Ripple has recently made a compelling case to the US Securities and Exchange Commission (SEC) for clearer standards in determining when a digital asset should no longer be considered part of an investment contract. The company’s detailed letter to the SEC’s Crypto Assets and Cyber Unit on May 27 addressed a question raised by Commissioner Hester Peirce in her “New Paradigm” speech.
In the letter, Ripple argued that most fungible digital assets traded on secondary markets should not be classified as securities. The company referenced legal research suggesting that these tokens lack the ongoing obligations between issuers and buyers that typically define investment contracts. Ripple also pointed to a 2023 court ruling in its favor, which determined that XRP was not a security in the secondary market, although some early institutional sales were considered investment contracts.
To provide guidance for future regulation, Ripple proposed a practical framework. According to the company, a token should only be subject to securities law if the issuer has yet to fulfill material promises or if token holders still have enforceable rights against the issuer. These material promises could include commitments to deliver a functioning network or provide financial returns. Ripple argued that regulatory oversight under securities law becomes unnecessary without these elements.
Ripple also recommended that the SEC move away from using “decentralization” as a primary regulatory benchmark, citing the term as vague and inconsistent across legal, technical, and policy discussions. Instead, the company suggested using “network maturity” as a more measurable and objective standard. Under Ripple’s proposal, a digital asset could avoid securities classification if it meets specific criteria, such as a significant market cap threshold, operation on a public and permissionless network for a set period, and the absence of unilateral control over the network’s core functions by any individual or group.
The company emphasized that assets meeting these criteria are already integrated into the broader financial system and are the basis for regulated investment products like ETFs and futures. Ripple concluded that it would be inappropriate to impose new securities law obligations on tokens and networks that have operated and traded openly, transparently, and permissionlessly in broad liquid markets for a significant time.
Overall, Ripple’s submission to the SEC highlights the need for clearer standards and guidelines in determining the regulatory status of digital assets, emphasizing the importance of network maturity and fulfilling material promises in avoiding securities classification.