Revisiting The “Reves Test” and XRP: Gary Gensler Talks Bearer Instruments

April 22, 2022 1:27 pm Comments

This is an update to a story we’ve recently started following here at ProCoinNews.

Big hat tip goes to @DigPerspectives on Twitter for first turning us on to this story (Digital Perspectives on YouTube).

Is XRP a security?

That’s, of course, the big thing currently being litigated as everyone in the XRP community knows.

But there’s another question that’s not getting asked much: Is XRP a “note”?

We all know the “Howey Test” and the famous orange groves when it comes to analyzing whether something is a security.

But the lesser known “Reves Test” also exists and allows the Court to determine whether something is instead a “Note”.

Funny thing is, these SEC Commissioners keep bringing up the concept of a “Note” and “bearer instruments”.

Here’s the latest from just yesterday.

Broadcasting from his living room yet again (is this guy on house arrest or something?) is Gary Gensler again shifting the conversation to notes and bearer instruments.

Watch this clip below:

It’s not the first time SEC commissioners have talked about notes recently.

Here is Peirce (listen to the end):

And here again is Gary Gensler once again from his living room (start at 1:25):

So what is the Reves Test exactly?

Lawcast had a fantastic breakdown of both the Howey Test and the Reves Test.

Here is a snippet (read the full article here):

Although the term “note” is specifically included in the statutory definition of a security, case law has determined that not every “note” is a security.  The Exchange Act and SEC specifically exclude notes with a term of less than nine months, the proceeds of which are used for a current transaction, from the definition of a “security.”  Moreover, numerous lower courts had carved out exemptions over the years for commercial paper type notes such as purchase money loans and privately negotiated bank loans.

Relying on Howey, many courts developed an analysis based on the risk of the loan.  That is, the issue revolved around whether the lender had contributed “risk capital” subject to the entrepreneurial or managerial efforts of the borrower.  Relying on Landreth, other courts decided a “note” is a security as it appears in the statutory definition.

Analyzing and bringing together the line of lower court opinions, the U.S. Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990) adopted the “family resemblance” test to determine whether a note is a security.

Under the “family resemblance” test, one must start with the presumption that a note is a security which presumption is rebutted if the note bears a resemblance to one of the enumerated categories on a judicially developed list of exceptions.  If the “note” does not bear a resemblance to an item on the list, the analysis continues to determine if a new category should be added to the list.

The following is a list of notes that have judicially been determined to fall outside the definition of a “security”:

(i) a note delivered in consumer financing;

(ii) a note secured by a mortgage on a home;

(iii) a  short-term  note  secured  by  a  lien  on  a  small  business  or some of its assets;

(iv) a note evidencing a character loan to a bank customer;

(v) a short-term  note  secured  by  an  assignment  of  accounts receivable;

(vi) a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized); and

(vii) a  note  evidencing  loans  by  commercial  banks  for  current operations.

In determining whether a note bears a resemblance to one of the enumerated exceptions to a security, or whether a new exception should be added, the courts consider:

(i) The motivation of seller and buyer – The first factor is described as the motivation that prompts “a reasonable seller and buyer to enter into” the transaction.  If the seller’s motivation is to raise money for his/her business and the buyer’s motivation is to earn profits, then the note is likely a security.  Even if the note is not necessarily characteristic of a security, if the investor reasonably expected that they were buying a security, and would be protected by the accompanying securities laws, the courts can determine that indeed a security has been sold.

(ii) The plan of distribution of the instrument – The second factor determines whether the instrument is being distributed for investment or speculation.  If the note instrument is being offered and sold to a broad segment or the general public for investment purposes, it is a security.

(iii) The reasonable expectations of the investing public – An instrument will be deemed a security where the reasonable expectation of the investing public is that the securities laws (and accompanying anti-fraud provisions) apply to the investment.

(iv) The presence of alternative regulatory regime – The fourth and final factor is a determination whether another regulatory scheme “significantly reduces the risk of the instrument, thereby rendering the application of the Securities Act unnecessary.”  The FDIC and ERISA laws are two such examples.

