In the past few months, Various class action lawsuits have been filed against Ripple for selling his XRP token in an unregistered share offer. So far, the U.S. Securities and Exchange Commission has not released an official statement on the subject that has kept everyone in uncertainty.
To end the uncertainty Chris Giancarlo, former Chairman of the Commodity Futures Trading Commission (CFTC), published an article last week arguing that Ripple’s XRP is not a security. Giancarlo is famous for establishing the position of the CFTC that Bitcoin (BTC) and Ether (ETH) are not securities. So it seems that he is the right person to represent this case.
The only problem is that Giancarlo no longer works for the CFTC – he is now in private practice. Not only that, but also He is currently working for a law firm on Ripple’s payroll. Given the clear conflict of interest here, before preparing to read the article, I prepared myself to expect some bias. However, he could never have imagined how bad it would be.
I know this will destroy the tension, but there’s no way around it: The case featured in Giancarlo’s post that Ripple’s sale of XRP should not be viewed as a stock offer is absurd and pointless, so I’m surprised that Giancarlo was willing to publicize his name.
I continue reading today’s article while reviewing Giancarlo’s analysis of whether the sale of XRP is a stock offer or not, and a real analysis of whether or not it is.
Related: Is XRP a legal value? We may never find out
How to tell if a token offer is a stock offer
The Howey test is the SEC’s primary method of determining whether an investment is an offer of securities or not. Yes it is, The issuer must register the offer with the SEC or ensure that the offer complies with a recognized derogation for registration.
As a quick update The Howey test includes four points that were established in a Supreme Court case in 1946. It was decided that there was an investment contract in which there was one.::
“A contract, transaction, or system through which a person invests their money [punto uno] in a joint venture [punto dos] and is made to expect profit [punto tres] exclusively from the efforts of the developer or a third party [punto cuatro]””
For the sale of XRP to be considered an offer of securities, you must meet each of these points. If the offer fails in one of them, it is not considered an offer of securities.
Read on to see how the XRP token is compared to the Howey test.
The first part of the Howey test is very simple: Was there an investment in the transaction?
In his analysis, Giancarlo states that the XRP does not meet this aspect of the Howey test because “eThe common understanding of the term “investment” is the transfer of valuables in exchange for a future return and not for a current one“”
At first glance, that sounds reasonable. However, The idea of ”investment” as an expectation of future returns is driven by the “expectation of profit” point of the Howey test. There is no reason to confuse it with the “money investment” part.
In essence, Giancarlo has presented a circular argument so as not to admit the obvious: there is no way to say that no money was invested here. People were clearly paying money in exchange for XRP tokens. There is no other way to see this. I believe that almost all courts that analyze this would agree that money was invested.
Notice, Just because XRP’s offer passes this Howey test doesn’t mean Ripple had an unregistered share offer. The offer must still pass all other Howey test points. So Giancarlo didn’t have to go to such creative extremes to argue against this point. Of all the points that could be achieved, none is stronger than this.
Yes, there was certainly a money investment when people bought the XRP. Ripple owned XRP and sold it for US dollars. End of the story.
The next aspect of Howey’s test mainly concerns whether or not the benefits are shared by those who have invested through the efforts of a joint venture. ANDThis point is also likely to be met because all XRP holders share the gains and losses when the value of their tokens rises and falls due to Ripple’s management efforts.
In Giancarlo’s document, he states that there is no joint company in this case because “An XRP holder is not entitled to participate in the profit and loss of Ripple“”
This is a terrible argument. There are innumerable investments that are classified as securities and that do not allow the company to share in the profits or losses. Take a bonus, for example. You don’t share in the profits or losses of the company or government that issued it, but a bond is certainly a value.
Giancarlo then compares Ripple to Bitcoin to support his reasoning. It is claimed that XRP holders are no different from BTC holders, and if BTC is not a value, XRP is not.
Unfortunately, this argument has one big and big mistake: Bitcoin development is really decentralized, while XRP is dominated by Ripple. Therefore, XRP owners are obviously in a joint venture, since their fate is equally united and depends almost exclusively on Ripple’s development efforts. The XRP network requires constant work, and much of the use of the token depends on its future development. To argue that there is no joint venture means to deny reality clearly.
Giancarlo resists this reality by claiming that the XRP ledger would work without Ripple’s involvement. And while it’s true that if Ripple were closed today, XRP would still exist, it’s true that The price of XRP would drop and the use of the platform would dissolve.
Yes – XRP owners have invested in a joint venture. All funds are collected by Ripple to build the system and all users benefit or lose from the corresponding price fluctuations of the token.
In your document Giancarlo claims that there were no profit expectations since Ripple never officially promised investors any kind of profit or return and instead stressed that XRP’s main purpose is liquidity.
This was a smart move for Ripple, as any potential profit trading or price hikes on XRP would have automatically led to the SEC-marked XRP sales. But just because Ripple doesn’t promise future profits in its marketing doesn’t mean that people don’t buy XRP with the expectation of profit. Anyone who has followed cryptocurrency in recent years knows that people are buying XRP in the hope that the price will go up.
XRP has always been one of the most successful tokens. To argue that there is no expectation of profit is absurd, not to mention useless. Both Kik and Telegram attempted to raise this argument with the SEC and were shot down.
Then Giancarlo continues, making a ridiculous comparison between XRP and Bitcoin. Since Bitcoin is not a value, XRP does not meet this point.
But this comparison is also very wrong. Bitcoin is not a value because it does not meet all the requirements of the Howey test. So, Although people buy BTC with a profit expectation, this is not worth it because the other Howey test points are not met.
Although Giancarlo does his best, his arguments here are circular and pointless.
Yes, users bought XRP in the hope that the price would go up.
From the efforts of others
The last point concerns whether the benefits come from a person’s individual efforts or entirely from the efforts of a third party in which you invested. Although Giancarlo doesn’t take the time to fully explain his case at this point, he claims that the benefits of the XRP tenure are not entirely dependent on the efforts of the Ripple team.
His argument is that “the XRP architecture is completely autonomous and exists completely independently of Ripple”. To support this, he points out that most of the Ripple XRP is deposited and that the amount released is controlled by the Ripple program. Control over the delivery of the token is only a minor way to influence the price of the token.
Just take a look at Ripple’s website to see the entire team behind Ripple driving the development and acceptance of tokens among institutional investors.
As mentioned above, it is possible that the XRP ledger will continue to work without the Ripple team. But that would definitely lower the token’s price dramatically. It is therefore clear that the growth of XRP and the corresponding benefits for token holders largely depend on the efforts of the Ripple team.
Yes, XRP buyers are simply passive investors who rely on the work of the Ripple core team to develop new products, promote acceptance and increase the value of the entire token.
The sale of XRP is clearly an offer of securities
In my opinion, XRP clearly meets all the requirements of the Howey test and is considered a value. Throughout his work, Giancarlo relies heavily on the assumption that Bitcoin and Ether have failed at all points in the Howey test, which is simply not true.
His entire argument was amateurish and deliberately misleading. The various points were summarized and relied on meaningless legal jargon to confuse and distract.
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