Aug 2, 2021
What They Are Not Telling You About Ripple (XRP)
SEC Refuses to Play by the Rules and May Get Burned by New Bill
Background on SEC vs. XRP Case
Many of you that keep up with the crypto world, particularly those that live in the United States, are keeping both eyes glued to the recent litigation actions inside the SEC vs. XRP case. This is in part because there has never been such a massive case to the importance of crypto adoption in the US, but also as to not miss the many “hall passes” being given to the SEC.
As I have talked about in my previous article, “5 Reasons XRP Will Crush the Crypto War”, the judge in charge of establishing a ruling for this case, Judge Sarah Netburn, has an enormous decision ahead with long lasting and far reaching implications.
I want to take a moment to highlight some of the recent case activity and take a stab at providing a possible explanation as to what may be happening behind the curtain that is the SEC’s standard operations.
To do this let me first take you back in time to April where the biggest thing on Ripple’s agenda was making a case for a fair notice defense. For those of you who may not be familiar with the fair notice defense it is essentially a defense that states the party being sued had no formal legal notice that what they were doing was wrong.
If Ripple would have known they were offering the sale of a security they would have needed to register it with the SEC. This process is often a lengthy one and always includes these 4 items.
- A description of property and business purpose
- A description of the security being offered
- Information on leadership
- All certified financial statements
Because Ripple failed to register XRP as a security with the SEC they are coming after Ripple CEO Brad Garlinghouse, holding him responsible for the sale of illegal securities.
Ripple’s team of illustrious lawyers intend to fight this case tooth in nail and have began working on a countersuit against the SEC to recover the losses resulting from the ongoing litigation action. Ripple biggest chance to settle or win this case lays within their fair notice defense. Ripple knows the SEC must prove XRP is a security.
Its true that even today SEC commissioners cannot agree on whether cryptocurrency should be considered an illegal security, a legal security, or not a security at all. According to the SEC’s archaic Howey Model for determining the classification of a security, Ripples token XRP meets the criteria, or atleast with a little ignorance and nescience it may.
The truth is that crypto is so much more than a security. Lets break it down in the context of the Howey test.
What is the Howey Test?
“The “Howey Test” is a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.” If so, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, those transactions are considered securities and therefore subject to certain disclosure and registration requirements.”
The Howey Test consists of 4 questions. If the answer to all 4 questions is “true” the transaction is said to be an investment contract and as such is governed and taxed accordingly.
Howey Test - Question 1
Is it an investment of money?
My Answer
Yes. Many of the early adopters of XRP originally purchased it with the intention that at some point later in time they would earn a yield from this investment. They had a hyperopic mindset and an understanding that the value of the tokens would increase as the network was built out and as XRP solved for more issues in the payment world. The retail investor understood the value add potential for a fast, low cost, and efficient form of payment.
So… question one — TRUE
Howey Test - Question 2
Is there an expectation of profits from the investment?
My Answer
Yes. Many early investors bought into the token to add it to their highly speculative digital asset portfolio with the expectation they would at some point see a return on their investment. As time moved on and as the network was built out, individuals and institutions began buying XRP to be used how it was designed by the Ripple team, as a means of payment and settlement. Fast forward to today and the majority of transaction volume on the network comes from businesses using RippleNet and individuals sending each other money.
You can think of it as people purchasing web domains right as the internet came out. Someone understood that .com domain names may one day be in high demand because they offered users value on a network that had not been fully developed yet. There was no way for these investors to know which names would be valuable or if .com would rank among the most popular domain extensions. Similarly in crypto we have many individuals buying large amounts of different coins to later sell without any real promise to make a profit. In this instance I would classify these transactions as a risky investment contract.
With that being said the reality now is that many of the holders of XRP are actively using the currency for the utility it provides. It is truly impossible to determine whether a person is speculatively holding XRP or they at some point plan on using it for its utility.
So… Question 2 — FALSE
Howey Test - Question 3
Is the investment into a common enterprise?
My Answer
In my opinion this is the most trivial of the four questions because it has been interpreted by courts in different ways. Essentially its asking whether funds were distributed into a central pool with the expectation that everyone makes a profit.
This is where XRP is really pushing back.
According to the SEC, Retail investors have made an investment contract with a common enterprise with the expectation that the enterprise act in a way that would result in either gains or losses for its investors. They back up their claim by pointing out the large the amount of XRP that is currently being used to fund the Ripple’s operations.
This is where Attorney John Deaton plans to turn the tables. He states,
“The open-source nature of XRP allows users throughout the world to use the token to pay for goods and services without any connection to or reliance on Ripple. According to Cryptwerk, over 1,300 companies currently accept XRP for payment across industries from business services to tourism and travel.”
