Ripple, XRP effect? Howey Test ‘hasn’t worked out well,’ admits SEC Commissioner Peirce
Hester Peirce, SEC Commissioner popularly known as ‘Crypto Mom,’ has always been one to highlight the need for clarity on the question of crypto-innovation. As one of the speakers at the recent Draper Goren Holm’s Security Token Summit, Peirce once again underlined the urgent need for a clear-cut regulatory regime for cryptocurrencies, especially since major companies such as Tesla Inc., BNY Mellon Corp, and Mastercard Inc. have started to embrace the alternative asset class.
“That adds to the urgency of us taking some sort of action in this area to provide more clarity.”
Peirce has long advocated for regulators to create clearer rules that would allow crypto-assets to thrive without fear of breaking the law. In the past, the Commissioner has said that such lack of clarity has hindered innovation, with the United States seen by many to be losing the technological race to other countries such as China.
The Commissioner also criticized the ‘Howey test’ used by the Supreme Court to determine whether an asset is a security. According to her, the Howey Test has had some challenges over the years, when being applied to the digital currency industry.
According to Peirce, digital currencies are similar to securities in several ways, but also unique in many ways. Analyzing recent developments, she implied that the Howey Test is not able to capture and define some instances of digital currency sales and distributions the same way it can capture what we would call securities sales.
It’s worth noting that the U.S Securities Exchange Commission (SEC) sued Ripple over an illegal securities offering in December, the outcome of which has been argued quite frequently on crypto-Twitter. According to digital currency lawyer at Anderson Kill, Stephen Palley,
“The scenario where Ripple would win the lawsuit, and replace Howey Test with another new legal identifier for crypto is delusional.”
In order to tackle the said ambiguity, ‘Crypto Mom’ has suggested a ‘3-year safe harbor’ for virtual currency token projects. Following this, it would provide exemptions under a given set of strict conditions.
“You have three years to develop the network so that the token is actually usable or the network is decentralized — and at that point, it’s clear the securities laws don’t apply. And everything that you say will be covered by the anti-fraud laws under the securities laws.”
With Gary Gensler, President Biden’s nominee for the SEC’s chairmanship coming in, the next few months are bound to be interesting. Especially since he is known for having commented on whether XRP is a security in the past. Commissioner Peirce concluded by highlighting her optimism about collaborating with the incoming SEC chairman to develop the proposed plan in order to bring more transparency to the regulatory domain in the U.S.