Ripple Says Most Digital Assets Are Not Securities
Commentary by Gage Raju-Salicki
Ripple, a provider of digital asset infrastructure, argued that the SEC lacks authority over most digital assets and that the SEC should focus on applying existing securities laws narrowly, instead of expanding its jurisdiction. Ripple encouraged congressional efforts to establish new legal standards for crypto.
In response to the SEC Task Crypto Force's request for information (see related coverage), Ripple said that the SEC "Crypto Task Force should make clear that Congress should not delay any legislative efforts on market structure or stablecoins while the Crypto Task Force does its work."
Ripple described the SEC crypto-guidance, to date, as "long, rambling, difficult to decipher, and based on novel standards found nowhere in the law." It argued that the Howey test had been "distorted and made needlessly complex to obscure its failure to apply the law faithfully." Ripple highlighted the agency's regulatory missteps, including its improper substitution of "speculation" for "investment" and its expansion of the "common enterprise" definition beyond legal precedent. Ripple also criticized the SEC for redefining digital assets as "crypto asset securities" to claim jurisdiction over secondary markets and for introducing "decentralization" as a legal factor, even though it was "a concept found nowhere in the law." Ripple warned that these missteps "disrupted markets and drove innovation outside the United States." Further, Ripple argued that a digital asset should not be classified as a security unless it granted rights to future income, profits, or company assets. Ripple's Chief Legal Officer Stuart Alderoty described the SEC as having "thrived on confusion to mask its failure to follow the law."
Ripple argued further that staking and yield-generating activities should not be subject to securities regulation as investment contracts if they generated returns through an algorithmic function rather than managerial efforts. Ripple urged the SEC to confirm that staking on public, permissionless networks did not fall under securities laws. Ripple also distinguished between Initial Coin Offerings ("ICOs") and established digital assets. The company acknowledged that ICOs involved raising funds based on future promises, making them more akin to investment contracts.
Ripple praised the SEC's recent statements on meme coins (see related coverage) and proof-of-work mining (see related coverage). The company encouraged the Crypto Task Force to continue this approach rather than relying on enforcement actions to shape policy.
Commentary
Ripple is correct that the SEC has created much confusion over crypto's status regarding securities law. Ripple appears to be retreading its "essential ingredients" test from its case against the SEC: specifically, that an "investment contract" requires "an enforceable agreement." Notably, Judge Torres rejected this line of argument in her (generally) positive decision for Ripple out of the Southern District of New York in July of 2023.
More interesting is Ripple's discussion of staking and yield. As discussed yesterday in the comment on the SEC Division of Corporate Finance's proof-of-work statement, staking is still an area on which the SEC must fully probe. Ripple called on the SEC to "confirm that staking and yield-generating arrangements dependent on the programmatic, functioning of a public, permissionless network that do not involve a definable issuer or counterparty making investment commitments are not securities." There is, of course, some difference between yield/earn products and staking—which perhaps should be a consideration for the SEC. However, the core idea is there: that a permissionless network—immutable, decentralized—is not exactly the "efforts of others" as contemplated under Howey and securities law.
While there will inevitably be disagreements about general approaches to a securities framework for crypto, Ripple's call for regulatory clarity is something on which there should be consensus. The SEC's Crypto Task Force has solicited public feedback, and it is incumbent upon those with industry experience to share their perspectives.
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