XRP A Security?
The XRP token has been the subject of much debate in the world of cryptocurrencies while investors are confronted with the question of whether they qualify as a security under the existing Howey Test. While there is currently no final judgment on XRP, the Ripple Labs actions indicate a concerted effort to comply with a new definition of digital security, the "Satoshi Test".
Ripple makes a move
On June 14th, William Hinman, Director of Corporate Finance at the SEC, provided the best definition of what factors make a digital resource a security to  Yahoo Finance All Markets Summit in San Francisco.
This definition held that neither Bitcoin nor Ethereum were titles at this time, and showed that a token can be issued as security and thus become decentralized enough to no longer be considered one, as in the case of Ethereum and their ICO.
Many investors have speculated that Ripple has met the new definition of security and made the corresponding conclusion that the XRP is therefore a security – a battle that will probably be fought by their recently hired internal counselor, Mary Jo White, that seems to be the former SEC commissioner.
From Hinman's announcement, we saw Ripple make several strategic moves. They have created a new digital asset logo that differs from the Ripple logo; wrote a post on the blog on their website stating that XRP is more decentralized than Bitcoin and Ethereum; hired a former SEC commissioner to act as their advisor; and claimed that Ripple did not create XRP in the first place – while fighting against numerous collective lawsuits against them.
I am not a lawyer, but from an analyst's point of view, the SEC seems to have posted a yellow brick road of "not being a security" and Ripple is following that yellow brick road as close as possible.
I wrote before the Ripple protocol, as a project for interbank communication, was one of the best use cases I've seen for blockchain. On the contrary, I have always been skeptical that XRP is required. Ripple at one point had over $ 72 billion on its budget in XRP and it can reasonably be inferred that they want to protect one of their main sources of revenue – the issuance of XRP.
The security classification would threaten that source of revenue.
The Satoshi Test
First we discuss what we learned in June about what makes a token a security. I have dubbed Hinman's list of requirements " The Satoshi Test " to determine whether digital goods are titles or not. This list is based on the Howey test.
The Howey Test is the default precedent to determine if a currency is a security token. Tokens have tried to avoid this definition to avoid being considered a security, and basically asks "are you investing money in a joint venture with a profit expectation?" If so, then this is considered a security token. (A brief overview of the Howey's Test is included at the end of this article.)
The Satoshi Test built on this but is simply the opinion of Hinman, and has yet to establish applicable jurisprudence . A series of questions is posed, focusing on whether a third party is guiding the expectation of return and the economic substance and technical structure of the digital asset. Here are five highlights I want to focus on:
- Is there a group that sponsored the creation of the token?
- Has this group maintained a stake in the capital to motivate them to spend efforts to increase the value of the asset?
- Is the instrument marketed to the public instead of to potential users?
- Is it clear that the main motivation to buy the asset is for personal consumption rather than for investment?
- Are the goods concentrated in the hands? of a few who can exert influence on their application?
A complete version of the Satoshi Test can be seen here .
How does the Satoshi test refer to Ripple?
Let's start using the 5 points above to see if Ripple meets any of these criteria.
- Ripple has used the same logo for its XRP token business since its inception in 2013, but recently changed the logo. Ripple, then OpenCoin Inc., also owned the Arthur Britto IP on the Ripple platform when the first XRP accounts went live on January 1, 2013.
- In 2017 Ripple grossed 55 billions of XRPs for "predictability of the offer". Only this is 55% of the token supply. They highlighted it on their website saying that "[…] XRP [that is escrowed] will become available for the use of Ripple." We can expect that we will continue to use XRP for market maker incentives […] ". It is clear that Ripple has rewarded considerable participation in the token and are attempting to increase the value of the asset to incentivize market makers.
- The XRP is marketed and sold to the public when its primary target client are financial institutions that are facilitating transfers such as remittances across borders, but I can also see a case in which a retail investor could use XRP as a medium of exchange. I will call this point inconclusive.
- Some people could buy XRP exclusively as a medium of exchange, but I would say that many people, as the XRP supporters on Twitter demonstrate, are investing to buy a Lambo in the next bull market. I can not guess the motivations of the investors, though. This point is also inconclusive.
- Ripple owns> 60% of the supply of XRP. They also publish market reports every quarter on their company's website on the performance of XRP, which is oddly similar to a profit report. An earnings report is an official public statement on the profitability of a public company as required by the securities law.
Why does a society not want to take credit for building such a successful solution?
We can reasonably assume that they do not want to be considered a security in the SEC's eyes, as this would probably mean that they would need to comply with the securities laws, would be erased by many exchanges and will therefore lose an enormous amount of value in quantity of XRP they own.
