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When it comes to the SEC, Ripple plays the long game. While most token issuers are likely to take a plea agreement, following the Airfox and Paragon examples, there is another exit for digital assets. By quickly pushing their cryptocurrencies to full functionality, companies that are encrypted like Ripple can create enough "facts on the ground" to completely escape the classification of titles.
Ripple may be too big to even fail. But in the event that it was not enough, the company is quickly becoming the type of prey that is just … too much trouble.
The Hinman paradox
The ability to "decentralize" an entity out of being a security has been outlined in Yahoo! Financial summit, when William Hinman of the SEC publicly stated that dealing with ether or bitcoin as securities "It would seem to add little value."
"Over time," Hinman added, "There may be other decentralized networks and systems where the regulation of tokens or coins that run on them as securities may not be required."
A SEC director is not under oath when she entertains a paying public, and a footnote clarifies that she was not speaking in an official capacity. Nonetheless, with other SEC officials taking up the same issues, Hinman's speech is as close as possible to the moment we arrive at regulatory clarity.
And that discourse suggests that a handful of advanced cryptocurrencies may escape a classification of securities by becoming sufficiently developed and distributed to no longer depend on central efforts. James Park, in a report for the Lowell Milken Institute, refers to it as the "Hinman's Paradox:"
[F]or a token of utility to be distributed freely without regulation by the securities laws, must be functional. But many utility tokens are functional only if they are distributed sufficiently broadly to create a decentralized system.
Very few initial coin offers, Park suggests, will never be decentralized enough to escape the Hinman paradox, and the Ripple issue is not addressed. But, based on what is publicly known of the SEC enforcement strategy, XRP is one of the best positioned to become decentralized enough to pass Howey's test.
XRP: a functional utility?
The words "utility token" have acquired a sour taste, and for good reason. Over the last year, he has been severely abused by ICOs in search of easy earnings.
The mistake, as the SEC officials have clarified since 2016, is that almost all cases "utility" it's on a non-existent platform. While regulators like Hinman and Valerie Szczepanik entertained the possibility of utility chips that are not securities, the overwhelming majority of ERC-20s are for sure.
But unlike most of the so-called "utility tokens", XRP already has almost all the features you need.
Unlike most ICOs, XRP is not intended for anything other than a payment and payment system – the platform is already up and running. Anyone can use XRP for purchases or payments and, after the launch of xRapid, XRP is also used for cross-border liquidity.
Weight sharing
Then there is the question of "decentralization", a thorny point of contention between Ripple and other cryptocurrencies. Decentralization is one of those words with almost as many different definitions as users, but when the SEC uses it, it is clear that they refer to management.
In his speech, Hinman pointed out that both Bitcoin and Ether are large communities with many companies, all working (and competing) together. You can not say for Ripple – as the company insists otherwise, the fate of XRP seems to depend a lot on that of the company "Management" efforts.
Fundamentally, this is already starting to change, after the announcements of this year that Omni and Coil will facilitate both payments in XRP. Both companies have strong ties to Ripple Labs, but they are nonetheless separate and independent entities, giving a better assertion that XRP depends on a market ecosystem rather than a single company.
Dollars and cents
The last tip of this strategy comes down to dowels and fees for lawyers. While the SEC did not rule out anything, all of its recent impositions were against the tokens launched after the 2017 DAO report – when the body first warned that tokens could be titles. In the words of Coinsource's deputy general counsel, Max Rich, they are "Turn off current fires rather than watch the charred remains of old fires."
This does not mean there is a pardon in the mail for Ripple, but it offers a space to breathe while regulators follow the lowest fruit – both for the purpose of developing stronger jurisprudence and (perhaps a cynical point) to take advantage of the limited resources of SEC.
This should not be taken as an argument that XRP is not a security. On the contrary, the fact that many investors consider Ripple Labs the central player of XRP – not to mention the huge centralization of tokens in the hands of Ripple – makes things really bad.
But this does not mean that the game has expired. As stated in the Hinman paradox, some centralized effort is needed to get a decentralized project from scratch. Depending on how much Ripple is in the SEC's list of priorities, Ripple could have enough time and resources to convincingly transform XRP into a truly decentralized resource.
The author is invested in digital resources, including XRP, which is mentioned in this article.
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