Ripple CTO Defines What Constitutes a Security and Commodity as the SEC Battles Over XRP

Ripple chief technology officer, David Schwartz, continues to share facts that indicate that XRP is not a security as claimed by the United States Securities and Exchange Commission (SEC).

In an attempt to provide some clarity as the SEC seems chaotic over which digital token constitutes a security or commodity in the crypto industry, David Schwartz pinpointed a simple metric that creates the perfect distinction. 

According to the Ripple CTO, a token that could be regarded as a security is one that gives holders rights. On the other hand, digital tokens that can be categorized as commodities are those that give holders abilities, he inferred. 

He wrote, “there’s a very simple way to tell if something is a security or a commodity. If it gives you rights, it’s a security. If it gives you abilities, it’s a commodity.” 

To further buttress this point and also answer a question from a user that governance token gives holders the ability and the right to vote, Schwartz made an illustration using oranges and IBM stocks. He noted, “I guess, somewhat. If you own an orange, you have the legal right to eat that orange. But it’s not a contractual right to have anyone else do anything, it’s a purely negative right.” 

Furthermore, he wrote:

“Say you buy IBM stock at a broker. You now have the legal right to participate in IBM’s governance. But you don’t yet have any ability to participate. IBM is legally obligated to ensure that you do have that ability to participate by notifying you and counting your votes.

“When you hold a governance token, nobody has given you any legal right to vote. They’ve just given you the technical ability to vote. And this right/ability distinction is of major legal significance. Securities give rights, commodities give abilities.”

However, the Ripple CTO cited an argument that countered his latest commodity and security definitions. This counter-argument was put forward by lawyers of former Coinbase product manager Ishan Wahi in a motion to dismiss a class action lawsuit filed by the United States SEC. “The Wahil motion to dismiss contains an interesting counter-argument to my position that tokens that include governance “rights” are more security-like, arguing they’re not rights but simply technical abilities,” Schwartz tweeted. 

It bears noting that these recent statements from the Ripple CTO come weeks after he asserted that XRP fits into the definition of a commodity under United States federal finance rules.

Whereas members of the XRP community and several other crypto proponents believe that the XRP Ledger native token is not a security, the presiding judge in the longstanding Ripple-SEC case is yet to issue a verdict on this matter. This verdict is expected by Q2 of 2023 as everything has been briefed.

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