Less Schrödinger’s Security & the SEC’s Shifting Stance on Digital Assets (Part IV)

SEC’s Aggressive Use of the Howey Test

Under Chairman Gary Gensler’s regime, the SEC applied the Howey test aggressively, creating significant uncertainty around the classification of digital assets. Gensler stated that “of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities”, making them a Schrödinger’s security until an enforcement action was filed.

Ripple Lawsuit and Key Court Ruling

On December 22, 2020, the SEC filed an enforcement action against Ripple Labs Inc. (“Ripple”), alleging that Ripple participated in unregistered securities offerings to investors of their native token, XRP, in violation of the ’33 Act.

Impact on Institutional vs. Programmatic Sales

In a key ruling, Judge Analisa Torres found that the programmatic sales of XRP did not constitute an investment contract as they were blind bid/ask transactions. However, institutional sales to sophisticated investors were deemed to be investment contracts under Howey as investors reasonably expected that Ripple would use the capital it received from sales to improve the XRP ecosystem and thereby increase the price of XRP.

Ripple Settlement with the SEC

After nearly five years of litigation, the SEC notified Ripple that it would dismiss their appeal against the firm.

Fine Reduction and Injunction Lift

Ripple’s CLO, Stuart Alderoty, announced on X that the firm will pay $50 million of the $125 million fine, and that the SEC will ask the court to lift the injunction that prohibited them from conducting institutional sales of their token and required registration with the SEC.

Broader Implications for Crypto Regulation

On May 8, 2025, the SEC filed a settlement agreement with Ripple Labs and both parties agreed to jointly request a dissolution of the injunction against Ripple that designated institutional sales of XRP as a security, and a reduction of the $125 million fine.

Commissioner Peirce’s Four-Category Taxonomy

As these events were unfolding, Commissioner Peirce proposed a potential four-category taxonomy

1. Crypto assets that are securities because they have the intrinsic characteristics of securities;
2. Crypto assets that are offered and sold as part of an investment contract, which is a security, even though the crypto asset may not itself be a security;
3. Tokenized securities; and
4. All other crypto assets, which are not securities, in Commissioner Peirce’s view, and are currently the biggest category.

Reinforcing the proposed taxonomy, Commissioner Peirce stated at the May 19, 2025 SEC Speaks event that “most currently existing crypto assets in the market are not [securities]”, emphasized that “economic realities matter and non-security crypto assets may be distributed as part of an investment contract”, and noted that most crypto assets today are not “instruments enumerated in the definition of ‘security’” in regards to tokenization of real-world assets.

Toward Greater Regulatory Clarity

This newly proposed taxonomy of digital assets and reframing of the Howey test points to regulatory transparency that seeks to clarify classification of digital assets as securities. As the President’s Working Group continues to propose rules, regulations, and changes, Compliance Exchange Group continues to analyze the latest news to assist in buying, selling and building Broker-Dealers, providing guidance for Broker-Dealer registration, principal outsourcing, and full-service compliance solutions for Broker-Dealers.