XRP is not a security, says former CFTC chairman

XRP is not a security, according to Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission (CFTC).

Giancarlo, who is currently employed by law firm Willkie Farr & Gallagher, co-wrote an op-ed with his colleague Conrad Bahlke, for the International Financial Law Review (IFLR) today, saying that XRP is not an “investment contract” and thus is not a security under the Securities and Exchange Commission’s (SEC’s) Howey Test.

The authors noted that Willkie is counsel to Ripple “on certain matters” and that the blockchain firm supplied “certain factual information” that helped in the writing of the op-ed.

Giancarlo and Bahlke argued that XRP “cannot be an investment contract as there is no contract or arrangement to speak of between Ripple and the overwhelming majority of XRP holders. To the contrary, the contracts that Ripple has entered into explicitly exclude general XRP holders as third-party beneficiaries."

They argued that like bitcoin (BTC) and ether (ETH), which U.S. regulators have deemed not to be securities, XRP is "sufficiently decentralized to avoid regulation as a security."

U.S. regulators have yet to declare whether XRP is a security. Earlier this year, CFTC chairman Heath Tarbert said the status of XRP is “unclear” at the moment. He added that the CFTC had been working closely with the SEC over the last year “to really think about which falls in what box."

Under the SEC’s Howey Test, a security is essentially an investment in which the investor has an expectation of profits derived from the efforts of others.

“The mere fact that an individual holds XRP does not create any relationship, rights or privileges with respect to Ripple any more than owning ether would create a contract with the Ethereum Foundation, the organization that oversees the Ethereum architecture,” they wrote.

As for the fact that the company itself holds a large supply of its own token, Giancarlo and Bahlke wrote: "Even though Ripple holds a large stake of XRP in escrow and funds its operations through the sale of XRP, this is no different than bitcoin miners selling mined tokens"

Further, they argued, Ripple has not marketed XRP as an investment product and has “repeatedly emphasized the functionality of XRP as a liquidity tool and a settlement mechanism.” 

Instead of a security, XRP should be considered a currency or a medium of exchange, they said. “The increased adoption of XRP as a medium of exchange and a form of payment in recent years, both by consumers and in the business-to-business setting, further underscores the utility of XRP as a bona fide fiat substitute.”