Fungible cryptos in secondary sales are not securities, Ripple tells SEC

Ripple, in a May 27 letter to the SEC, argued that fungible cryptocurrencies, like XRP, are not securities in secondary market transactions. This argument rests on the assertion that secondary transactions lack the necessary characteristics of an investment contract, a key element in defining a security. The company cited Lewis Cohen’s 2022 paper, “The Ineluctable Modality of Securities Law,” which posits that most fungible crypto assets are not securities when transferred in secondary markets due to the absence of a legally cognizable relationship between a legal entity and the asset holder—a hallmark of a security.

Ripple also referenced SEC Commissioner Hester Peirce’s May 19 speech outlining a “new paradigm” for crypto regulation. Peirce criticized the SEC’s past approach as deviating from sound regulatory practices and stated that most existing crypto assets are not securities. She acknowledged that while non-security crypto assets might be distributed as part of an investment contract (a security), economic realities should be considered.

This letter comes amidst Ripple’s long-running legal battle with the SEC, which began in late 2020. The SEC initially argued that XRP sales constituted unregistered security offerings, reflecting a broader view that a significant portion of the crypto market falls under securities regulations. This stance, previously held by former SEC Chair Gary Gensler, led to protracted litigation.

However, a recent court ruling largely favored Ripple, determining that while certain institutional XRP sales by Ripple were investment contracts, XRP itself is not a security, and secondary market sales were not considered securities. The SEC subsequently dropped its appeal. Ripple’s letter to the SEC highlights this ruling, emphasizing the distinction between primary and secondary market transactions. The outcome, while a victory for Ripple, leaves the broader crypto legal landscape without a definitive precedent, leaving the future regulation of cryptocurrencies uncertain.