The SEC lawsuit against Ripple Lab took an interesting turn on April 6 when Ripple’s attorney requested access to internal SEC documents discussing the status of Bitcoin and Ethereum’s assets. The judge granted the favor despite protests from the SEC, leading many to believe that XRP could pass the test as well, leading the SEC to declare the ETH token as unsecured.
In January, we asked “How does the SEC explain telling the public that BTC and ETH are not securities and then turn around and pretend the opposite is true for XRP?” https://t.co/8KVBuSi1i7
Maybe we’ll start to get answers now.
– Stuart Alderoty (@s_alderoty) April 6, 2021
In its lawsuit, the SEC claimed that Ripple violated security laws by offering XRP tokens without registering them under Section 5 of the Securities Act. The regulator claimed that XRP tokens are offered as an investment contract making it liable under securities law.
However, Ripple’s legal advisor argued that the definition of the ‘investment contract’ was not final and that the SEC’s permission for Bitcoin and Ether transactions made them believe that XRP was also not in breach of the securities law.
Would the status of Ether’s assets (ETH) be submitted to the scanner again?
The SEC in 2018 claimed that Ether is not considered security because the network is sufficiently decentralized. There has been a lot of talk about the Ether pre-mine and what caused the SEC to view the ETH token as insecure despite a pre-mine, to which William Hinman, the former CFO. of the SEC, said:
“Based on my understanding of the current state of the ether, the ethereum network, its decentralized structure, we believe that the current offers and sales of ether are not securities transactions,”
Bitcoin is the only digital asset to be unanimously considered an asset class due to its decentralized nature and the fact that every Bitcoin has been mined since the network was established in 2009. With the SEC lawsuit underway, it seems that the ETH token is not the security status could be questioned by Ripple’s lawyer to prove that the XRP token is not security.
Where does the SEC stand with the investment contract and the Howey test?
According to a super court ruling, any asset that does not pass the Howey test is considered an investment contract and is therefore registered under section 5 of the Securities Act 1933. According to the Howey test, a transaction is an investment contract if:
- It’s an investment of money
- There is an expectation of profit from the investment
- The investment of the money is in a joint venture
- Any profit comes from the efforts of a promoter or a third party
Bitcoin is the only digital asset that has passed the Howey test and is therefore considered a non-security. Ether, on the other hand, has been approved as a non-safety based on development over time. The SEC in 2018 suggested that even though the ETH token could not pass the Howey test due to a pre-mine, it became decentralized over time to move out of the safe category.
What to expect next?
The SEC’s obscurity around Howey Test has created controversy in the past, and right now it has given Ripple the upper hand in the matter. Prior to the start of the SEC legal proceedings against Ripple Labs, many believed this would be the end of the road for the XRP token, however, during the three legal proceedings Ripple’s attorney offered a stronger case than that. of the SEC.
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