Securities are tradable financial instruments issued by governments or companies. If an asset is classified as a security, it means that it must register under the SEC. Most cryptocurrencies, being decentralized in nature, can’t be classified as securities despite the fact that they are tradable assets.
Some of these digital assets, however, are developed by private companies and this has sparked the debate about which of these cryptocurrencies could be considered a security. The SEC has also been enigmatic about deciding which crypto assets are securities. But it has made it clear that Bitcoin and Ethereum are not securities taking into matter their largely decentralized nature.
This, however, has not been the case with XRP. Ripple, the company behind XRP has been embroiled in various lawsuits accusing it of selling unregistered securities, talking about an early XRP ICO sale. The fact that the major portion 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 back in May 2018 against Ripple labs and its chief executive officer Bradley Garlinghouse. Sostak was suing the organization over his losses after investing in XRP, claiming that the firm misled investors and sold XRP as unregistered security in violation of federal law.
XRP not a security?
Now an amendment to the class-action lawsuit against Ripple filed on March 25 claims that the company also engaged in false advertising and unfair competition under California Business and Professions Code. The filing states:
“Lead Plaintiff brings this sixth claim for relief for false advertising in violation of California Business and Professions Code Section 17500 under the alternative theory that XRP is not a security.”
These sixth and seventh claims are a direct hedge upon the event that the court rules that XRP is not an unregistered security. Hence the lawsuit further adds:
“Defendants cause to be made or disseminated through California and the United States through advertising, marketing and other publications, statements that were untrue or misleading, and which were known, or which by the exercise of reasonable care should have been known to Defendants, to be untrue and misleading to consumers and Lead Plaintiff.”
Ripple had previously moved to dismiss the case back in September 2019, claiming that the court need not resolve whether XRP is a security. The blockchain company itself never acknowledged XRP as security, but it had filed a motion to dismiss the lawsuit against it.
After several months, Ripple’s motion for the case to be dismissed was only partially granted by the District Court judge, allowing the allegation that the XRP token was sold as an unregistered security to proceed.
If the court actually rules against the original lawsuit, this would also be a major clarification as to how the court visualises cryptocurrencies. This case is now at a crucial point, as the court’s decision would be something that clarifies the security or not security debate raging within the crypto industry for so long.