Coinbase has released a batch of internal documents obtained through Freedom of Information Act (FOIA) requests, offering a rare glimpse into the U.S. Securities and Exchange Commission’s (SEC) evolving views on the regulatory status of XRP and Ethereum (ETH). The documents span communications from 2021 to 2023, reveal inconsistencies, internal doubts, and political pressure during the SEC’s high-profile legal battle with Ripple Labs and parallel investigations involving Ethereum.
SEC Staff Question XRP’s Security Characteristics
One of the most revealing disclosures stems from internal emails exchanged in 2021, where SEC staffers openly questioned whether XRP exhibits characteristics typical of securities. In one exchange, staff considered bringing in an expert to assess how the XRP Ledger (XRPL) would be affected if Ripple ceased operations. This hypothetical implies doubt over XRP’s dependency on Ripple, a key factor in applying the Howey Test.
In a more formal tone, the SEC expressed its stance in a letter dated December 9, 2021, referring to XRP explicitly as a security. The letter criticised Ripple for launching its Liquidity Hub without consulting the SEC for guidance regarding securities law compliance.
The SEC warned that Ripple might be offering XRP and other securities through the platform, either directly or indirectly. Two weeks later, Ripple responded, calling the claim “confounding” and asserting that the SEC is not its prudential regulator. Ripple also argued that engaging with the SEC often invites enforcement action, referencing the agency’s litigation history.
Background: Ripple vs. SEC Legal Battle
These documents surfaced amid Ripple’s legal standoff with the SEC, which began in December 2020. The SEC alleged that Ripple conducted an unregistered securities offering, raising $1.3 billion through XRP sales. Ripple vehemently denied the claim, stating that XRP is not a security and operates independently of Ripple’s activities.
After years of back-and-forth litigation, a New York federal court ruled in favor of Ripple, stating that XRP itself is not a security. The ruling dealt a significant blow to the SEC’s case, casting doubt on its regulatory strategy toward digital assets.
Related article: Ripple CLO: No Clear Crypto Laws Drove SEC to Drop Legal Fight
New York AG Pressures SEC to Label Ethereum a Security
The FOIA documents also uncover fresh insight into Ethereum’s regulatory status. In June 2023, Shimso Maswoswe, head of the New York Attorney General’s Investor Protection Bureau, emailed the SEC requesting the agency to file an amicus brief supporting New York’s position that Ethereum is a security.
This request came three months after New York’s Attorney General sued KuCoin, accusing the exchange of allowing users to trade unregistered securities and commodities, including ETH. Maswoswe argued that SEC support in the form of an amicus brief would bolster the AG’s case and improve investor protection.
While KuCoin eventually settled with New York, agreeing to cease operations in the state and pay a $28 million fine, the SEC’s investigation into Ethereum continued. The ongoing scrutiny prompted Ethereum software firm ConsenSys to sue the SEC, aiming to block any classification of ETH as a security.
However, the SEC quietly dropped the investigation after approving multiple spot Ethereum ETFs, signalling an informal shift in its stance on Ethereum’s classification.
