Leading U.S. exchange Coinbase has shared documents revealing the SEC’s internal discussions about XRP and Ethereum’s security status. 

Coinbase obtained this internal communication through Freedom of Information Act (FOIA) requests to several U.S. federal agencies, including the SEC. 

According to internal emails from 2021, SEC staffers questioned whether XRP exhibits certain security characteristics. Notably, the securities agency, at one point, internally discussed asking an expert what risks the XRP Ledger (XRPL) might suffer if Ripple seized operations and walked away. 

SEC Labeling XRP a Security 

In a separate letter dated December 9, 2021, the SEC directly referred to XRP as a security. The regulator made this known when expressing disappointment regarding Ripple’s planned launch of its Liquidity Hub. 

Per the letter, the SEC expressed dissatisfaction that Ripple launched Liquidity Hub without first seeking the commission’s opinion on how federal securities law may apply to the platform’s operations. 

At the time, the SEC cited information indicating that Ripple directly or indirectly planned to offer XRP and other crypto assets deemed securities through its Liquidity Hub platform.  

Two weeks later, Ripple responded to the letter, describing the commission’s claim as ‘confounding.’ Explaining why it did not consult the SEC, Ripple emphasized that the commission is not its prudential regulator. It added that reports suggest that the SEC usually files enforcement actions against entities that engage with it. 

It bears mentioning that these internal emails came when the SEC was embroiled in a heated legal battle with Ripple. This lawsuit, which was introduced in December 2020, centered around XRP’s regulatory status. The SEC initially labeled XRP a security, alleging that Ripple raised $1.3 billion through its sales. 

However, Ripple pushed back and refuted these claims, leading to a protracted legal battle. Interestingly, a New York federal court also sided with Ripple and emphasized that XRP is not a security in itself. 

New York Seeking SEC Support to Classify Ethereum as a Security 

In another email dated June 2023, Shimso Maswoswe, the head of the New York Attorney General’s Investor Protection Bureau, asked the SEC to file an amicus brief in its case against KuCoin to support its argument that Ethereum (ETH) is a security. 

Maswoswe’s email comes three months after the New York Attorney General’s office sued KuCoin for facilitating the trading of unregistered commodities and securities. In the lawsuit, New York labeled ETH as an unregistered security and sought the SEC’s support to back up the claim. 

According to the New York Attorney General’s office, the SEC’s amicus brief, which might prompt the court to label ETH a security, would benefit investor protection. Several months later, KuCoin settled with New York’s regulators, agreeing to shut down its operation in the state and pay a fine of about $28 million. 

Despite the settlement, the SEC still launched a probe to ascertain whether ETH was a security. This prompted Ethereum software company ConsenSys to sue the SEC. However, the case was later dropped after the SEC approved the launch of multiple Ethereum ETFs.