Cardano Founder Addresses ADA’s Security Concerns, Ripple CTO Reacts

The founder of Cardano and the CTO of Ripple has reacted to the SEC’s argument on the reason behind its classification of ADA as a security.

Charles Hoskinson, the founder of Cardano (ADA), and David Schwartz, Ripple’s CTO, have reacted to the SEC’s argument behind its classification of ADA as a security in the recent Binance and Coinbase lawsuits. Both individuals challenged the SEC’s position in response to tweets from Bill Morgan, a pro-XRP attorney.

Recall that the SEC recently filed lawsuits against Binance and Coinbase, accusing them of facilitating unregistered securities transactions. Notably, the Commission includes ADA on the list of alleged securities in both cases.

However, taking to Twitter, Bill Morgan questioned the validity of the SEC’s argument. The lawyer argued that the SEC’s claim fails to consider the nature of technological progress and innovation in the crypto industry.

Why does the SEC thinks that #ADA is a security.
Imagine you create a product and then you add some feature or capability that makes it better. This happened a lot in the history of smart phones. You announce this improvement and how it will increase demand for your product/1

— bill morgan (@Belisarius2020) June 10, 2023

He drew a parallel with the history of smartphones, where manufacturers continuously enhance their products with new features and capabilities. Citing an excerpt of the SEC’s complaint, Morgan pointed out that the agency argues that ADA is a security because IOHK improved the Cardano blockchain and released blogs to inform the public.

Morgan emphasized that sharing information about product improvements does not automatically make the product a security. According to him, the same logic should apply to the ongoing development of the Cardano blockchain.

He pointed out that the SEC’s allegations primarily revolve around secondary market sales on Coinbase after ADA’s listing in March 2021, not the initial coin offering (ICO) that took place four years prior. 

Cardano Founder and Ripple CTO React

When the situation surrounding ADA’s ICO came up, Hoskinson chimed in to provide clarification. He emphasized that the ICO occurred in Japan and did not involve direct sales of ADA. Instead, it utilized vouchers, targeted marketing in Japanese, and was priced in Yen and Bitcoin, with no participation from Americans.

The financing was done in Japan, no ada was sold, only vouchers, marketing was in Japanese, priced in Yen and Bitcoin, no one from the United States participated. Ada launched in 2017 as an airdrop two years after the voucher sale. The facts might be inconvenient to the SEC, but…

— Charles Hoskinson (@IOHK_Charles) June 11, 2023

Hoskinson confirmed that all purchases of ADA made by US citizens were 100% pertaining to secondary sales four years after the ICO. This suggests that Americans only bought ADA on the secondary market and had no affiliation or connection with the ICO in Japan.

100% done by the secondary market

— Charles Hoskinson (@IOHK_Charles) June 11, 2023

Morgan pointed out that the SEC’s jurisdictional reach does not extend to the ICO due to its location and nature. He stressed that, despite the reality of this situation, the agency alleges that ADA “became” a security through its availability on US-based exchanges. Morgan called out the absurdity of this line of thought. 

David Schwartz, the CTO of Ripple, joined the discussion, highlighting the SEC’s stance on ICO transactions and secondary sales. Schwartz posited that the SEC’s position might be that the ICO constituted a securities offering, albeit one outside their jurisdiction due to the lack of US ties.

I guess their argument must be the ICO was a securities offering, just not an SEC issue because of no US nexus. But then I thought it was their position that secondary sales were exempt. The ICO transactions didn't take place on exchanges. So what's the investment contract?

— David "JoelKatz" Schwartz (@JoelKatz) June 11, 2023

However, Schwartz highlighted that the SEC had previously claimed that secondary sales are exempt from securities regulations. This raises the question of what constitutes the investment contract that would subject ADA to security classification.