Ripple & # 39; s Response Speaks Volumes
Ripple has made four strategic moves since the Satoshi Test was established:
Ripple dissociates from XRP
public relations team Ripple said media partners and the general public that XRP and Ripple are "distinctly different". According to Ripple is a technology company and XRP is an independent digital resource. They also indicated that Ripple does not control the success of XRP and that the XRP register can not be owned by a single entity.
At the same time Ripple created a new logo for XRP that is different from the Ripple Labs logo and made sure that Coin Market Cap for the first time since the beginning of the XRP, has honored the change of the brand. (The URL for XRP on CoinMarketCap, incidentally, is https://coinmarketcap.com/currencies/ripple/ – perhaps the SEC does not check URLs.)
Ripple says he did not create XRP
On July 3, Ripple's CTO David Schwartz said on Twitter that "Ripple did not create XRP." The company that became Ripple gave XRP to people who they created. "There are certainly some legal complications here and it seems that he is discussing semantics, but Ripple owned the IP of the Ripple platform when the first accounts were created.  Ripple claims that XRP is more decentralized than Bitcoin or Ethereum
On August 22, Ripple published a blog post to show the inherently decentralized nature of XRP Ledger. For a high-level overview: Schwartz recognizes that Bitcoin and Ethereum are considered the gold standard for decentralization, but then identifies that they use Proof of Work consent models that become more centralized over time by forming pools of mining activities. He argues that Ripple does the opposite and is becoming more decentralized over time using a majority consensus protocol and reducing the number of Ripple validators.
This seems similar to Hinman's opinion that a company could start centralized and become decentralized time to avoid being a security. I've never seen Ripple do this before Hinman's speech.
This happened just before Hinman's public speech, but Ripple hired two lawyers to defend them in a lawsuit (as most companies do) at the beginning of June to defend yourself in a lawsuit for security fraud. In fact, they hired a high profile team from Debevoise & Plimpton – former SEC president Mary Jo White and her military chief Andrew Ceresney.
Ripple currently defends four cases that are all class-class securities in which all plaintiffs basically claim that XRP is a security and Ripple has violated state and federal law by not registering security before offering it, promote it and sell it to retail investors.
So, XRP is a security or not?
I want to reiterate that I am not a lawyer, and I am not saying that XRP is a poor investment. I am simply claiming that Ripple seems to skip the circles to meet the arbitrary definition that Hinman has established, to avoid being considered a security.
These actions align with the date a governor made claims that apparently point to XRP being a security, which gives the impression that the company is intentionally doing these steps.
Perhaps this is a coincidence and Ripple meant to dissociate from the XRP prior to this announcement – I do not claim to have a vision of Brad Garlinghouse.
Many investors could make huge returns on XRP in the future, and eventually may not be considered a security: but it seems that XRP meets the definition of security in the United States.
What we learn from Ripple's compliance mission
I believe there are two purposes of the law: to facilitate and discourage. The laws on commercial companies allow companies to set up and enter into legally binding agreements in which there is no personal responsibility for personal assets; facilitate trade and capital creation. The securities law has another purpose to ensure that the securities are properly disclosed to investors to protect them.
The title law has a noble and necessary purpose. It's there to protect. Should companies be able to change history? Should they be allowed to find creative ways to comply retroactively with securities regulations in nascent industries?
This is the way to decide the SEC, and decide that they will do it for sure.
A good rule of thumb in my mind is that if your cryptocurrency has a C-Suite, the PR department, it publishes quarterly reports, creates all the coins and puts most of the stock premise in escrow for personal use, lacks blocks , has transactions that can be frozen, confusion between their brand, name and logo, and has someone you can sue – is probably not decentralized enough by to avoid the regulation of titles .
If XRP falls on the side of the currency or security, the disruptive influence of this surprisingly effective currency will help define the future of cryptocurrency.
Appendix: The Howey Test – 1946
The American legal case Securities & Exchange Commission Vs. Howey 1946 created this jurisprudence. Howey was the name of a farm in South Florida. The company mainly sold oranges, but they gave people the opportunity to buy pieces of their land with citrus trees.
Howey ran the business as usual by taking care of the trees, collecting and packing the fruit and selling the fruit. Howey would then share the profits with the landowner.
Howey eventually failed and ceased commercial operations, but he still expected land buyers to pay their land debts. The buyers refused and claimed to have bought the land only because they were promised an investment opportunity: the profits of the farm would have paid their land and would have also rewarded a profit each year. They said that if the business was not operational and had not made any income from their land, then they would not have been able to make payments.
This case therefore determined that the sale of land was an investment in a security and developed the Howey Test for future cases. This was the jurisprudence used in the last 72 years.
The author is invested in cryptocurrencies, but has never held any position in XRP.