[Insight & Opinion] Are Crypto Assets Securities or Not?

Kim Ki-dong, Chief Attorney at Lawbox Law Firm.

The "securities nature of crypto assets" is a hot topic among financial authorities, crypto asset operators, and investors worldwide.

The securities status of crypto assets hinges on the U.S. Securities and Exchange Commission (SEC) vs Ripple (XRP) lawsuit.

Ripple is an international remittance coin developed by a company called Ripple Labs. At one point, its market capitalization reached 50 trillion won, ranking second only to Bitcoin. Over 60 countries have integrated Ripple into their payment systems, and it is available for use at 13 banks in the United States.

In 2018, investors who suffered losses from the price crash of Ripple filed lawsuits seeking damages. In December 2020, the SEC filed a lawsuit against Ripple and its co-founders, alleging that Ripple sold unregistered securities to retail investors for seven years and earned $1.3 billion in profits. The case is currently ongoing.

Why are financial authorities worldwide paying close attention to this lawsuit?

Major countries involved with crypto assets, including the U.S., have not enacted separate laws specifically regulating the securities nature of crypto assets. Instead, they have protected crypto asset investors by incorporating crypto assets under existing financial regulations.

Therefore, the outcome of this lawsuit, which will determine "whether Ripple is a security," will have a decisive impact on the crypto asset market and regulatory standards and directions.

If the SEC wins this lawsuit, it will not only confiscate Ripple Labs' sales revenue worth trillions of won but also lead to unprecedentedly strengthened crypto asset regulations.

The standard used to judge Ripple's securities status in this lawsuit is the "Howey Test." This is the criterion the SEC applies to determine whether a transaction qualifies as an investment contract security. The concept of "investment contract securities" in our Capital Markets Act is also derived from this standard.

In 1946, the U.S. Supreme Court established the legal principle to determine securities status based on four criteria: ① Was money invested? ② Was the investment in a common enterprise? ③ Did profits come from the efforts of a third party other than the investor? ④ Was the investment made with the expectation of profits?

However, interpreting these criteria is by no means easy. The Ripple lawsuit is currently in the discovery phase, making both the timing of the verdict and the outcome difficult to predict. Nonetheless, our financial authorities are likely to refer to this lawsuit's outcome and the resulting regulatory direction in the U.S.

Despite the recent global macroeconomic downturn and the stagnation of the crypto asset market, the market continues to develop in various forms.

It is already possible to purchase crypto assets using Google Pay and Apple Pay, and Visa, Mastercard, and PayPal have launched crypto asset payment services. Many domestic companies such as Naver, Kakao, and Wemade are also entering the coin issuance and blockchain platform business. By the end of 2021, the market capitalization of 29 registered cryptocurrency operators in Korea reached 55.2 trillion won, with 5.58 million users actively participating in transactions.

What is the way to foster a healthy development of the crypto asset market while protecting bona fide investors? How can legal responsibility be clearly established for those who exert influence and gain profits behind the veil of decentralization? The solution to this difficult challenge may be found in the SEC vs XRP ruling. The outcome of the lawsuit is eagerly awaited.

This content was produced with the assistance of AI translation services.