As is known, Ripple, its former CEO and founder Christian Larsen and current CEO Bradley Garlinghouse have been sued by the US Securities and Exchange Commission. The SEC claims they raised more than $ 1.3 billion through the illegal sale of securities.
At the center of the crypto community is a fundamental question about XRP: is it a security or a currency? According to the SEC’s case, it’s a security and therefore Ripple did not provide its investors with the correct information they needed to assess any potential risk. According to Garlinghouse, it’s a digital currency, so the SEC has nothing to do with it. The SEC had previously decided that Bitcoin and Ethereum are currencies. Also, the Justice Department treated XRP as a currency in 2015 when Ripple filed a lawsuit for its business.
But XRP is significantly different from Bitcoin and Ethereum. For these two cryptocurrencies, new coins are created through an ongoing “mining” process. Ripple, on the other hand, launched XRP by generating 100 billion units simultaneously. Ripple has approximately 6.4 billion XRP and Garlinghouse and Larsen have a significant share. 48 billion XRP is kept in reserve for seasonal sales. This difference may be the reason why the SEC claims that XRP is a security, not a currency.
The lawsuit alleges that Ripple violated securities laws by selling XRP over a seven-year period that began in 2013.
Why Do People Say XRP Is A Stock, Not a Commodity?
Claims that XRP is an unregistered security and not a commodity digital asset have been around for years. However, listing on a major digital asset trading platform can be viewed as a confirmation of its legitimacy. It is an important issue here whether customers who are trading are aware of the claims.
The lawsuit claims that XRP is a security because Ripple has “sole control over the nodes of the so-called cryptocurrency, and therefore a joint venture,” under US federal securities laws. Moreover, Ripple’s existence as a company was linked to the public sale of XRP tokens and used the proceeds from that sale to finance its operations.
Defines a node as a computer server that stores a ledger of all transactions of an entity and processes transactions. Ripple / XRP therefore represents a different situation than other (unsecured) cryptocurrencies that use “decentralized nodes” that are not controlled by any company. This makes Ripple / XRP a “joint business” with a single point of failure, a situation not found in other digital assets like Bitcoin.
As Dr. Craig Wright has said in the past, regulators may move slowly on issues related to blockchain and digital assets, but they will catch up. Ripple and XRP have been in the market for over seven years and have been one of the top five crypto assets with high transaction volume, which has stood out for most of this time. The SEC is taking action against Ripple, showing that it is more concerned with ambiguous ICO token scams and that no name is too big to escape regulatory scrutiny. In the coming years, the elimination of uncertainties and compliance with the law will be among the most important new changes for the digital asset industry.
An important part of deciding whether XRP is a currency or a security could also include the Howey test created by the 1946 Supreme Court case. This decision defined a security as an investment of money in an organization that is shared in anticipation of earning from the jobs of others. In other words, according to the test, it is checked whether an asset has the following 4 basic properties to understand whether it is a security or not:
“IT COULD BE OBTAINED FOR MONEY? IS IT HOPE TO MAKE A PROFIT FROM INVESTMENT? WAS THE INVESTMENT MADE IN A COMPANY / VENTURE? IS THE PROFIT DUE TO THE EFFORT OF A THIRD PARTY OR PARTNER? ”
According to Ripple, XRP does not meet the Howey test for a variety of reasons, especially because no one bought XRP in anticipation of taking Ripple’s profits. It is a matter of curiosity how the case will end within the framework of these details.