Bill Morgan, a well-known lawyer in crypto circles online, shared his beliefs that the Securities and Exchange Commission (SEC) would face a significant hurdle in its controversial lawsuit against Ripple when it comes to Ripple’s XRP sales to its On-Demand Liquidity (ODL) customers.
Morgan recently published a lengthy Twitter thread laying out his thoughts on the matter:
The SEC wants to be able to say that all XRP in the market are or represent Ripple’s investment contracts (meaning all XRP Ripple has offered/sold/distributed). Problem is the uncomfortable truth about what the SEC calls the ‘small subset’ of sales to ODL customers/1
— bill morgan (@Belisarius2020) May 23, 2023
According to Bill Morgan, the SEC’s long-standing argument that all the XRP that exist in the market represent Ripple’s investment contracts would be opposed by what the Commission previously described as the “small subset” of sales to Ripple’s ODL clients. The problem for the securities regulator arises from the inability to apply the infamous Howey test to said ODL sales.
Morgan stated that the Howey Test, which has long been used to determine if an asset qualifies as a security, wasn’t able to accommodate the XRP sales to Ripple’s ODL clients. The crypto lawyer highlighted that even the SEC acknowledged that ODL customers immediately dealt with the XRP they bought by using them as a bridge rather than holding it with an expectation of profit. The expectation of profit is one of the three prongs of the Howey Test.
In addition to no expectation of profit, the XRP sales to ODL clients also negated the existence of a common enterprise, since ODL users are customers of Ripple’s products. The existence of a common enterprise needs to be proved to qualify an asset as a security under the Howey Test.
Bill Morgan told his Twitter followers that the dilemma over ODL clients posed a problem for the SEC. According to Morgan, an exception for the security status of XRP sales to ODL customers would undermine the securities regulator’s long-standing argument that all the XRP in the market is or represents an investment contract.
According to the crypto lawyer, the SEC chose to tackle this problem by arguing that for the most part, Ripple didn’t sell XRP to its ODL clients till mid-2020. The SEC asserted that instead of making a sale, Ripple paid the ODL clients to use XRP. The securities regulator also asserted that ODL customers took what XRP they found in the market and immediately resold it.
