Ripple Labs has recently submitted a new legal filing in Washington, addressed to the U.S. Securities and Exchange Commission’s (SEC) cryptocurrency task force, dated May 27. Chief Legal Officer Stuart Alderoty announced this development via Twitter, stating that the submission directly responds to SEC Commissioner Hester Peirce’s May 19 “New Paradigm” speech. In that address, Peirce raised the critical question of when a crypto asset, initially considered part of an investment contract, might legally separate from that contract and cease to be classified as a security.
In its four-page memorandum, Ripple began by expressing gratitude to the SEC staff for the May 20 meeting and positioned its arguments as a theoretical response to Peirce’s inquiry. Citing the 2022 academic paper “The Ineluctable Modality of Securities Law,” Ripple argued that existing legal frameworks lack clear, definitive principles to categorize most crypto assets as securities, especially when these assets are traded on secondary markets. Consequently, Ripple proposed a dual standard to assess when a token can be deemed to have separated from its original investment contract. Under this test, a secondary sale would constitute a securities transaction only if (i) significant promises made to the original purchaser remain intact, and (ii) the subsequent owner acquires enforceable rights related to those promises. Examples of such promises include functional blockchain capabilities or dividend provisions, whereas general statements or marketing claims would not qualify.
Ripple further aligned its proposal with the July 2023 ruling by Judge Analisa Torres, which found that despite institutional sales, XRP itself was not a security. According to Ripple, secondary market trading of XRP should thus be considered legally non-security in nature. While acknowledging the SEC’s concern that certain actors might exploit legal ambiguities, Ripple maintained that resolving these gaps falls within Congress’s legislative prerogative rather than the SEC’s regulatory ambit. The company endorsed the establishment of a “safe harbor” zone for crypto assets but cautioned against ambiguous terms like “fully functional” or “sufficiently decentralized,” which could complicate lawmaking and enforcement.
Commissioner Peirce had previously acknowledged that most existing crypto assets are not securities and recognized the difficulty in distinguishing when an asset has separated from an investment contract. She also suggested the prospect of a time-limited safe harbor. Ripple’s recent memorandum builds on this foundation, asserting that its proposed standard offers a more robust alternative to reliance on decentralization metrics, enabling active networks to facilitate transparent and unrestricted token circulation without undue regulatory burdens.
This development comes as the protracted legal battle between the SEC and Ripple approaches a potential resolution. Earlier this month, the SEC proposed a settlement that would limit Ripple’s institutional sale liabilities and lift restrictions on XRP distribution, although the court has yet to approve the agreement. Market reaction to these legal proceedings has been muted, with XRP’s price steadying near $2.30.
Further details on this story can be found here: https://bitcoinist.com/ripple-new-letter-sec/
