PERSPECTIVE: If Ripple is Classified as a Security, What Does That Mean for Cryptocurrency?
Back in the summer of 2018, the United States Securities and Exchange Commission (SEC) stated, in separate statements within 2 days of each other, that it doesn’t consider Bitcoin or Ethereum as securities.
The SEC stated that the highly decentralized nature of Ethereum, with no central authority or company controlling it, does not currently meet the standards that would make it a security. Likewise, they pointed out that Bitcoin is a replacement for sovereign fiat currencies and that this type of crypto is not a security. While this was clearly great news for cryptocurrency overall, it does lead to a question. What are the guidelines to consider a cryptocurrency a security?
That answer may become startlingly clear thanks to Ripple.
As the third most valuable cryptocurrency in the world today, the Ripple XRP coin doesn’t behave in the same manner as Bitcoin or Ethereum. In fact, on the surface, XRP looks exactly like a security. And for the past year, Ripple has been embroiled in several class action lawsuits claiming that Ripple was selling unregistered (read illegal) securities. The lawsuits are actually about relatively small amounts of money. The reality is that this lawsuit will force the U.S. Courts to provide clarity as to the true classification of what types of cryptocurrency will qualify as a security and what types will not.
In 2017, the cryptocurrency “DAO” was officially classified as a security. In the report, it stated that it was applying the Howey Test to clarify if a product can be classified as a security. The Howey Test was created by the Supreme Court in SEC vs Howey. This test determines if a deal involves an investment contract. An investment contract means that it is a type of security. In the case of cryptocurrency, its status as a security is determined through three standards that must be met to qualify as a security. These are:
1) The investment of money;
2) In a common enterprise; and
3) The expectation of profits due to the efforts of others.
All three standards must be met for a coin to be considered a security. And if it is a security, then is must be registered with the SEC. Even worse, securities can only be purchased by accredited investors… which doesn’t include the average cryptocurrency investor.
Based upon these qualifications, the SEC determined that most Initial Coin Offerings (ICO) are in fact securities. As a result, you may have noticed that many new ICO’s exclude U.S. citizens from participating in their launch.
But what about ICO’s that took place before the SEC statement? That’s where Ripple comes in.
Ripple was clearly created before there was any relevant legal or SEC guidelines in place. It was created by an ICO, where people invested money (satisfying requirement 1). It is run by a common enterprise, Ripple Labs, who still holds 60% of all the XRP in the world (satisfying requirement 2). And Ripple continues to slowly sell the additional XRP on the market. This in effect is creating a never-ending ICO.
As for requirement 3, many investors in XRP were worried about Ripple dumping the remaining 60% of the coins onto the market. In response to this worry, Ripple announced they would put most of the XRP into escrow. Escrow means a third party held the coins and wouldn’t release them except under certain specific conditions.
With approximately 60% of XRP suddenly in escrow, it caused the value of XRP to soar. As a result, investors bought XRP expecting to make a profit (thus fulfilling requirement 3).
Ripple also promoted, and continues to promote, partnerships that are not related to XRP. Many argue that this misled investors to assume that Ripple and XRP are the same thing.
On the surface, it appears fairly clear cut — XRP is a security. But as is often the case in the U.S. legal system, nothing is ever clear cut. Cryptocurrency is a new technology and the rules and guidelines are still being formulated. The final decision will belong to the courts and the SEC. Until they rule, this becomes a bit of a boondoggle that leaves hundreds of other ICO’s in limbo in the United States and internationally. If the U.S. rules XRP is a security, it will likely be picked up in some form by other governments around the world.
So what does this mean for Ormeus, ORME and the upcoming Ormeus Cash Coin (OMC)? Well, on the surface it doesn’t look like there is a problem. Ormeus Coin is a DAO, a Decentralized Autonomous Organization. That means there is no “common enterprise” running the organization. It is an organization represented by rules encoded as a computer program that is transparent, controlled by shareholders (ORME coin holders) and not influenced by a central government or management structure.
ORME, the initial coin released by Ormeus Coin, was also never an ICO. No funds were raised to create Ormeus Coin through an ICO. In February 2018, SEC Chairman Jay Clayton told a Senate Banking Committee that if companies engage in an ICO — then a security is essentially being created. This therefore strengthens ORME’s position as a non-security. (The Ormeus Whitepaper will be updated soon with additional information. STAY TUNED!)
OMC, on the other hand, is meant to be a transactional coin that holds a relative value based upon cryptocurrency assets held in the Ormeus Reserve Vault. It will be partnered with the innovative POS system that has been created by COTI. Many believe that this new system will revolutionize the way we handle online and direct buying and selling, creating a true system for the integration of cryptocurrency into retail.
OMC is also similar to ORME in that any potential profits will be based on market forces, not on the efforts of a promoter or a company. It also isn’t an ICO, which further strengthens its case that it’s also not a security. (The Ormeus Whitepaper will be updated soon with additional information. STAY TUNED!)
While we wait to see the outcome of Ripple’s class-action lawsuits, and the resultant effect that ruling has on ICO’s, it’s good to know that Ormeus will most likely not be impacted and is positioned to be a leader in cryptocurrency’s move into mainstream retail.
