Key Takeaways
- Ripple challenges SEC’s stance on digital assets in a new letter citing case law and legal scholarship.
- The letter proposes a legal framework for when tokens separate from investment contracts.
- Ripple urges clarity through law, not enforcement, and supports a safe harbor to protect innovation.
Ripple Labs reignited its regulatory pushback today with the submission of an additional letter to the SEC’s Crypto Task Force. It follows a week after Commissioner Hester Peirce’s seminal “New Paradigm” speech, in which she raised the question of when a digital asset is no longer tied to its initial investment contract.
Ripple’s Chief Legal Officer, Stuart Alderoty, stressed the need to resolve this legal ambiguity, referring to foundational law and case precedent.
The letter addresses squarely a central question posed in Peirce’s speech: When does a token, sold to begin with under a contract of investment, no longer have that status in the second market?
Ripple cites legal scholar Lewis Cohen’s 2022 study, The Ineluctable Modality of Securities Law, that posits that once a token becomes part of secondary transactions free of legal connections to its issuer, it is no longer a security.
It was also reaffirmed in Judge Analisa Torres’s 2023 decision in SEC v. Ripple Labs, wherein the judge held that XRP per se is not a security, although certain past institutional sales were indeed investment contracts.
A Framework for Legal Clarity
Ripple’s letter spells out a formal test to assist in determining if a token has detached from its origins in an investment contract. The standard proposed has two conditions that are central to it: whether material issuer promises are still outstanding and whether there are enforceable rights against the issuer by the token holder today. Only if the latter applies, Ripple contends, does the token remain part of a security transaction.
The company discourages the loose criteria of “sufficient decentralization,” instead recommending quantifiable factors of network maturity, market value, and characteristics of governance.
The firm advises that tokens should not be subject to securities law if they pass certain criteria, including that they are based on a permissionless network with no central control and that they have a high market capitalization.
Ripple Urges Congressional Action Over Regulatory Overreach
The letter condemns so-called regulatory overreach by enforcement, cautioning that it fosters ambiguity and discourages innovation.
The company contends that Congress alone, and not the SEC, ought to reinterpret securities law. While legislative action must first occur, Ripple submits that the SEC must issue guidance based on current jurisprudence, not hypothetical standards.
This increased activity marks Ripple’s ongoing commitment to not just protect itself in the legal arena but to influence how digital assets are handled throughout the U.S. financial ecosystem.
Related Reading | Is Solana (SOL) Facing Early Bearish Pressure? Negative Funding Rate Sparks Debate
