Last week Ripple filed an important motion, with former SEC chair Mary Jo White on the briefing, but it, sadly for me, largely sidestepped the issue of whether XRP is, or is not, a security under U.S. federal law.

Summary of the Case

If you’re just now joining me, let me bring you up to speed. A few months ago a San Diego plaintiff filed a lawsuit against Ripple arising out of his XRP token purchase. His theory is that Ripple, in issuing the token, both committed securities fraud and failed to register XRP tokens with the Securities and Exchange Commission (“SEC”) prior to its offering.

His losses were around $500 but he’s seeking class action status against Ripple whether the combined losses among plaintiffs could be significantly larger.

For more details review my initial analysis here.

Procedural Posture

In American litigation, procedure is, in some ways, almost as important as substantive law – so lawyers talk and think quite a bit about it. In the Ripple litigation, the defendants recently removed the case from California state court to a San Francisco federal court.

Now there’s a showdown as to whether the case should stay in federal court or be sent back to state court, where the case started.

Ripple argues the case belongs in federal court, not state court, because of a statute called the Class Action Fairness Act (“CAFA”). They likely want to keep the case in federal court because it’s thought to be a friendlier forum to corporations, especially in class actions.

Predictably, plaintiff filed a motion to send the case back to state court a few weeks ago, arguing that case law requires cases arising under various securities laws to stay in state court.

Thus, I was thinking this might raise an interesting showdown in San Francisco to determine whether Ripple’s XRP tokens are, or are not, securities under the 1933 Securities Act.

Ripple’s Opposition

Last week, Ripple’s lawyers, who include a former, heavyweight litigating chairwoman of the Securities and Exchange Commission, Mary Jo White, filed an opposition to the motion.

The filing touched briefly on the issue of whether XRP is a security or not but largely sidestepped the issue.

Ripple’s Arguments re: XRP as a Security

What little they did say seems to indicate that Ripple is going to argue XRP is a commodity – not a security – which is a conservative, precedent-based approach. The brief discussion of XRP as a security in the opposition was as follows:

“Virtual currencies are generally defined as “‘digital assets used as a medium of exchange.’” Commodity Futures Trading Comm’n v. McDonnell, 287 F. Supp. 3d 213, 218 (E.D.N.Y. 2018). “They are stored electronically in ‘digital wallets’ and exchanged over the internet through a direct peer-to-peer system” called a “blockchain.” Id. As one court [CFTC v. McDonnell], concluding that a virtual currency was a “commodity” (not a security) within the regulatory purview of the Commodity Futures Trading Commission, described it:

The “blockchain” serves as a digital signature to verify the exchange. “The public nature of the decentralized ledger allows people to recognize the transfer of virtual currency from one user to another without requiring any central intermediary in which both users need to trust.” Some experts believe blockchain technology underlying virtual currencies will serve to “enhance [future] economic efficiency” and have a “broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.”

Note the “not a security” comment.

What Happens Next

It’s not totally clear what happens next. Much of the hearing in San Francisco on August 1 may turn on broader issues, or the court may want more briefing as to whether XRP is a security or not, including possibly, an evidentiary hearing.

Why? Because to real issue before the court is whether the case should stay in federal court or return to state court. It may be easier to avoid the issue of a securities finding by sending to another forum or deferring to another time – which is what Ripple seems to asking for with its recent filing.