SEC statement on "true cryptocurrencies"

[Apollo]

I agree that XRP will probably be deemed a security.  XRP seems to fit under the "Howey test" which the SEC uses to evaluate non-standard offerings. This does give added regulatory risk to XRP, but it's not all gloom and doom.  

Ripple has led the space in terms of KYC, AML, and a few other aspects of compliance. Ripple's settlement with the DOJ is probably an additional blessing as the DOJ (not the SEC) is responsible for criminal enforcement of securities laws. The settlement is far from a perfect shield but it could help Ripple buy some time until the regulatory landscape is addressed by Congress. Additionally, unlike most others in the space, Ripple very likely has sufficient funds to pay a fine and comply with the registration provisions. 

The main drawbacks I see are that registration would only affect some players in the space and it may limit access to standard Crypto exchanges. Quite simply, that is a huge problem with the SEC's approach. Ripple and other possibly disadvantaged coins need to higher some heavyweight lobbyists to ensure the regulatory system is not picking winners and losers. It is downright crazy to allow trading with reduced regulation in LTC but not XRP just because of the consensus mechanism. 

On the bright side, registration would probably get XRP added to some standard stock and/or commodity exchanges. 

[corak]

Quote

 

Under the Howey Test, a transaction is an investment contract if:

1. It is an investment of money

2. There is an expectation of profits from the investment

3. The investment of money is in a common enterprise

4. Any profit comes from the efforts of a promoter or third party

 

Fails points 3, 4. Point 1, 2 only applies to speculators, it certainly doesn't apply to users of xRapid.

Now if points 1, 2 w.r.t speculators was enough, then commodities would also be considered securities. So they clearly aren't.

 

Edited February 10, 2018 by corak

[Trickery]

The other question that needs to be asked is if I decide to start selling my own version of a cross border settlement software package that uses XRP (as I'm quite entitled to do) then am I required to meet the regulations of the SEC as if I am somehow responsible for XRps value? Or to put it another way if my system uses USD does USD become a security?

[n2it]

Wow. Didn't expect all the comments all over the map.

Looks like there's no consensus on what the SEC's comments imply.

Thanks to all, though. Seems like there's a loophole that XRP can squeak through to avoid being classified as a security. Amirite?

[corak]

What? I'm not sure I understand.

XRP is currently traded inside exchanges. xRapid (or a clone) just runs on top of that. It's the job of the exchanges to make sure trading is within regulatations. So long as your product makes legal trades on your behalf there, and assuming you are authorized to run a remittance service, you only send and receive fiat currencies to and from your clients. Why would it matter if XRP is even considered a security or not, from your perspective?

Edited February 10, 2018 by corak

[Trickery]

5 minutes ago, corak said:

What? I'm not sure I understand.

XRP is currently traded inside exchanges. xRapid (or a clone) just runs on top of that. It's the job of the exchanges to make sure trading is within regulatations. So long as your product makes legal trades on your behalf there, and assuming you are authorized to run a remittance service, you only send and receive fiat currencies to and from your clients. Why would it matter if XRP is even considered a security or not, from your perspective?

That is exactly what I'm saying, it's not Ripples' requirement to comply with SEC regulations in regards to XRP.

[Apollo]

6 minutes ago, corak said:

Under the Howey Test, a transaction is an investment contract if:

1. It is an investment of money

2. There is an expectation of profits from the investment

3. The investment of money is in a common enterprise

4. Any profit comes from the efforts of a promoter or third party

Fails points 3, 4. Point 1, 2 only applies to speculators, it certainly doesn't apply to users of xRapid.

Now if points 1, 2 w.r.t speculators was enough, then commodities would also be considered securities. So they clearly aren't.

2

I disagree with most of that and I think it is pretty clear the "common enterprise" segment of the test will be satisfied. 

Three different methods are used to determine whether or not an offering satisfies the common enterprise requirement of the Howey test: (1) the horizontal approach, (2) the narrow vertical approach, and (3) the broad vertical approach.

Quote

"The horizontal approach to common enterprise focuses on the relationship among investors in an economic venture."[23] Integral to this approach is the pooling of investors' money in a common venture.[24] The Eleventh Circuit correctly noted that "[m]ost circuits that have considered the issue [of what is a common enterprise] find it satisfied where a movant shows 'horizontal commonality,' that is the 'pooling' of investors' funds as a result of which the individual investors share all the risks and benefits of the business enterprise.

