SEC Urged by Ripple to Define When Assets Stop Being Securities

• Ripple stresses the need for clear laws to separate crypto tokens from securities rules.
• A safe harbor and maturity test could help protect honest market participants.
• Ripple warns that unclear regulations could confuse the market and cause legal issues.

The Ripple legal team addressed the SEC Crypto Task Force, calling for clear guidance on when crypto assets separate from securities contracts. They emphasized that existing law does not classify most fungible crypto assets as securities after their initial investment contract sale. Ripple’s letter referenced a court ruling that distinguished Ripple’s institutional XRP sales as investment contracts but ruled XRP itself is not a security. 

The letter warned that vague SEC concepts like “fully functional” or “sufficiently decentralized” increase market confusion. Consequently, Ripple proposed a legal framework to reduce uncertainty and protect good-faith market participants.

Legal Framework for Crypto Asset Classification

Ripple’s counsel highlighted a 2022 analysis by Lewis Cohen, which states that secondary transfers of most crypto assets lack the legal relationship that defines securities. The letter explained that a crypto asset only remains tethered to an investment contract if material promises from the issuer remain unfulfilled and subsequent holders have enforceable rights. 

Ripple cited Judge Torres’s 2023 ruling, which found institutional XRP sales were investment contracts, but secondary market sales were not. The ruling clarified that XRP itself does not constitute a security. 

According to Ripple, the SEC was supposed to keep regulations focused on investment contracts and not make broad changes without authorization from Congress. They said that using vague guidelines for enforcement could lead to too many rules and problems for the market.

Related: Circle Denies Ripple and Coinbase Sale Rumors Amid IPO Plans

Proposal for Safe Harbor and Maturity Test

Ripple proposed a safe harbor framework to shield market participants acting in good faith during legal uncertainty. This framework would reduce enforcement risk and provide clear compliance standards for early-stage network development. However, it would not expand securities laws to assets no longer tied to investment contracts. The letter urged that any new standards adhere strictly to existing federal securities laws.

Furthermore, Ripple believes Congress may want to look into a maturity test for all crypto assets. Based on the test, assets would not be subject to securities regulations if their total value is high enough, if their network has run error-free and permissionlessly for a decade, and as long as the network does not have a single controlling entity.

The letter warned that imposing disclosure obligations on mature assets already traded broadly in liquid markets would mislead investors. Such rules could imply ongoing control where none exists. Ripple concluded that tokens integrated into financial markets with public information and transparent trading should not face additional securities law burdens.

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