Why XRP is Not a Security
A discussion that has been prevalent in all parts of the cryptocurrency market is about Ripple. People can’t seem to make up their mind on what it actually is. Ripple in the past year, has been in the media quite a few times. The reasons have all been good throughout 2018.
The first time it came into the media last year was when it announced the its cross-border payments solution RapidX was in short finals and was about to release across the globe. The second time was when it overtook Ethereum by market capitalisation to become the second largest cryptocurrency in the market at the time.
However, another major discussion that has been ongoing in the community forums and the media is whether XRP is actually a cryptocurrency. The reason for these discussions is, for starters, the fact that the token is not minable. While most cryptocurrencies are minable and there is a large mining industry around them, XRP is not one of them.
Another reason that people believe that it is not a cryptocurrency in the traditional sense is that Ripple and XRP are used interchangeably. In the context of the cryptocurrency market, XRP is often referred to as Ripple which gives investors, regulators and financial bodies the wrong idea.
SEC Confused
While the SEC is predominantly pro-crypto, in the case of two tokens in the market they are unsure. The two tokens, ironically, happen to be the 2nd and 3rd largest cryptocurrencies in the world; Ethereum and XRP.
The two tokens can fall into the securities categorisation as well as the cryptocurrency category. Even though both companies behind the tokens have repeatedly issued statements and defended their statuses, the SEC is not convinced.
Even if the SEC regulated the cryptocurrency market at this point and ETH and XRP are deemed to be securities, they will be the outliers in the cryptocurrency market. Which can cause problems of uniformity in the market as they trade heavily in the cryptocurrency market.
Why XRP is Not a Security
In the past, the Bradley Kent Garlinghouse, the current CEO of Ripple Labs has come out many times to justify why XRP should not and is not a security. He has been very vocal about his reasoning, having said the same over and over again in many different forums.
According to Garlinghouse there are four main reasons why the XRP token is not a security. And they are;
- XRP Functions Independently
A common misconception among the community, media and market is that XRP’s functionalities in the cryptocurrency market are dependent on the functioning of the company. However, this is not the case.
XRP and Ripple Labs are independent from each other. And even if Ripple Labs is to shut down, the XRP token will continue to trade normally without any effect on the investors.
XRP is truly open source, decentralised and functions completely independent of Ripple Labs. - XRP is Not The Same As Ripple
The second reason that XRP does not fall into the same bracket as securities is that XRP as a token has no connection to Ripple Labs. In other words, just because you own XRP does not make you an investor in Ripple.
Investors are not entitled or authorised any part of Ripple’s dividends or profits because buying XRP is not the same as buying stock in Ripple. Buying XRP does not give any sort of ownership over Ripple to the investor. - XRP Has Utility
One of the biggest criteria for a token or a stock to be a security is that it should not have a utility. However, this is not the case with XRP. XRP has a real-world implementation and application that solves a problem.
Because it has applicability, XRP has utility and hence cannot be a security token. - Clears Howey Test
And if all of the above reasons are not enough to change your mind about why XRP is not a security, here’s the final nail. XRP passes the Howey Test. The Howey Test panels a number of characteristics that a token or stock must have to be deemed a security.
XRP passes the Supreme Court mandated test and hence cannot be called a security or given its status.
In the past, many ex-SEC officials have come out in support of the cryptocurrency market and have also made statements about XRP. An official actually went on to say that he does not believe that XRP is a security but he believes that the token is actually a currency in itself.
While the SEC nor the community have made any decisions regarding the status of the cryptocurrency, the fact remains that people are divided about XRP and are, as of now, not sure what to make of it. But if all the above reasons are to be tested, it is clear that XRP is not a security.
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