A former chairman of the Commodity Futures Trading Commission – Chris Giancarlo – has come to the defense of Ripple and claimed that it is not a security.
Chris Giancarlo: Leave XRP Alone
Ripple has been at the center of a controversial class-action lawsuit for many months, now. Several early investors claim that the company has lied about the currency’s status as a non-security. One investor has even gone so far as to claim that Ripple is a never-ending initial coin offering (ICO).
To be fair, Ripple is also a client of Giancarlo’s law firm, which means that Giancarlo has a lot to lose if Ripple winds up losing its case. He’s also clearly in charge of defending it, but he’s adamant that the currency should remain unregulated as a security. He insists that the Securities and Exchange Commission (SEC) has no place in deciding how Ripple’s XRP should be governed.
In a new report entitled “Cryptocurrencies and U.S. Securities Laws: Beyond Bitcoin and Ether,” he writes:
Ultimately, under a fair application of the Howey test and the SEC’s presently expanding analysis, XRP should not be regulated as a security, but instead considered a currency or a medium of exchange. The increased adoption of XRP as a medium of exchange and a form of payment in recent years, both by consumers and in the business-to-business setting, further underscores the utility of XRP as a bona fide fiat substitute.
The Howey test that Giancarlo speaks of consists of three specific qualifications, none of which he believes apply to XRP. Initially defined by the SEC, the Howey test’s first section is an investment contract that exists between the issuer of the asset and its holder. Giancarlo explains:
The mere fact than 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.
In other words, owning Ripple the currency does not automatically mean that the person who owns it is in any sort of contract or partnership with Ripple the company, yet according to Giancarlo, the SEC wishes to behave as though this were the case.
Ripple Doesn’t Meet the Qualifications
The second prong suggests that there cannot be any “common enterprise” between the shareholders of a company and the issuing venture itself. Giancarlo explains:
Given the juxtaposition between XRP’s intended use as a liquidity tool, it’s more general use to transfer value and its potential as a speculative asset, XRP holders who utilize the coins for different purposes have divergent interests with respect to XRP.
Lastly, the test says that Ripple holders should not expect any specific profits due to maintaining any stash of the asset in question. Giancarlo argues that thus far, nobody owning Ripple can or should expect to make any specific amount from their holdings.