Ripple CTO David Schwartz calls for congressional action

In a recent development, Ripple Labs Chief Technology Officer David Schwartz said: a careful analysis for the complex classification of tokens as securities. While his argument is not specifically aimed at XRP, it appears to be a direct nod to Ripple’s ongoing legal battle with the US Securities and Exchange Commission (SEC). Schwartz delves into the Howey Test and its application to cryptocurrencies, including XRP, offering new perspectives on the challenges of crypto law.

I’ve talked a bit about US securities law and will do so in more detail. As many of you know, the main argument that some tokens are securities stems from the inclusion of “investment contracts” in the list of items that are securities. The Supreme Court…

– David “JoelKatz” Schwartz (@JoelKatz) November 28, 2023

Ripple CTO Analyzes Howey Test

Schwartz began his argument by pointing out the flexible nature of the Howey test, a crucial tool for determining whether an asset qualifies as a security. He emphasized that this test cannot be applied mechanically due to its complexity and many interpretations. For example, Howey’s original requirement that profits come “solely” from the efforts of others was modified in later cases to include market forces and other external factors.

Ambiguity in the Howey test

Additionally, Ripple’s CTO highlighted the ambiguity of each requirement in Howey’s test. He emphasized that even something given for free can be considered an investment contract. This interpretation suggests that the traditional view of an investment can go beyond monetary contributions, making the classification of digital assets difficult.

Purpose of the Securities Laws

Schwartz also discussed the broader purpose of securities laws, specifically their role in preventing fraud. He questioned the need for these laws given the existing illegality of fraud. He emphasized that securities laws aim to make securities fraud more difficult, especially through disclosure requirements for those seeking public investments.

Legal precedents and digital assets

Schwartz examined legal precedents and their impact on digital assets. He wondered why orange groves were considered an investment business in the Howey case, but early works of art were not. “Why are there no investment deals in collectibles when all the Howey elements are there?” he wondered.

Role of Congress

When discussing the role of Congress, Schwartz expressed skepticism about the courts’ ability to strike an appropriate balance without legislative intervention. He suggested that only a dramatic change in the judiciary’s attitude away from viewing crypto tokens as securities could spur Congress into action.

Independent insights

Importantly, Schwartz made it clear that his findings are personal in nature and may not reflect Ripple’s position. “I am not a lawyer… I have no idea if this reflects my employer’s position,” he explained, emphasizing the independence of his analysis.

At the time of publication, XRP was trading at $0.61686.