Is XRP a Security? We May Never Know

Among other things, the plaintiffs allege that Ripple has raised hundreds of millions of dollars through the sale of XRP - an asset that the plaintiffs allege is an unregistered security - to retail investors in violation of the registration provisions of federal and state securities laws.

In addition to claiming that XRP constitutes a security under California law, the plaintiffs in the Ripple case argue that XRP is a security under the SEC's long-standing "Investment contract" analysis promulgated under 1946 case of the SEC v. W.J. Howey Co., 328 U.S. 293 - i.e., the Howey test).

With respect to the second prong of the Howey test, the plaintiffs argue that purchasers of XRP have clearly invested in a "Common enterprise," acknowledging Ripple's own concession that it "Sells XRP to fund its operations and promote the network."

The plaintiffs argue that the price of XRP is clearly dependent - at least, on some level - on the development, adoption and efficacy of XRP Ledger.

XRP, according to the plaintiffs, ticks many of these boxes: XRP is available for trading on secondary markets, XRP is offered broadly to potential purchasers rather than targeted users, the issuer expends funds from proceeds or operations to enhance the functionality or value of the network of the digital asset, and so on.

In short, if the plaintiffs are able to overcome Ripple's motion to dismiss and the case were to result in a finding that XRP is a security, it would effectively prohibit secondary trading of XRP, radically alter the legal framework within which many trading venues currently operate, and ultimately imperil Ripple's economic viability.

Regulatory and practical implicationsHistorically, Ripple has not treated XRP as a security.

Based on this fact, as well as the fact that XRP would constitute an illegal unregistered security, these venues would be forced to immediately delist XRP.However, the ramifications to existing trading venues would extend far beyond an obligation to delist XRP - by having sold XRP and facilitated secondary market trading in the past, these venues will have violated Section 15(a)(1).

The practical implication of a violation of Section 29(b) is that purchasers of XRP will have the right to redeem the amounts they have paid for XRP from Ripple as well as potentially from the various venues through which they have bought XRP.Given the active trading market that exists for XRP - as well as additional complicating factors, such as the fact that many venues allow customers to buy and sell digital assets using other digital assets - verifying, coordinating and satisfying rescission requests would constitute a monumental, if not impossible, undertaking.

Fueled in part by the SEC's recent framework, the plaintiffs in the Ripple case have made a compelling argument that XRP is a security.