Former Commodity Futures Trading Commission chair and “Crypto Dad” Chris Giancarlo argued forcefully on Wednesday that XRP is not a security but a currency under U.S. law.
That’s a huge, potentially life-or-death question for Ripple, the international payments firm that holds more than half of the fourth-largest cryptocurrency by market capitalization.
Ripple has been bedeviled by accusations and civil lawsuits claiming that XRP is a security created by Ripple rather than a commodity or currency. If a court or the Securities and Exchange Commission (SEC) ruled against Ripple, it would essentially turn the company’s sale of XRP into an ongoing, illegal securities offering.
Depending on the findings, such a settlement could cripple XRP’s usefulness as a utility token used to make financial settlements and provide liquidity for cross-border transactions, and damage or even kill Ripple.
Which isn’t to say it would. The SEC let Block.one settle charges that its $4 billion initial coin offering (ICO) was an illegal securities sale for just $24 million. By contrast, Telegram’s attempt to get around SEC rules for its TON blockchain led to a lawsuit that threatened to drag on so long the project was abandoned, and investors lost more than a quarter of the $1.7 billion raised.
In both cases, and similar ones, having a blockchain up and running was a big factor in the SEC’s willingness to settle charges on reasonable terms. Ripple is in good shape on that front, working with more than 300 banks in 40 countries including Banco Santander, American Express, and MoneyGram.
[Editor’s Note: Ken Kurson, the founder of Modern Consensus, sits on the board of Ripple.]
When Crypto Dad speaks
While the Ripple has made the same arguments before, Giancarlo’s voice—in the form of a June 17 column for the International Financial Law Review—carries weight. The former chair of the Commodity Futures Trading Commission (CFTC) remains hugely popular in the crypto community for his support of bitcoin and ether at a time when digital assets had very few friends among U.S. regulators. Giancarlo, whose term expired in April 2019, has a highly regarded and credible voice with regulators and elected officials.
He has also remained active in the cryptocurrency industry, launching the Digital Dollar Project to advocate for the creation of a U.S. central bank-issued digital currency, similar to the digital yuan China is already testing in several cities. Giancarlo also joined the advisory board of the Chamber of Digital Commerce.
On the other hand, Giancarlo is also an attorney at Willkie Farr & Gallagher, where he has a number of clients in the cryptocurrency industry, including Ripple.
Preston Byrne, a partner at the law firm Anderson Kill, highlighted Giancarlo’s conflict on Twitter: “The only problem is he’s no longer a regulator. In fact, he’s on the payroll of Ripple, the largest single owner of XRP, whose co-founders actually created the cryptocurrency.”
Howey: XRP is not a security
The argument over whether XRP—and almost every token issued via ICO or its variants—is a security boils down to one four-part question, called the Howey test. Based on a Supreme Court decision, Howey is the benchmark the Securities and Exchange Commission (SEC) uses to determine if something offered for sale is a security that falls under its jurisdiction.
The Howey test has four prongs that must all be met for a sale to be considered a security: When “a person (1) invests his money in a (2) common enterprise and is led to (3) expect profits solely from the (4) efforts of the promoter or a third party” they are purchasing an “investment contract”—a security.
In the column that ran in the International Financial Law review on June 17, “Cryptocurrencies and U.S. Securities Laws: Beyond Bitcoin and Ether,” Giancarlo and his law partner and co-author, Conrad Bahlke, went through the pro-Ripple case one at a time:
On the investment in a common enterprise front, Giancarlo and Bahlke argue that the vast majority of XRP holders have no involvement with Ripple, which only contracts with banks and money transmitters like MoneyGram to make sending funds between different countries and currencies nearly instantaneous and extremely cheap compared to the current interbank settlement method.
And while non-Ripple XRP holders are investing money, they are not investing with Ripple, the argument goes. “The mere fact that an individual holds XRP does not create any relationship, rights or privileges with respect to Ripple any more than owning ether would create a contract with the Ethereum Foundation, the organization that oversees the Ethereum architecture,” according to the pair.
That said, if Ripple is successful the value of XRP should go up for everyone. And with more than 55 billion of the total existing 100 billion XRP in Ripple’s hands, it is the 800-pound gorilla in the XRP room.
Where it gets muddier is that several Ripple co-founders created the company behind XRP’s blockchain, which minted all 100 billion tokens in the genesis block. They then gave a huge chunk to Ripple, which they also owned.
It’s worth noting that While Ripple controls more than half of all XRP, the now-decentralized blockchain requires an 80% supermajority to reverse transactions, so Ripple cannot commit a 51% attack on XRP, according to Giancarlo and Bahlke. That said, it can certainly veto changes.
As far as having a reasonable expectation of profit from the efforts of Ripple, Giancarlo and Bahlke argued that “Ripple has repeatedly emphasized the functionality of XRP as a liquidity tool and a settlement mechanism,” not an investment.
“The fact that certain parties may acquire XRP with the hope that it may appreciate in value” gives them different interests than Ripple, they added.