U.S. judges are clarifying the legal status of cryptocurrency tokens. In a series of recent rulings, judges have emphasized that the tokens themselves are not securities. These decisions build on cases involving Ripple, Kraken, and Binance, in which the SEC sought to classify these tokens as securities under existing laws.

Judge Torres in SEC v Ripple told the SEC that the XRP token itself is not a security /1 pic.twitter.com/XpjbaJbdsl

— bill morgan (@Belisarius2020) August 29, 2024

In SEC v. Ripple, Judge Torres explicitly stated that XRP, Ripple’s digital token, is not inherently a security. The decision addressed the SEC’s argument that XRP, by its nature, should be classified as a security. Judge Torres stated that XRP does not meet the Howey Test’s criteria for being an investment contract. The decision highlights the need to distinguish between the token itself and sales of the token, which may be subject to securities laws depending on the circumstances.

Similarly, in SEC v. Payward Inc. (Kraken), Judge Orrick reinforced this distinction. He noted that just as the orange groves in Howey were not securities, cryptocurrency tokens are not securities by nature. Judge Orrick cautioned the SEC to be careful when making such claims. He emphasized that the claim that tokens themselves are securities cannot be sustained under the law. This assertion reinforces the idea that the context in which tokens are sold or promoted is critical to determining their legal status.

In another case involving Binance, Judge Jackson rejected the SEC’s “embodiment theory.” The SEC argued that the tokens themselves were investment contracts. Judge Jackson disagreed, saying that tokens could be used in investment contracts, but were not themselves securities.

Taken together, these rulings highlight the importance of context when applying securities laws to cryptocurrency tokens. While transactions involving tokens may be subject to regulation, the tokens themselves are not automatically regulated. This distinction is critical to the ongoing debate over how cryptocurrencies are regulated in the United States.

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