For a long time, it has been a question of whether cryptocurrencies can be considered a security. Securities are tradable financial instruments issued by governments or companies. Since many cryptocurrencies are decentralized in nature, they can’t be classified as securities despite the fact that they are tradable assets as well. Since many cryptocurrencies are created by private companies, it sparks the debate about which of these cryptocurrencies could be considered a security.
If an asset is classified as a security, it means that it must register under the SEC. While the SEC has been enigmatic about deciding which crypto assets are securities, it made it quite clear that Bitcoin and Ethereum are not securities taking into matter their decentralized nature.
This, however, is not the case with XRP. Ripple, the largest holder of XRP has been embroiled in various lawsuits claiming that it was selling unregistered securities, talking about an early XRP ICO sale. Ripple also behaves a lot like security and the fact that 60% of XRP is held by Ripple Labs makes it subject to questions about it being somewhat centralized.
Taking this into account, Bradley Sostak, an investor, had filed a class-action lawsuit in May 2018 against Ripple Foundation and their chief executive officer Bradley Garlinghouse. Sostak was suing the organization over his losses after investing in XRP back in January 2018. The filing read:
“It arises out of a scheme by defendants to raise hundreds of millions of dollars through sales of XRP—an unregistered security—to retail investors in violation of the registration provisions of federal and state securities laws.”
The lawsuit also charged Ripple of market manipulation stating:
“In order to drive demand for and thereby increase profits from the sale of XRP, Defendants have made a litany of false and misleading statements regarding XRP in violation of California’s securities laws, and false advertising and unfair competition laws.”
Ripple, however, moved to dismiss the case in September, stating that the court need not resolve whether XRP is a security. While Ripple has never acknowledged XRP as a security, it has now filed a motion to dismiss the lawsuit against them.
Ripple’s filing states that the plaintiffs had failed to meet a legal deadline for filing the suit as Ripple started selling XRP back in 2013 and the lawsuit was filed in 2018, which is too late to bring legal actions against the company as the statute of repose was passed before the lawsuit.
The filing also added that Ripple doesn’t consider XRP as security and mentioned that the debate over XRP being a security was irrelevant to this on-going lawsuit. The filing read:
“XRP is not a security, but that is irrelevant for purposes of this motion. Even if XRP were a security, Plaintiff’s claims still fail as a matter of law.”
If the court considers Sostak’s argument, it would force it to provide clarity over the matter as to what types of cryptocurrency would qualify as a security. If XRP is classified as a security, that would make it subject to SEC regulations. This could result in all previous XRP sales being considered as a violation of the Securities Act.
Another effect of a decision like this could see most of the entrepreneurs in the cryptocurrency industry to focus on a proof-of-work (PoW) based system to minimize regulatory constraints as the SEC doesn’t view cryptocurrencies like Bitcoin, that runs on a PoW consensus mechanism, as a security. This would narrow down the space for innovation and would also slow the rate of adoption.
Unless we see some kind of clarification from the regulators, cases like this could keep troubling the companies behind cryptocurrencies like XRP. It is however evident that with the growing popularity of cryptocurrencies, at some point the SEC ought to take a decision.