In a recent Twitter thread, attorney Bill Morgan shed light on a significant challenge faced by the U.S. Securities and Exchange Commission (SEC) in its ongoing case against Ripple.
According to Morgan, the SEC’s argument that all XRP tokens represent Ripple’s investment contracts is undermined by the “small subset” of sales to On-Demand Liquidity (ODL) customers.
Morgan contends that these sales to ODL customers do not align with any aspect of the Howey test. He argues that since the SEC alleges that ODL customers immediately utilize the XRP tokens as a bridge asset, no investment is involved, no profit expectation, and no common enterprise. Instead, these customers are simply using XRP as a product.
This poses a significant problem for the SEC. If sales to ODL customers are considered exceptions, the SEC’s claim that all XRP tokens are securities or investment contracts loses its foundation. As all XRP tokens are fungible, any exceptions undermine the notion that the asset itself is a security.
Ripple: ODL Sales & The SEC’s Elusive Response
The SEC’s response to ODL sales has been elusive, with the regulatory body employing a series of disparate facts to obfuscate the issue. They argue that until the introduction of the ODL product in 2018, there was no use for XRP.
They further claim that Ripple primarily did not sell XRP to ODL customers until mid-2020, instead compensating MoneyGram to use XRP for over 90% of ODL transactions.
The SEC also highlights the fact that ODL customers promptly resold any XRP they acquired from the market. Additionally, they note that Ripple repurchased the XRP it sold to protect its price, implying that this behavior does not align with typical commodity sales.
From the SEC’s perspective, ODL served as a mechanism relying on speculative investment-related trading of XRP. The SEC acknowledges some sales of XRP to ODL customers since mid-2020 but classifies them as a small subset.
They view these sales as an indirect distribution of XRP into secondary markets, potentially involving statutory underwriters or evading registration requirements.
Curiously, the SEC does not apply the Howey test to any specific sales of XRP to ODL customers. Conversely, Ripple argues that the Howey test does not apply to any of its XRP sales.
Moreover, the SEC’s case faces additional challenges in the form of exceptions. These include XRP giveaways to early adopters and developers and charitable donations.
The SEC does not claim that the charities were statutory underwriters, indicating that these XRP tokens were not considered securities.
The crux of the issue lies in the SEC’s assertion that all XRP tokens are fungible. However, once exceptions such as gifts, giveaways, and sales to ODL customers are recognized as not being securities or investment contracts, the argument that all other XRP tokens are securities becomes untenable.
These exceptions cast doubt on the SEC’s claim that XRP is inherently a security, establishing it as nothing more than an asset.
As the case between the SEC and Ripple continues, these exceptions undermine the SEC’s attempt to categorize XRP as a security or investment contract, leaving it in a precarious stance to defend in court.
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