In a series of analytical Tweets, crypto lawyer Bill Morgan presented his views, facts and evidence pertaining to Ripple’s SEC case, observing that people expect a decision soon on the case. The commercial litigation specialist explained why the real-time gross settlement system Ripple’s native XRP token’s sales to the ODL (On-Demand Liquidity) customers are not investment contracts. Morgan denied XRP sales to ODL customers would qualify as investment contracts, and that comprehending its sales type is crucial.
The issue of #Ripple sales to #ODL customers and how they can be investment contracts continues to intrigue me but does not seem to interest many others and is little discussed. The preference seems to be to distinguish early and later sales rather than types of sales /1
— bill morgan (@Belisarius2020) June 29, 2023
In Ripple’s On-Demand Liquidity (ODL) feature, XRP could be used by customers to bridge two currencies in mere seconds. As per Morgan, Ripple XRP’s sales to ODL customers is not an act of investment or investment intent by ODL customers, nor are there any profit expectations kept by XRP holding customers, as they use it as a consumption.
Morgan stressed on how programmatic sales and the sales to the ODL customers are significantly distinct, fuelling inferences that the XRP community would prefer to omit. Ripple’s responses submitted to the Securities and Exchange Commission’s (SEC) Rule 56.1 statement also signal that the securities regulator does not dispute that ODL transactions could initiate “in as little as 3 seconds,” and hence do not qualify as investments.
Morgan clarified that the SEC does not dispute that prior to May 2020, ODL customers didn’t have to buy XRP from Ripple, and nor did Ripple sell XRP to customers.
The Australia-based attorney asserted that as per Ripple’s quarterly reports, all XRP tokens were sold to ODL customers by Ripple in May 2020. Morgan maintained that this could mean that ODL customers used XRP in ODL transactions in a considerable volume while acquiring XRP tokens not from crypto exchanges but Ripple.
Ripple is reported to have been a party to agreements with ODL customers wherein the customers contractually agreed to not buy XRP as an investment or with a profit expectation. According to Morgan, the agreement in question bound the customers to use XRP solely for payment transactions.
The arbitration specialist contended that an ODL customer who contractually acquired XRP tokens solely to use them on ODL for payments, and not otherwise as an investment or for profit, cannot qualify as an investor.
Morgan questioned why there was a restriction on the manner in which ODL customers use the XRP when the actual concern is it should not be used or held as an investment. Morgan argued that this scenario differs from Ripple’s programmatic XRP sales—reportedly ‘paused’ since November 2019.
Further, Morgan revealed that XRP’s programmatic sales were reportedly made partly on exchanges by market makers, with the help of “blind bid/ask transactions,” wherein, Ripple was unaware of the XRP buyers’ identity. Ripple placed no restriction on market makers pertaining to selling XRP to buyers using the token as money.
While in Q4 2019, XRP’s programmatic sales were paused, Morgan questioned why it was so; potentially signaling it might be due to the September 2019 conversation between Ripple and the SEC staff. The regulator is reported to have subtly alerted Ripple that it might view XRP’s sales as securities transactions.
Morgan advised that the SEC’s position in the Ripple case would have been stronger had the regulator limited its scope to programmatic sales. The digital asset enthusiast maintained that Ripple paused programmatic sales after the SEC’s September 2019 warning.
Morgan noted that Ripple then moved solely to direct XRP sales to ODL customers by May 2020, exhibiting that Ripple was worried about programmatic sales from a securities perspective. As per Bill, Ripple had a higher risk with programmatic sales qualifying as investment contracts.
