SEC regulations, the company has to decentralize the XRP tokens and segregate the token from itself. Nevertheless, XRP is a crypto asset designed for value exchange and it is likely that other authorities will not classify it as a security.