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[Insight] U.S. SEC-Ripple, What are the Argument of Both Sides?

XRP, a digital asset issued by Ripple Labs Inc. (Ripple) that had been well known for being number 3 to 4 for its total market value, was charged by the U.S. financial authority, Securities and Exchange Commission (SEC). XRP was a digital asset designed for fast, convenient, and cheap payment and transaction between borders. The charge for the prosecution was that Ripple did not enroll beforehand for the issuance and trade of XRP, even though XRP itself can be considered as a security.

Under these suspicions, the SEC, U.S., charged Ripple along with its CEO Brad Garlinghouse and its co-founder Chris Larsen. Though the charge alone will not conclude the situation and Ripple is likely to take every legal action to the bitter end for its life is depending on it. However, it seems obvious that this could be a crisis for XRP and other similar digital assets.

While SEC is declaring that XRP is one of the securities, Ripple is making a counter-argument by saying that XRP is merely one of the currencies or alternative assets. Though the decision is up to the court, it seems we need to examine further the arguments from both sides. In traditional ways, the deciding method for whether it is a security or not is the Howey Test presented by the supreme court of the U.S. in 1946.

The Howey Test includes 4 standards: 1) Investment of money, 2) In a common enterprise, 3) With an expectation of profits, 4) From the efforts of others. According to these standards, most of the digital assets are corresponding to the condition of 1) and 2). So it depends on 3) and 4) to decide whether it is a security token or not.

The total amount of XRP currently issued is around 100 billion. This includes 55 billion XRP under the possession of Ripple, and the company is gaining some profits by selling it quarterly. According to SEC, “Ripple is selling XRP by advertising its various uses. Yet such uses are non-existing and not even in such uses.” Also, they added, “Even the financial firms currently using XRP are keeping their uses because of the benefits Ripple is providing. Even though it is expensive than other alternatives.”

Furthermore, in the latter half of the last year, SEC has presented a guideline for the judgment for Investment Contracts to ensure the standard 3) and 4) of Howey Test. As for the standards in details, they have presented the followings: △ Is it possible for token holders to sell it for their benefits or ask for some dividends △ Are they expecting a price rise of the token through the team’s efforts △ Does the team is responsible for development and management of the network △ Does the team is in control of generating and issuing of the token △ Does the development of both decentralized network and the token has been completed and functioning accordingly △ Was it designed to have a flat or decreasing value, and the reasonable purchasers would not buy them for the purpose of making investments △ Does the advertisement of the token is focusing on its use rather than as a means for investment, etc.

According to this standard, there is a firm called Ripple that is in de facto management of XRP, and XRP holders are making some benefits by selling them to the market, and the XRP’s system is not decentralized, it is clear that XRP can be seen as security.

On the other hand, Ripple declares XRP cannot be viewed as an investment contract security since the stocks of Ripple Lab Inc. and its stockholders are already existing separately. That is to say, the only stockholders who can share the benefits from Ripple or receiving dividends are only those who are holding Ripple’s stock. And therefore, the XRP holders are irrelevant. Ripple also declares that the price of XRP is much more related to other digital assets than Ripple’s business activities.

Cory Johnson, Chief Market Strategist of Ripple, also insisted that “XRP is not meeting the standards for being a security.” He also added that the XRP ledgers are already decentralized and Ripple Labs Inc. is a firm that is completely separated from XRP. CEO Garlinghouse is making his protests by saying, “In 2015, the Department of the Treasury and the Department of Justice have already decided that XRP is a digital asset. And the same goes for the regulatory authorities of G20. Why SEC alone is claiming XRP is a security?”

Right now, it is hard to determine which one is right, and which one is wrong. For the standard to decide whether it is a security or not is quite vague, and both arguments are partially right and partially wrong. Since the life of it is depending on it, Ripple will throw everything it can for this court controversy, the lawsuit could be extended over a long period of time.

There is a saying good comes with the bad. Though the soaring price of Bitcoin that is even surpassing its past records have reignited the interests for the digital assets, the concerns related to SEC is also looming ahead. Right now, there are no options but to keep our eyes on the development of this controversy.

*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information but we cannot guarantee its accuracy or completeness.

*The document has reflected the individual’s opinion and it may not be consistent with the company’s official point of view.

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