- Ripple has submitted a new letter to the SEC arguing that tokens should lose their security status once they mature and circulate freely in liquid markets.
- The company also urged Congress to clarify securities laws and proposed a safe harbor to protect good actors in the crypto space.
Ripple Tackles a Critical Crypto Question
Ripple recently submitted a fresh letter to the U.S. Securities and Exchange Commission (SEC) that dives deep into a key regulatory dilemma: When should a digital asset lose its “security” label? Ripple’s Chief Legal Officer, Stuart Alderoty, shared the update on X (formerly Twitter), revealing the letter was sent directly to the SEC’s Crypto Task Force, led by Commissioner Hester Peirce. The letter responds specifically to Peirce’s thought-provoking speech, The New Paradigm, where she asked, “When does a digital asset separate from an investment contract?”
Drawing on Legal Precedents to Redefine Security Status
In its response, Ripple leaned heavily on respected securities law experts, including Lewis Cohen, who argued that normal trading of fungible crypto assets on secondary markets should not be classified as securities under current U.S. law. Ripple highlighted Judge Analisa Torres’s landmark July 2023 ruling in their ongoing case against the SEC. The judge agreed that while XRP sales to institutional investors qualified as securities transactions, XRP trading on secondary markets did not constitute investment contracts—and that XRP itself is not inherently a security.
Congress Should Clarify, Not the SEC
Ripple acknowledged the SEC’s concerns about regulatory loopholes possibly exploited by bad actors but argued that closing these gaps is Congress’s job—not the SEC’s. The company stressed that clearer laws from lawmakers would reduce confusion in the crypto market, whereas vague SEC concepts like “sufficient decentralization” only fuel uncertainty.
Ripple suggested Congress could consider factors such as network maturity to decide when a token breaks free from its original investment contract ties. Tokens that have matured and widely circulated, Ripple argued, should no longer need securities exemptions.
A Proposed Safe Harbor for Market Clarity
To protect legitimate participants, Ripple proposed a “safe harbor” that would lower enforcement risks and offer clear compliance guidelines. This would empower good actors while promoting legal certainty in the rapidly evolving crypto space.
When Does a Token Stop Being a Security?
Ripple clarified that a token initially sold as part of an investment contract should only remain a security if:
- The issuer has failed to fulfill promises made to original investors, and
- The current token holder retains enforceable rights linked to those promises.
If these conditions aren’t met, tokens trading transparently in liquid markets should not face new securities regulations.
This letter marks another strategic move by Ripple to push for clearer crypto regulations. Earlier this year, Ripple proposed three comprehensive solutions aimed at resolving regulatory confusion. As the crypto market awaits clearer rules, Ripple’s arguments highlight a growing call for legislative action over regulatory ambiguity.