I agree that XRP has massive utility and the power to revolutionize the payment and settlement industry. I believe it also has a future in the DEFI and NFT space. It is far too early to discount the utility that the XRP token provides and I believe it would be an atrocity to prematurely label XRP and the like securities.
So…Question 3 — FALSE
Howey Test - Question 4
Do the profits come from the efforts of a promoter or third party?
My Answer
It seems this question is similar to the previous question but it differs in the aspect of how the asset was originally funded and how it was marketed at sale.
The SEC claims that Brad Garlinghouse and the other members of Ripple sold tokens before the blockchain was complete and in doing so disobeyed the Securities and Exchange Act of 1934.
While it is true and public knowledge that Ripple’s founders were responsible for the creation of XRP, they claim that both run independently of one another and as such the holders of XRP have no ownership or equity in Ripple the company. In addition, they emphasize the value associated with the utility XRP provides, which they point out is not a characteristic it shares with traditional securities.
Ripple sold XRP to the public before the two were distinctly separate.
So…Question 4 — TRUE
The Howey Test Verdict
As you can clearly see using the Howey Test to determine the status of cryptocurrency is a futile effort. It does not fully take into account all the factors that make digital currency assets distinguishably different than any other previously labeled securities.
I believe the biggest thing XRP has going for it is the lack of regulatory clarity in the years since cryptocurrency’s creation. There has been many statements made by SEC officials admitting there is no consensus on the status of cryptocurrency. Thankfully, Ripple was successful in obtaining a disposition from William Hinman, the former director of the division of corporate finance at the U.S. SEC.
Mr. Hinman declared both Ethereum and Bitcoin securities in 2018. The transcripts from the disposition are not open to the public but there will likely be a full brief that will come out in the future.
The deposition was a miraculous win for Ripple. They were hopefully able to illustrate to the court just how chaotic the regulatory clarity has truly been. Ripple also has requested documents from the SEC, but they refuse to relinquish them. The SEC has continuously delayed this case putting them in danger of violating “good faith”.
The SEC must be careful that they are not overstepping their bounds. Recently senators have joined the discussion and have even went as far as to say the SEC may have no place in establishing regulations around cryptocurrency.
The government is scared of cryptocurrency as you can plainly see here in Senator Elizabeth Warren’s letter from the Senate.
Specifically, Section 120 of the Dodd Frank Wall Street Reform and Consumer Protection Act gives FSOC the ability to “provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies” when the “ conduct, scope, nature, size, scale, concentration, or interconnectedness of such activity or practice could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financial markets of the United States, or low-income, minority, or underserved communities.”
The SEC may be given guidance on how to proceed from higher ups. Maybe some of that advice has been to delay the case and to fight long and hard. Maybe they were told to settle thereby laying the issue to rest for the time being. Who knows?
One thing for sure is that something fishy is going on!
What They Are Not Telling You?
This next part is purely speculation and good fun. My thoughts on this topic should not be taken as financial advice.
To fully understand my hypothesis I encourage you to read my article, “Sexy CBDC for Uncle Sam”, where I talk about how the United States government is already be working out the details for its very own central bank digital currency.
It is my belief that we are closer to a legal tender CBDC than we may think. Its possible the government is working with the SEC to reach a verdict in this case that will result in the labeling of XRP as an illegal security. This will set a precedent for the SEC to go after pretty much any and all cryptocurrency.
This witch hunt for “dangerous” cryptocurrencies will be accompanied by a United States CBDC offering where they will come out and say that the only way to pay for goods and services is through their currency or designated stable coins. They will defend their decision by stating its a matter of national security.
The currency will be centralized and governed by the same corrupt financial institutions that currently run the world. They will end the fight for free banking and financial freedom.
If there is anything I’ve learned from my 24 years on this planet it’s that the government will always take what does not belong to them and there is little we can say or do that can stop them from doing anything.
Hope on the Horizon
Today a bill was introduced that outlined the distinction between a security, a digital security, and a digital asset. The bill simply defines crypto in one of two ways.
- A digital asset security provides the holder equity, rights of profit, and rights to vote.
- A digital asset that is issued after completion and not used to fund operations
Of course there is still a lot of work to be done to get this bill passed. If passed into law the regulation of crypto would not be handled by the SEC but rather the CTC.
If the law is passed it would likely apply retroactively to the SEC vs. XRP case, ultimately shutting down all arguments.
As always, I hoped you enjoyed this article and thanks for reading! Please clap and respond in the comments. I would love to engage with you. Be on the lookout for more articles following this case.
If you liked this article and would like to read some of my other stories check out some of the links below.
Major Events Pave the Way to Massive Crypto Adoption
5 Reason Why XRP Will Crush The Crypto War
