SEC v RIPPLE: Ripple Ordered to Disclose Legal Opinions

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Coinmonks

4 min readFeb 24, 2022

This past week saw a potentially key development in the United States Securities and Exchange Commission’s (“SEC”) case against Ripple Labs and its crypto token XRP. As we discussed in a previous blog post (here), the SEC is arguing that XRP is a security and that Ripple was offside of securities legislation by selling XRP without registering it.

In this recent development, Ripple was ordered to provide unredacted copies of two legal opinions that it received in February and October, 2012. These legal opinions were with respect to whether the SEC would deem XRP to be a security.

The February 2012 Opinion

The February 2012 opinion found that:[1]

Coins that are purchased are likely to be prepaid access: Coins could become subject to regulation as “prepaid access” under the Bank Secrecy Act. This regulates providers and sellers of prepaid access.

Any Coins sold to investors could be considered securities: “If sold to Investors who provide Founders with the capital necessary to launch and operate NewCoin, Coins will likely be considered securities and subject to regulation under federal securities laws”.

Coins not initially sold may still constitute securities if sold at a later date: Coins could be considered securities when sold on the secondary market at a later date.

Additionally, Coins may become commodities: Should contracts for future delivery of Coins be developed, they will likely be classified as commodities under the Commodities Exchange Act.

Regulators could treat exchanges as money transmitters or currency exchangers.

The October 2012 Opinion

Based on the February 2012 opinion, it appears that Ripple revised its business plan and then sought an opinion on its revised plan. This second opinion in October 2012 found that:

“Although we believe that a compelling argument can be made that Ripple Credits do not constitute securities under the federal securities laws, given the lack of case law, we believe that there is some risk, albeit small, that the SEC disagrees with our analysis”.

The October 2012 opinion also suggested that Ripple seek a letter from the SEC confirming it would take no action against Ripple over XRP.

What does this mean in the Current Action?

On release of these opinions, both the SEC and Ripple claimed that the opinions were supportive of their respective cases. The SEC argued that the opinions demonstrated that Ripple knew there was a risk in 2012 that XRP would be considered a security by the SEC. As further argued by the SEC, Ripple ignored this risk and also failed to seek a no-action letter from the SEC.

On the other hand, the opinions were proactively sought in 2012. This was years before the SEC had turned its attention to crypto assets in a meaningful way and in a dearth of case law on the subject. Accordingly, Ripple can argue that the opinions show that it was being prudent and diligent in its launch of XRP.

Further, Ripple can argue that the SEC acquiesced its right to act against Ripple by waiting until December 2020 to launch this action. Put another way, if XRP was such a concern in 2012, why did the SEC wait 8 years to take action?

Also, and from a practical point of view, the October 2012 opinion did admit that the there was a small risk that the SEC would find XRP to be a security. Although the SEC will certainly use this in its favour, this type of ‘cover yourself’ language is common in legal opinions. I would expect arguments from both sides on how much weight to give this statement, with Ripple arguing that it has to be taken in the context of the entire opinion.

On balance, the disclosure of the legal opinions are interesting, but will probably have little impact on the legal action. However, there are sure to be more developments as this action continues and we will be here to provide updates.

This article is not financial advice.

Kevin Stenner and Mihai Beschea

[1] https://www.fxempire.com/forecasts/article/unsealed-documents-favor-ripple-and-xrp-905490

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SEC v RIPPLE: Ripple Ordered to Disclose Legal Opinions

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