Both before and after Reves, the issue of whether bank notes or CD’s are a security has been often litigated.  In Marine Bank vs. Weaver, 455 U.S. 551 (1982), the U.S. Supreme Court held that a federally insured bank CD is not a security. In that case the court relied heavily on the fact that the bank was federally regulated and the subject CD was federally insured.  The Court stated that CDs could be securities subject to the Act in other contexts, and that instruments “must be analyzed and evaluated on the basis of the content of the instruments in question, the purposes intended to be served and the factual setting as a whole.”

What about XRP specifically?

You might be surprised to learn who has spent significant time advocating the idea that XRP could be a “note”: none other than Chris Giancarlo, former chairman of the Commodity Futures Trading Commission (CFTC).

Check out this article from Forbes where Giancarlo speculates XRP may indeed fit the definition of “Note” much better than “Security”:

When Chris Giancarlo was the chairman of the Commodity Futures Trading Commission he became a rock-star of sorts in certain corners of the cryptocurrency community, helping establish criteria that eventually led to bitcoin and ethereum being declared commodities, more like coffee or sugar than stock in a company. The U.S. Securities and Exchange Commission largely followed suit, eventually also declaring that bitcoin and ether, the cryptocurrency powering the ethereum blockchain weren’t securities.

Now chairman emeritus Giancarlo, who was deemed “Crypto Dad” following an impassioned speech he gave to Congress where he credited bitcoin for finally getting his kids interested in finance, is at it again, having co-written a detailed argument published this morning in the International Financial Law Review for why XRP, the cryptocurrency formally known as “ripples,” was also not a security. The only problem is he’s no longer a regulator. In fact, his employer is on the payroll of Ripple, the largest single owner of XRP, whose co-founders actually created the cryptocurrency.

The bombshell paper, titled, “Cryptocurrencies and U.S. Securities Laws: Beyond Bitcoin and Ether,” co-authored by commodities lawyer Conrad Bahlke of New York law firm Willkie Farr & Gallagher LLP, methodically reviews the criteria of the Howey Test, established by the SEC in 1946 to determine whether something is a security, and point-by-point argues that XRP does not qualify. Rather, the paper argues, like its name would indicate, cryptocurrency is a currency of perhaps more interest to the Federal Reserve and central banks than securities regulators.

What’s at stake here to the cryptocurrency world cannot be overestimated. XRP is now the fourth largest cryptocurrency by market cap, with $5.9 billion worth of the asset in circulation according to cryptocurrency data site Messari. While Ripple was valued at $10 billion according to its most recent round of funding, the company continues to fund itself in part by selling its deep war chest of 55.6 billion XRP, coincidentally valued at the same amount as the company itself.

Not only could an eventual decision by the SEC to classify—or not classify—XRP as a security impact the untold individual owners of the cryptocurrency, but other clients using Ripple services that don’t rely on the cryptocurrency, including American Express, Santander, and SBI Holdings could stand to be impacted positively or negatively depending on the decision. After all if XRP were to be rescinded it would be a huge cost to their software provider. If Giancarlo is right though, Ripple could end up being one of the most valuable startups in fintech.

“Ultimately, under a fair application of the Howey test and the SEC’s presently expanding analysis, XRP should not be regulated as a security, but instead considered a currency or a medium of exchange,” Giancarlo and Bahlke argue in the paper. “The increased adoption of XRP as a medium of exchange and a form of payment in recent years, both by consumers and in the business-to-business setting, further underscores the utility of XRP as a bona fide fiat substitute.”

You need to read the entire paper by Giancarlo and Bahlke where they evaluate every element of the “Howey Test” and determine XRP does not fit virtually any element of that test.

Instead they conclude the following:


Here’s more, from Bitboy and Brad Kimes:

Is the whole world starting to piece together how this all plays out?

Endgame coming soon?

Clarity coming soon?

In a Hollywood-esque twist of fate, will XRP end up soon becoming the “only” coin with regulatory clarity?

Will it be conclusively deemed “not a security” and perhaps instead a Note?

You know, kind of like these used to say? 👇

New financial system incoming?

We’ll continue to watch and see and keep you updated right here at

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