Ripple CLO Urges US SEC For Clarity On Crypto & Investment Contracts

Ripple CLO Stuart Alderoty has submitted a letter to the US SEC addressing a key question from Commissioner Hester Peirce. The letter focuses on when a digital asset is separated from an investment contract.

This issue remains central in the debate over how crypto assets should be regulated under US securities law. The letter went to the US SEC’s Crypto Task Force, led by Commissioner Hester Peirce.

The response comes to her recent speech titled ‘The New Paradigm’ that asked when a token becomes a security and should cease to be called one. The letter is intended to provide clarity on this issue for market participants and regulators.

Ripple CLO Responds to Key Questions on Investment Contracts

A digital asset should not always be treated as a security, argues Ripple CLO’s letter. The letter cites legal writings of experts such as Lewis Cohen, who pointed out that routine transfer of most fungible crypto assets in secondary markets does not make them securities.

To clarify the point at which a token loses its security status, this legal perspective is cited. Stuart Alderoty referred to the 2023 court decision by Judge Analisa Torres in their case against the US SEC.

The judge ruled that Ripple’s sales of XRP to institutional investors met the definition of a securities offering. She also found, however, that sales of XRP on the secondary market were not investment contracts.

In addition, the judge ruled that XRP itself is not a security, despite prior sales being made pursuant to an investment contract.

According to the Ripple CLO, a safe harbor would assist market participants in differentiating periods when the token is no longer under security obligations. In doing so, this clarity could support innovation and result in a more stable regulatory environment.

The letter, however, says a safe harbor would benefit regulators and the crypto industry by reducing disputes.

Calls for Legislative Action Over Regulatory Overreach

The letter from Ripple CLO acknowledges the US SEC’s concern about bad actors using gaps in securities law to evade rules. However, it argues that changes to securities law should come from Congress, not the US SEC.

Alderoty states, “Lawmakers are in charge of establishing new legal standards,” and adherence to current law by the SEC would help reduce market uncertainty. Stuart Alderoty warns that relying on vague terms such as “sufficiently decentralized” adds confusion.

The letter suggests that Congress should consider network maturity when deciding if a token remains an investment contract. Once mature, tokens could circulate freely without securities law restrictions.

This position calls for lawmakers to clarify the law rather than leave the US SEC to create new standards. The Ripple CLO encourages Congress to set clear rules that reflect the evolving crypto market and protect investors.

Proposal of Safe Harbor for Market Participants

In the US SEC letter, Stuart Alderoty also proposes a safe harbor for good actors in the crypto market. This safe harbor would offer legal protection to issuers and participants who comply with clear rules. It aims to reduce enforcement risks while offering compliance guidance.

Stuart Alderoty suggests that such a safe harbor would help market participants understand when tokens no longer carry security obligations. This clarity could foster innovation and provide a more stable regulatory environment.

According to the letter, a safe harbor would benefit both regulators and the crypto industry by minimizing disputes. Ripple CLO Stuart Alderoty reaffirmed in his letter that XRP should not be treated as a security in itself.

He warned that vague terms like “fully functional” or “decentralized” cause more confusion than clarity. His comments highlight Ripple’s ongoing effort to seek clear and consistent regulatory treatment for XRP and similar tokens ahead of the US SEC decision on XRP ETF approval.

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