Ripple Asks SEC to Share Digital Asset Transactions of Employees. Will the Legal Strategy Work?

The ongoing legal battle between the Securities and Exchange Commission (SEC) and Ripple and its founders continues to work its way through the halls of justice.  While the SEC continues to pursue its belief that XRP (the digital currency created by Ripple) has always been a security, Ripple, via its attorneys, claims otherwise.

Last week, an interesting set of documents circulated on the Twittersphere, including a letter from Ripple counsel sent to the Magistrate Judge who is attempting to sort things out.

The letter notes that “in June 2021, this Court granted Defendants’ [Ripple] motion to compel the SEC to produce its trading policies regarding digital assets. Your Honor found that Defendants’ request met the threshold for relevance.”

Unfortunately for the defendants, the SEC has moved rather slowly in complying with the request to reveal its policies regarding the treatment of digital assets and employee trading. The gist of the dustup has to do with whether, or not, the SEC believed that XRP was a security in regards to its internal policies and employee transactions. If the SEC did not (or could not) determine XRP was a security, then it stands to reason that it probably wasn’t. Right?

Ripple attorneys state:

“the SEC has additionally refused to produce – the certifications by its employees showing the amounts of XRP they bought, sold, or held on an annual basis. Such certifications are required under January 2018 Policy … and Defendants thus seek the annual certifications (just relating to XRP) filed by employees for the years 2018, 2019 and 2020. Defendants are willing to receive those certifications in redacted, anonymized form, or in an aggregate form whereby the SEC provides to Defendants the total number of SEC employees, by year, who bought, sold or held XRP, with the amounts bought, sold or held.”

So were SEC employees trading XRP? Did the Commission believe it was a security? And if the SEC did not believe it was a security (at one point or another) how was an issuer of a digital asset able to discern whether or not they were transgressing existing securities law.

While not disclosing if anyone at the SEC was trading crypto at that time, the SEC does admit that Bitcoin and Ether have never appeared on a “watch list” of “Prohibited Holdings” pertaining to securities and XRP didn’t make the list – at least until April 13, 2018. XRP was first issued in 2012.

So does this effectively undermine the SEC’s case against Ripple? That’s the question at hand. But according to at least one high profile crypto-sphere attorney, Lewis Cohen, the argument by the defense may be novel but it does not directly address the Howey theorem – the test to determine whether or not an offering crosses the securities line.


Cohen notes that [Ripple’s] counsel states that the SEC’s failure to prohibit its employees from selling or buying #XRP “provides strong corroboration” of Defendants’ defenses and undermines the SEC’s claims” while adding that “It does no such thing.”

Crowdfund Insider reached out to Cohen for additional perspective and this is what he had to say:

“The SEC has appropriately pushed back on the latest discovery request by Ripple Labs’ defense counsel to see more records about the SEC’s policies and records on its employees’ trading of the XRP digital asset on the grounds of irrelevance.  The key question, though, is why this information is irrelevant.  The simple answer is that the case brought by the SEC does not relate to whether the XRP digital asset is (or is not) a “security”.  Independent of this question, the SEC alleges that it was the fundraising transactions in which the Ripple Labs defendants sold XRP that triggered the application of the federal securities laws.  In the long history of cases interpreting the famous Howey test, none have ever implied or suggested that the asset sold in the relevant fundraising scheme (e.g., the whiskey, the animals grown for pelts, the bank certificates of deposit) were themselves “securities”.  The SEC should continue to push back on these irrelevant discovery requests and make clear to the court that the status of the XRP token as a “security” is simply not at issue in the case.”

So will the legal strategy work and convince the courts? Uknown for now, but Cohen believes the strategy falls short. The SEC v. Ripple saga continues…

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