Is Crypto a Security? A US Judge Is About to Decide

Stuart Alderoty, chief legal officer at Ripple, says the company is certain that XRP does not meet any of the Howey criteria, but that it is particularly confident that there is no common enterprise—a group undertaking that affects the fortunes of XRP investors—among XRP holders, only “common interest.” 

However, the SEC has long said that the majority of cryptocurrencies are securities, because people invest with the goal of turning a profit and, although tokens sit atop decentralized blockchain networks, many projects are in practice sufficiently centralized to meet the definition of a common enterprise.

The SEC declined to comment for this article.

Speaking at a conference in September, SEC chair Gary Gensler called on crypto businesses to register with the agency. “Given that many crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity,” he said.

However, US government bodies have disputed the SEC’s right to regulate crypto. In a lawsuit filed on March 9 against crypto exchange KuCoin, New York Attorney General Letitia James alleged that ether (the cryptocurrency of the Ethereum network), among other crypto assets, should be treated as a security. But the Commodities and Future Trading Commission (CFTC), another US financial regulator, contends that ether is a commodity and should therefore come under its purview.

The SEC has been pushing the crypto industry hard over the past four months following the implosion of crypto exchange FTX in November, which took hundreds of millions of dollars in customer funds down with it. Since then, the SEC has launched a series of quickfire actions against crypto businesses serving the US market.

In January, the regulator charged crypto exchange Gemini and crypto lender Genesis Global Capital over a service that allowed US customers to earn interest on their assets, which the agency alleged was an unregistered securities offering. In a Twitter thread, Gemini cofounder Tyler Winklevoss called the charges “a manufactured parking ticket” and announced that “we look forward to defending ourselves,” but neither the company nor Genesis responded to a request for comment.

This was followed in February by a settlement with another exchange, Kraken, which agreed to halt its crypto staking service in the US, and a threat to sue crypto firm Paxos over its BUSD stablecoin. In both instances, the SEC again claimed the parties were in breach of securities laws. In a statement, Paxos wrote that it “categorically disagrees with the SEC.”

However, the agency has suffered setbacks over the past few weeks in bids to block crypto exchange Binance from purchasing the assets of bankrupt crypto lender Voyager Digital, and asset management firm Grayscale from bringing to market a bitcoin exchange-traded fund (ETF).

Because the case is being held in a district court, the outcome will not set a “binding precedent,” says James Filan, a defense lawyer and former federal prosecutor. Therefore, the verdict is not required to be factored into judgments on similar cases moving forward. However, the judgment may establish what’s known as “persuasive precedent,” he says, which could influence the thinking of judges in future cases.