Court proceedings between Ripple Labs and the Securities and Exchange Commission are not over, and we won’t be able to provide any definitive answers for where we are today, but we can speculate based on the information at hand.
Determining whether the XRP cryptocurrency is a security is really beyond the scope of this article, we do not intend to try. Our aim here is to provide some clarification, clarify some of the confusion surrounding the issue, and perhaps shed a little light on what we can expect in the future. So let’s roll with some definitions.
Stocks vs Commodities
Here’s how Investopedia defines a stock:
The term “collateral” refers to a fungible, negotiable financial instrument that has some kind of monetary value. Represents an ownership position in a public joint stock company via shares; A creditor’s relationship with a governmental body or company represented by holding the deed of that entity; or equity as represented by an option.”
And since we’re on the topic, here’s how they define a commodity:
“A commodity is an essential commodity used in commerce that can be exchanged for other commodities of the same kind. Commodities are often used as inputs in the production of other commodities or services. The quality of a particular commodity may vary slightly, but it is essentially the same between producers. When it is traded on an exchange, it must That the goods also meet specific minimum standards, also known as basic grade.”
Here is an explanation about the goods.
Some traditional examples of commodities include grain, gold, beef, oil and natural gas. Recently, the definition has been expanded to include financial products, such as foreign exchange and indices. Technological developments have also led to new types of goods being exchanged in the market. For example, mobile minutes and bandwidth.”
I got you?
By definition, a governance currency issued by a DeFi project such as Uniswap can be considered a security as per the above definition. Represents the perks of ownership in a corporation, and carries a cash value. This is definitely something to watch for in the future.
What is the relationship here with XRP?
Owning XRP gives you zero ownership rights, voting rights, or any other kind of rights related to Ripple. Ripple is its own independent company, complete with its own shares, and there are legitimate and legal ways to own parts of Ripple Labs by buying some of its shares, but not through XRP.
The Securities and Exchange Commission uses a different evaluation model to determine what is safe and what is not. Let’s discuss that next.
What is the Howie Securities Test?
The Howey test refers to a case for the Supreme Court to determine whether a transaction qualifies as an “investment contract” and therefore a security, and whether it falls within the jurisdiction of the disclosure and recording requirements set forth in the Securities Act of 1933 and the Securities Act of 1934.
More specifically, the Howey test refers to SEC v. W.J. Howey Co., which was shown before the United States Supreme Court in 1946. The Howey Company sold citrus orchards to buyers in Florida, who then leased the land to Howey. After that, the company’s employees maintain the orchards and sell the fruits to the owners. Both parties made money from the deal. Howey did not record the transactions, and the SEC had something to say about it. The court ruled that leaseback arrangements meet the qualifications of investment contracts.
Specify this criterion that SCOTUS will use to determine the existence of an investment contract. Investment contract as defined by them is:
- investing money
- in a joint venture
- With the expectation of profit
- To derive from the efforts of others
The case did not work out well for Hoy. The people who bought citrus orchards in Florida derived value from the transactions because of the labor and expertise provided by others. Buyers only needed a capital investment to access the income stream, which classified the transaction as an investment under what is now called a test, and thus had to be registered with the Securities and Exchange Commission.
What does this have to do with cryptocurrency?
Cryptocurrencies do not fit well into the current categories, hence they are known to be resistant to regulation. This won’t stop the SEC from trying to push cryptocurrency squarely under current regulations.
How does XRP fit into this standard?
The Securities and Exchange Commission (SEC) asserts that the “money investing” test can be easily satisfied with digital assets because cash or other digital assets are exchanged.
Second, the Securities and Exchange Commission (SEC) maintains that all XRP holders have participated in the testing of a nearly closed “joint venture,” but some lawyers (and Ripple themselves) disagree. A joint venture is defined as a method of common goals to be pursued by two or more firms. Thus, the investor’s profits are combined and depend on the success of the third parties that are appointed or those who offer or sell the investment.
As far as the utility of XRP is concerned, the asset has found uses in cross-border remittance payments. Ripple’s on-demand liquidity solution uses XRP as an intermediary currency between fiat currencies around the world.
“The open source nature of XRP allows users around the world to use the token to pay for goods and services without any connection or dependence on Ripple. According to Cryptwerk, more than 1,300 companies currently accept XRP for payments across industries from business services to tourism and travel,” he said. John Deaton of Deaton Law Firm said in his blog.
Deaton also filed a motion in the Ripple v. SEC on behalf of XRP holders to state that they were not in a “joint venture” with Ripple, contrary to the SEC’s claims.
Finally, in most cases, whether a digital asset can qualify as an investment contract depends on whether there is an “expectation of profit to be obtained from the efforts of others.” In this case, it’s an intriguing question.
Do buyers of digital assets rely on the efforts of others if they are dependent on project backers or development team to develop and maintain the digital network, especially in its early stages? Probably. The test could also be done in theory if backers of the project support the price of the asset, such as by controlling scarcity and supply through token burning, or perhaps by acting as asset managers.
What does this mean for the future of cryptocurrency?
Again, we can only speculate here, but if the courts were to come back in favor of the SEC’s claim and Ripple had to appear to register XRP as collateral (and then deal with class action lawsuits) in theory, it could result in a more cautious approach to centralization than there is currently. . This will certainly reinforce the idea that centralization is leading to government overreach for some, and we will see a cautious rollback of DeFi, with many organizations pushing full decentralization forward on their timelines.
Stablecoins, like the US-based stablecoin USDC, which is backed by an American company, Circle, could be in a bit of a tricky situation.
The case continues in court.
– Joseph Morton