To Be a Security, or Not to Be

Oct 01, 2019

Off in the distance, high atop Mount Regulation, a small but sinister black puff of smoke belched forth from the long-quiet cone of the volcano. Most didn't notice the smoke, at first, but the simply massive XRP-is-officially-a-Security-Decision earthquake that soon followed was quick to become everyone's full focus. Within seconds, XRP-based businesses were laid to ruin in crumpled heaps, XRP-hodlers buried alive in molten flash crash as everyone tried to escape, Ripple's legal teams incinerated by SEC pyroclastic flows, ODL (On-Demand Liquidity) vaporized in a mushroom cloud of obsolescence, and Brad forever mummified as the greatest scam artist of all time.

Or so the maxis would have you believe..

It never ceases to amaze me how far the XRP-is-a-security FUD campaign is willing to go, insofar as to slap a bunch of assholes in a room (crypto rating council) that have zero influence on the SEC, yet feel entitled/qualified to suggest that there's a gray scale (1-5) for whether something is a security or not. This is about as stupid as saying someone's partly pregnant. The worst part is these FUD campaigns are actually effective in confusing/intimidating newcomers to the space. Hopefully I can clear up some of this insanity.

What would happen if XRP was ubiquitously defined as a security?

Let's start at the most absurd worst-case scenario. Like the volcano metaphor indicates, XRP itself being legally inherently designated as a security would be really bad. Ripple's ODL product would instantly be shuttered because you can't legally move securities in the same fungible manner as money. Securities are laden with ownership tracking, voting rights, dividend payouts, tax reporting requirements, etc. It wouldn't work for the same reasons you can't go buy a lambo with shares of Microsoft stock.

Furthermore, XRP would probably be delisted from every exchange, because no crypto exchange is licensed to trade securities. XRP would become essentially worthless, its entire use case destroyed.

Bad, very bad.


Allow me to explain:

A key salient point is to understand the difference between a coin and a traditional security. Traditional securities are stocks issued by companies to raise money, and those stocks are typically issued for this purpose only, so it's easy to fall into the trap of thinking that something can only serve a single purpose. Coins are different. They can in parallel both serve the purpose of a security (ICO), and they can also serve the purpose of utility (utility). For example, if I buy an ICO coin from a new company that issues the coins to try to raise money, then I've just bought a security. If I then buy a sandwich with it, my coin is now a utility coin.

Simple? Conceptually sure, but in practice, not at all. This is where the regulatory clarity is missing. It's because coins can be multi-purpose that traditional security regulations get confused. Pay attention to this fact, it's the multi-purpose aspect that is lacking in clarity, however it's still VERY CLEAR what would be defined as a security.

What this multi-purpose characteristic has exposed is the idea that what makes something a security ISN'T something intrinsic to the coin, but rather IS "how the coin is used". In other words, it's the context of the transaction that defines the nature of that coin FOR THAT TRANSACTION ALONE.

This means we can absolutely dismiss any notion that XRP ITSELF is or isn't a security. Putting Ripple aside for now, there is nothing you or I can do with XRP that could be anything but a utility transaction. This means that XRP will always be a utility token for everyone in the world, the exchanges will obviously continue to list it, the value will hold up, ODL will continue to work since it uses market XRP (not Ripple's) to work, etc. The fucking volcano of total devastation will never erupt, get that through your head. XRP itself CANNOT be designated a security.

That leaves us only with the idea that Ripple's XRP sales 'could be' construed as securities sales, and believe it or not, all the regulatory clarity we need for this has been around since 1946, so let's break that out:

The Howey Test

Surely you've heard of this test by now. This is the US standard criteria to decide if something is a security or not. It breaks down to four key requirements:

1) It is an investment of money

Busted! Yep, definitely XRP qualifies for this requirement.

2) There is an expectation of profits from the investment

This is really tricky, because it could be said that nobody would've invested in XRP if there really wasn't an expectation of profit, but at the same time, Ripple doesn't seem to put a lot of effort into promoting XRP's price potential. Sure there's the obscure references to potential price valuations by Ripple employees, but that's a stretch to say it's official promotion of price appreciation. Still, if you want to say this requirement has been satisfied, OK.

