Ripple CTO Comments on US Securities Law, Says No Howey Factor Is An Absolute Requirement 

In a tweet today, Ripple CTO David Schwartz provides clarity on U.S. securities laws, emphasizing that no Howey factor is an absolute requirement.   

Ripple chief technology officer (CTO) David Schwartz has explained why the United States government established securities laws. 

In a lengthy X post yesterday, Schwartz noted that the argument about the security status of any token is due to the inclusion of investment contracts into the list of things deemed as securities. 

I've talked a little bit about US securities law, and I'm going to do that a little bit more. As most of you know, the primary argument that some tokens are securities comes from the inclusion of "investment contracts" in the list of things that are securities. The Supreme Court…

— David "JoelKatz" Schwartz (@JoelKatz) November 28, 2023

The Ripple CTO pointed out that the Supreme Court in the Howey case listed different factors that a transaction needs to possess to constitute a security. Notably, Schwartz asserted that none of the Howey factors is an absolute requirement to determine the security status of a transaction. 

While Howey requires a transaction to have the “investment of money” prong to qualify as an investment contract, Schwartz noted that some cases have shown that “gifts” can be deemed as securities. 

“If you put all of those cases together, you pretty much get that nothing is an absolute requirement,” Schwartz remarked. 

Reason Why Securities Laws Were Established 

According to Schwartz, the reason why the U.S. government established securities laws is to prevent securities fraud. He noted that it is difficult to detect and punish securities fraud. 

With the introduction of securities laws, the government has made it difficult for entities to get away with these illicit acts. He emphasized that securities laws were established to ensure entities who raised money from the public do not defraud investors. 

Schwartz said for a transaction to be deemed an investment contract, there has to be a contract. 

“There has to be some future set of facts that would constitute defrauding the investor. If not, the securities legal regime serves no purpose,” he added. 

Court Can’t Get Appropriate Balance Without Congress’ Help 

In the absence of clear regulation for the crypto industry, courts have come to the rescue to curtail the SEC’s enforcement actions against crypto projects. 

This is reflected in the SEC’s case against Ripple and Grayscale, where the commission suffered significant losses. 

Reacting, Schwartz said courts may strike a balance without getting help from Congress. However, he noted that achieving this goal could be daunting for courts. 

Furthermore, the Ripple CTO speculated that Congress would be prompted to act if courts continue not to deem tokens as securities. 

As reported earlier, the judge overseeing the Ripple case ruled that XRP in itself is not an investment contract. It is only a matter of time before more judges also rule other tokens as non-securities.