A napkin, in and of itself, is not a contract, but what about XRP?
Napkins, a standard for most tables around the globe, in and of themselves are not contracts, however, with the stroke of a pen, we can transform a tissue for the hands into a legally binding document.
The same is true for tokens or any other digital asset; in and of themselves they are not securities, however, when they are used as means of capital formation, they too transform into a security, or in other words a contract. Unfortunately, the echo chamber of the crypto universe has yet again, through magical thinking, dismissed age-old legal doctrine in favor of unaccepted legal theory. It is time to set the record straight regarding Judge Torres’s summary judgment opinion.
To best understand Judge Torres' statement, we need to split into two sections. The first stating the inherent or intrinsic nature of a token. Second, the factors that are necessary to transform the token into a security. Judge Torres is not claiming that a token cannot be a security, rather she is stating that a token in a vacuum is not a security, which is true.
Part 1: "XRP, as a digital token, is not in and of itself a 'contract, transaction[,] or scheme' that embodies the Howey requirements of an investment contract."
Part 2: “ Rather, the Court examines the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP”
Part 1: Inherent Nature
In and Of Itself: by itself; with respect to its intrinsic or inherent nature without consideration of extraneous factors; per se, intrinsically, inherently.
The Napkin Analogy
In the realm of law, the intrinsic nature of an object often doesn't define its full legal potential. Consider a napkin: a simple piece of paper or cloth, typically used for mundane tasks. Its basic nature doesn't inherently make it a contract. However, under the right circumstances, a napkin can transform into a legally binding contract, such as when two parties jot down terms of an agreement on it and sign. This transformation occurs not because of what the napkin inherently is, but because of the context and the intentions of the parties involved. The napkin's transformation into a contract depends on the actions and intentions of the parties using it, not its physical nature.
Similarly, a digital token like XRP is not inherently a security or investment contract. At its core, it's a digital asset or code. The way it's used, marketed, and the expectations set around it can potentially transform it into a security. This depends on whether it meets the criteria of legal definitions like the Howey Test. Just as the napkin's role as a contract depends on the surrounding circumstances, the classification of a digital token as a security depends on the totality of circumstances surrounding its sale and distribution.
The fundamental reason a token alone cannot be a security lies in the nature of securities. Securities typically represent an investment in a common enterprise with the expectation of profit derived from the efforts of others. A digital token, without accompanying promises or schemes, lacks these defining characteristics. The additional elements, such as promotion, investor expectations, and integration into a larger scheme, potentially qualify it as a security.
Part 2: Better Reason
Rather: with better reason or more propriety
“In and of itself” like most media soundbites was intentionally taken out of context to promote personal agendas rather than the truth. By starting the second sentence with “Rather” Judge Torres articulates the better reasoning, in this case, the legal standards, for determining whether a token is a security.
To determine whether a token is a security, the court:
“examines the totality of circumstances surrounding Defendants’ different transactions and schemes involving the sale and distribution of XRP”
What follows in the Summary Judgement opinion is the court’s analysis of XRPs transactions in the context of investment contracts. The plain language is difficult to misinterpret.
The Opinion
Tracking the chronology of Crypto decisions, what separates Judge Torres's opinion in XRP from Judge Rakoff’s opinion in Terraform is the merging of the investment contract and the token. What is striking and eloquent about the XRP decision is what isn’t said. In judicial restraint, the opinion classifies the sale of XRP to institutional investors as investment contract transactions and she stops there. She doesn’t declare whether the tokens are or are not securities. Her statement regarding “in and of itself” alludes to this conclusion. Comparatively, Judge Rakoff’s take goes one step further merging the token and investment contract transaction together, stating that when a token is sold or a part of an investment contract transaction, the token is a security.
Judge Torres's restraint makes sense when considering the larger crypto market. XRP, unlike Luna, MIR, or UST is still actively traded, and the characterization of XRP as a security may have significantly damaged the market. Additionally, we will likely see the conclusion of XRP's status as a security in the resolution of the Coinbase case.
Delusions or Sanity
By and large, it seems that the crypto community, from crypto lawyers to enthusiasts, has chosen delusions rather than sanity. Digesting “in and of itself” in full context, it is clear that tokens are securities when they are used as a securities contract. It is an unfortunate reality that many crypto professionals, especially lawyers, have selfishly chosen to ignore well-established law in favor of media-centric interpretations to influence the court of public opinion. While likes and retweets drive views and follows, they don’t impact legal logic. In the long run, the failure to respect the existing law may prove toxic to this current version of the industry.