The D.C.,[26] First,[27] Second,[28] Third,[29] Fourth,[30] Sixth,[31] and Seventh[32] Circuits all apply the horizontal approach. These circuits place great weight on whether the scheme involves a "pooling" of assets. For the common enterprise prong to be satisfied, horizontal commonality requires that an investor's assets be joined with another investor's assets into a joint venture where each investor shares the risk of profit and loss according to their individual investment.

 

Thus, if the investors are holding the same asset this should satisfy this test. This is to exclude something like owning a condo, which is normally not a security. 

Quote

"The narrow vertical approach finds a common enterprise if there is a correlation between the fortunes of an investor and a promoter."Under narrow vertical commonality

a] common enterprise is a venture "in which the 'fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment....'" It is not necessary that the funds of investors are pooled; what must be shown is that the fortunes of the investors are linked with those of the promoters, thereby establishing the requisite element of vertical commonality. Thus, a common enterprise exists if a direct correlation has been established between success or failure of [the promoter's] efforts and success or failure of the investment.

 

Do I even need to explain why XRP fits this?

Quote

"[T]he broad vertical approach finds a common enterprise if the success of an investor depends on a promoter's expertise."[37] "Broad vertical commonality … only requires a movant to show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns."

 

Again this seems likely to me. 

https://blj.ucdavis.edu/archives/vol-5-no-2/why-the-common-enterprise-test.html

I am not a lawyer, I am probably wrong about many things. Talk to a lawyer if you have legal questions. 

[Trickery]

Ripple have clearly stated that XRP is not a speculative investment so cannot be considered a promoter.

[corak]

In that case, why aren't the invested funds in say, BTC considered pooled and dependent on the fortune of its promoter (that would be BlockStream), and their expertise? Or pretty much any crypto HODLers and their "foundation" of choice, which in most cases holds a stake in the asset itself?

I'll admit it's a bit of a difficult case with these assets, and the regulators probably share that sentiment.

I still think the SEC only meant to warn about / go after ICOs, for dividend-bearing / profit-sharing / etc financial products that are wrapped in a "coin". But that is just guessing. We'll just have to wait and see.

Edited February 10, 2018 by corak

[n2it]

Thanks to all for the enlightening replies.

But... (there's always a 'but') What effect will all this have on XRP prices? Being a  bottom line kind of person, I, and I assume others, might like like a couple of scenarios that might play out.

Will Ripple handle the extra regulation (if deemed a security) better than the competition? If so, how much better? 

I understand there's no black and white extremes here, just wondering what the probability distribution is looking like to this forum's experts.

Thanks again for putting up with my noob understanding of the CC ecosystem.

[Apollo]

5 minutes ago, n2it said:

Thanks to all for the enlightening replies.

But... (there's always a 'but') What effect will all this have on XRP prices? Being a  bottom line kind of person, I, and I assume others, might like like a couple of scenarios that might play out.

Will Ripple handle the extra regulation (if deemed a security) better than the competition? If so, how much better? 

I understand there's no black and white extremes here, just wondering what the probability distribution is looking like to this forum's experts.

Thanks again for putting up with my noob understanding of the CC ecosystem.

I think... Way better! 

[deadestfish]

12 hours ago, n2it said:

But... (there's always a 'but') What effect will all this have on XRP prices? Being a  bottom line kind of person, I, and I assume others, might like like a couple of scenarios that might play out.

Personally if xrp is adjudged to be a security and other crypto-assets like Ethereum and Bitcoin are not, I expect to see a decline in the price in the short term as some may sell out of fear of the new regulatory landscape.

That said, once the new regulatory regime is in place, I don't expect a change like this to have a long term downward pressure on XRP price and the price would recover. There's even some possibility that being regulated as a security ends up working in XRP's favour as the asset could become more attractive to institutional investors.

12 hours ago, n2it said:

Will Ripple handle the extra regulation (if deemed a security) better than the competition? If so, how much better? 

Ripple are doing more than most to work with regulators, for that reason I expect them to handle the extra regulation well. Also, if the thinking is heading in the direction of XRP being considered a security, Ripple will be aware that is the case and planning ahead.