3) Any profit comes from the efforts of a promoter or third party

Here's another tricky one, does Ripple promote the idea that their products will drive value into XRP? Yes, I can see that. They've said a few times they're the most interested in the price appreciation of XRP, so that could be construed as they are responsible for driving value into XRP.

Holy shit! That's 3 out of 4 requirements satisfied so far! Soooo scary! I'm never going to sleep again! Maxis are already sipping champagne in the hot tub. I can barely continue from fear...

4) The investment of money is in a common enterprise

BOOM fuckers! Big fail. Ripple DOES NOT sell their XRP under the notion of it being a security. They sell it as an asset. No direct XRP buyer has ever EVER been misled by Ripple into thinking they are actually purchasing part ownership and rights to Ripple. There is no common enterprise, XRP investors have zero say.

There you have it, 3 out of 4 requirements is NOT 4 out of 4, and there is no 'proximity' to being a security, you either satisfy ALL 4 points, or fucking go home. Maxis try desperately to spin even ONE failed Howey Test requirement as some sort of proof of security, but there's no harm in Ripple vigorously violating 3 of the requirements so long as that 4th one is a failure. In other words, Ripple can breakdance all day long on those 3 passing requirements and XRP will still never be considered a security.

Maxis also desperately cling to the notion that this last requirement is implicitly being met simply because Ripple holds the lion's share of XRP, but I'm still waiting for them to show me where in the Howey Test it indicates a large/majority asset holder is automatically stuck with a bunch of securities. Does Satoshi now have a million Bitcoin securities? Blow me.

The REAL worst-case scenario

Let's play this out then. Let's say the SEC randomly decides after years of tight-relations with Ripple that now they are spontaneously going to fuck them into the ground like my ex-girlfriend did to me. With industry-terrifying adoption-crushing ferocity, the SEC determines that Ripple has indeed been selling XRP as securities and must pay huge fines and make reparations to those that purchased XRP. Ripple is financially hobbled, unable to continue financing the expansion of RippleNet, and their lead is consumed by competitors in the space.

And here's why that will never happen:

1) Companies sell assets all the time

XRP was gifted to Ripple as an asset. I know it's a weak technicality, but whether regulators acknowledge this shell game or not, it's pretty hard to 'undo' a coin from initially being a pure utility coin, to suddenly it's now a security when they resell it. What if instead of XRP they were gifted another kind of asset (e.g. gold, other stocks, etc.)? Does that then make gold a Ripple security?

I've heard quacking imbeciles argue that the difference is XRP was created out of thin air (you mean like all cryptos?). How does creating an asset make it a security? What makes something a security is the Howey test, nothing more, nothing less. There is clearly no stipulation in the Howey test that if you create an asset, then it's a security. The market decided what XRP was worth, not Ripple, and so Ripple was able to sell their XRP assets to acquire cash.

XRP is an asset, Ripple's XRP sales are sales of an asset. Again, ALL companies sell assets ALL THE TIME to acquire cash for their operations. There is nothing unusual, shifty, or immoral about companies selling assets to get money, and Ripple is just as entitled to sell their assets as any other company is, and obviously enough people are interested in XRP to keep buying it.

Even more important, there's no reason that Ripple couldn't legally PROMOTE XRP as an investment opportunity, any more than someone with a lot of gold can go around saying that gold is definitely going to go up. This shameless promotion doesn't make gold a security, so why would it make any asset a security? Ripple's already succumbed to this part of the Howey Test, so go ahead, promote that shit!

The key is to understand that XRP is an asset in all cases, and despite the parallels that assets and securities may have, unless the Howey test is satisfied ON ALL COUNTS, it remains an asset. There's no coming 'close' to being a security, or being a 'partial' security, the context either IS a security transaction, or it isn't. Is it even necessary to describe XRP as coming close to being a security? Did my ex have to send me their sex tape? Of course not.

I won't deny that the SEC can still construe the entire initial setup as a conspiratorial mechanism to skirt securities laws, but they sure haven't acted on it yet. If this doesn't sound compelling enough, don't worry, this is the least potent of my supportive arguments.

2) Ripple very very clearly did not DIRECTLY sell XRP as a security to anyone, nor have they ever publicly promoted XRP as a security

This is very important to highlight the word 'directly'. Ripple is ONLY responsible for the sales it conducts directly. This means that if some dumbass goes to an exchange and buys XRP thinking it gives them security rights to Ripple, then they are shit-outta-luck. Another example, someone not affiliated with Ripple purposely advertises they are selling XRP securities for Ripple, and another dumbass buys it from them thinking they now have a share of Ripple, and they also are shit-outta-luck.

