It is time for the US to create a ‘Ripple test’ for crypto
July 21, 2021. Summarized by summa-bot.
Compression ratio: 20.7%. 3 min read.
The need for a clearer, more reasonable path to regulatory compliance is illustrated by the SEC vs. Ripple case.
In my previous Expert Take, I suggested that the case was consistent with prior SEC enforcement initiatives and the Howey investment-contract test, simply known as the Howey test, which has long been used by the SEC to determine when crypto assets are securities.
Ripple Labs: Cryptocurrency and ‘Regulation by Enforcement. ’” With a preenrollment of more than 500 members of the public, the audience was overwhelmingly unhappy (and unimpressed) with the SEC’s action against Ripple and its XRP token.
This general dissatisfaction with the Ripple case, often denigrated as “regulation by enforcement,” has led some to call for the development of a “Ripple test” to more clearly articulate how securities laws should apply to crypto assets.
The label of a Ripple test might have first been used in a specious post from Dec. 22, 2020 falsely claiming that the SEC was abandoning the Howey test in favor of an approach that reportedly required “new companies to operate for eight years to find out if what they’re doing violates securities law. ” However, more thoughtful commentators have joined the call for a Ripple test to prevent businesses from operating for years without knowing whether they might be called into court for having run afoul of U. S. securities laws.
Layton’s response was that “those seven years have a broad public record of refusal by the SEC to provide any clarity over XRP. ” She noted, convincingly, that during those years, the SEC declined to announce how it intended to treat Ripple’s XRP token.
While it would probably take an act of Congress to encourage (or force) the SEC to move in this direction, a Ripple test adopting the utility token (or consumptive purpose) approach could have precluded the application of securities laws to Ripple’s XRP tokens.
An alternative Ripple test could limit the scope of the SEC’s authority under the securities laws so that an interest determined by the Financial Crimes Enforcement Network (FinCEN) to be a currency is not a security.
A significantly more limited response, which could also be called a Ripple test, might involve something as simple as limiting how late the SEC can act after the commission becomes aware of the distribution of an interest it regards as a security.
Even if the SEC was not fully aware or did not understand what Ripple was doing when it began marketing XRP tokens in 2012, clearly there was a general understanding of the company’s activities by 2015 when the FinCEN settlement was announced.
However, the federal securities laws currently provide no statute of limitations on the right of the SEC to initiate enforcement actions.
Presumably, it will take an act of Congress to amend the law to limit the SEC’s authority to act, but the very fact that the SEC has been willing to sue Ripple for decisions and actions initiated more than seven years earlier suggests that such action could be justified.
First, a test that is focused on whether a particular crypto token has utility (or consumptive value) in order to determine whether or not the asset in question is a security may leave members of the public with inadequate remedies in the event that there is fraud.
A problem with saying that utility tokens are exempt is that it might be too easy for issuers to evade applying the securities laws by pretending that tokens are being sold for a consumptive purpose when the real hope is that they will be bought by speculators, pushing the price up.
Ripple, where no fraud is alleged, yet the SEC waited to bring an enforcement action for more than seven years after the company began selling its token.