Ether and XRP Face Heightened Regulatory Scrutiny

Over the past several months, rapid growth of market interest in digital assets has invited significant regulatory attention.  While much of the focus to this point has been on initial coin offerings, questions have recently been raised as to whether the issuance of some of the most popular virtual currencies, including ether and XRP, constituted illegal securities offerings.

Former Commodity Futures Trading Commission Chairman Gary Gensler recently sent waves through the industry when he raised the idea that ether and XRP may be operating as “noncompliant securities”.  Shortly thereafter, the Wall Street Journal reported that senior officials at the CFTC and the Securities and Exchange Commission met to discuss whether the initial issuance of ether should be deemed an illegal securities offering.  This was confirmed by CFTC Commissioner Brian Quintenz, who urged the joint SEC and CFTC working group to reach a decision on the matter as quickly as possible. 

The courts may also play a role in determining whether some virtual currencies should be regulated as securities, as investor Ryan Coffey sued Ripple Labs earlier this month alleging that the company conducted an illegal securities offering in connection with the sale of XRP.

These developments presage clarification of the regulatory posture with respect to ether and XRP, which may provide market participants with guidance concerning how virtual currency activities will be treated.  We will continue to monitor this topic for further regulatory developments.