Ripple Proposes Network Maturity Test for Crypto Token Regulation

Ripple has introduced a new legislative framework aimed at determining when crypto tokens should no longer be considered securities. This proposal, known as the "network maturity" test, evaluates whether a token has outgrown its initial investment contract based on objective criteria such as market capitalization, operational history, and decentralization of control. The proposal was outlined in a May 27 letter from Ripple’s legal team to the SEC’s Crypto Task Force, responding to the agency’s question about when a crypto asset, originally part of an investment contract, becomes legally distinct from that contract.

According to Ripple’s legal team, once a digital asset reaches a certain level of maturity, it should be able to circulate without registration or the need for exemption under securities laws. This is because it is no longer part of an investment contract, and transactions in it are not securities transactions, even if conducted by parties originally associated with the asset. Currently, there is no clear rule under federal law for when a crypto token transitions from being part of a securities offering to being a freely tradable commodity or currency. The SEC has historically used concepts like “sufficient decentralization” to describe when a token might no longer be a security. However, Ripple argues that this is too vague and subjective. The team has proposed the “network maturity” test as a clearer, more practical alternative to “decentralization.”

Under this approach, tokens could be excluded from securities regulation if they meet specific criteria, such as a high market capitalization, a long-operating, permissionless network, and the absence of any party with unilateral control over the protocol. Ripple suggested a $1 billion circulating market value threshold and a 10-year operational requirement as reasonable benchmarks. The company noted that tokens meeting these standards already trade in broad, liquid markets with sufficient public information and market data. This proposal aims to provide a more objective and transparent process for determining token status, potentially reducing legal risks and encouraging further development and adoption of blockchain technology.

In addition to its legislative recommendation, Ripple has put forward a legal test to clarify when a crypto token sold as part of an investment contract should no longer be treated as one. Under this framework, a token is presumed to have separated unless the issuer has left a material promise unfulfilled and the current holder has enforceable rights tied to that promise. This initiative represents an important step towards creating a more transparent and predictable regulatory environment for crypto tokens. However, the success of Ripple's proposal will depend on its acceptance by regulators and the broader crypto community. While the test offers a promising solution to the regulatory challenges facing the industry, it remains to be seen whether it will be adopted and implemented in practice.