Should Ripple’s XRP Be Classified as a Security?

Arjun Govind
Jul 21, 2019 · 11 min read
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Image Attribution: Bitcoin Exchange Guide

Part 1: About Ripple, XRP, and Securities Law

What is Ripple?

Part 2: Is XRP a Security?

The Howey Test, Applied

Part 3: What Happens if XRP is Deemed a Security?

XRP being deemed a security could have a range of implications for Ripple. This is because the sale and trade of the XRP will now be subject to SEC regulations, specifically the Securities Act of 1933. In the short run, the most immediate implication could be relating to the sale of unregistered securities. If XRP is deemed to be an unregistered security, then past sales of XRP can be viewed as violations of the Securities Act. This could result in heavy penalties for the company.

Conclusion

This article contends that the SEC should classify XRP, Ripple’s native cryptocurrency, as a security. From a technical standpoint, it is clear that the XRP Ledger functions very differently than the Bitcoin and Ethereum networks, especially with respect to proof-of-work. The Howey test indicates that since capital gains would be the direct consequence of an identifiable third-party (Ripple, in this case), it must be classified as a security. This is bolstered by the speech given by Director Hinman of the SEC in June, as Ripple is not adequately decentralized to qualify for the exemption that Bitcoin and Ether have used, and its tokens are not mined. In terms of the impact branding XRP as a security would have, it is likely to increase transparency via disclosures and thereby bolster consumer protection. However, it could also result in the shunning of non-proof of work network architectures. That could increase the energy intensivity of future distributed ledgers and also reduce throughput relative to non-proof-of-work consensus algorithms.

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Arjun Govind

Written by

Digital Identity @ R3 | Wharton (Finance) + Penn Engineering (Master’s in Data Sci) ’21 | Venture Capital and Chess Enthusiast! | Twitter: @ArjunG_

The Startup

Medium's largest active publication, followed by +684K people. Follow to join our community.

Arjun Govind

Written by

Digital Identity @ R3 | Wharton (Finance) + Penn Engineering (Master’s in Data Sci) ’21 | Venture Capital and Chess Enthusiast! | Twitter: @ArjunG_

The Startup

Medium's largest active publication, followed by +684K people. Follow to join our community.

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