It is ONLY Ripple that can possibly sell XRP as a security. That means, only the entities that specifically went to Ripple to buy their XRP (via their OTC desk), would be in a position to claim that Ripple pitched it as a security to them.

The frivolous securities lawsuit against Ripple out there is grasping on some tenuous vacuous liberal interpretations of statement fragments published by Ripple over the years. Most of those agenda-laden interpretations preclude the validity of a company legally selling or promoting its assets, and when viewed from that perspective, there are no published statements that condemn them as selling securities.

3) Ripple has been working with regulators from day uno

AND they have some of the best lawyers in the business, including SEC former employees. There is no chance that i's weren't dotted, or t's not crossed. A billion dollar company like Ripple doesn't take chances. It isn't a chess-game between Ripple and the SEC, they are working together to forge the best way forward so there won't be any surprises for anyone, and innovation in crypto can move forward. The SEC isn't the enemy, it's the parent trying to get their kids through their teens without destroying themselves. Any actions where you see the SEC taking action against other cryptocurrency companies are the result of these companies NOT seeking guidance from the SEC.

4) The SEC hasn't acted

There's this belief that the SEC is waiting on the pending court case against Ripple. This is not true, The SEC hasn't acted because it most likely won't. There is absolutely no reason for them to delay any action, particularly since their job is to protect investors and they wouldn't exactly be protecting investors by delaying any actions if Ripple was actively violating securities law, now would they?

So where is the SEC's letter of No Action against Ripple?

Very good question. The answer is the same that I apply to all my relationships: fear of commitment. Crypto is a groundbreaking technology. We are witnessing the next epoch of technology-leveraging in defining the human condition, and the ramifications of decisions made today can have repercussions for centuries. The particularly potent quality of legal precedent may have unintended nefarious consequences as this space evolves. Far be it for the SEC to vindicate Ripple in perpetuity, while inadvertently empowering a possible future evil Ripple-doppelganger to slip through the cracks and wreak havoc on the world economy. Said another way, The SEC is being cautious, but I'd say the fact that they haven't specifically pursued Ripple to date is clear evidence they won't.

Hopefully after reading the above, you will understand with certainty, XRP is not a security today. Absolutely no chance. I see only two outcomes possible:

  1. The SEC does nothing against Ripple

  2. The SEC issues a slap-on-the-wrist fine for Ripple's earlier sales, like it did to

I'm expecting option 1 because the amount of time for the SEC to act continues to pass, and the longer they wait, the weaker their position. Again, there is nothing about the ongoing frivolous lawsuit against Ripple that is delaying any SEC action, the SEC is just not going to do anything.

As for option 2, I'm skeptical this will be the outcome because XRP has always been an open public ledger before Ripple acquired the XRP. Sure, arguments can be made that Ripple did the bulk of the rippled coding, and hosted most of the nodes (controlling vote) for the first years, but that doesn't have any relevance to whether XRP was being marketed for utility purposes or not, which is the only relevant factor. XRP's role in Ripple's product line has always been about its utility in cross-border payments, which is why I believe Ripple has survived all this time without SEC action.

In summary, regulatory clarity is already sufficient to be certain that XRP isn't a security. Further regulatory clarity in terms of cryptocurrency definitions and categories will only serve to further cement XRP's clear function as a utility token.

There is NO SCENARIO where XRP itself is declared a security and Ripple is destroyed.

I repeat

There is NO SCENARIO where XRP itself is declared a security and Ripple is destroyed.

Believing the XRP-is-a-security FUD-campaign is a mistake you'll regret for a lifetime, like the time you called your ex-girlfriend's mother a meddling bitch. The intensity of the anti-XRP sentiment is a direct reflection of the threat XRP represents to the incumbents who are eye-bags deep into Bitcoin and will do and say anything within their power to keep the Bitcoin dream alive. Ripple has been on top of this security issue from day one, there is no problem, only desperate anti-XRP maxis that want you to believe otherwise. Do you really want to be manipulated by these psychotic jerk-offs?

That is the question.

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