Exhibit C Filed Under Seal

Case 1:20-cv-10832-AT-SN Document 130-2 Filed 04/22/21 Page 1 of 29
Exhibit C
Filed Under Seal
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PRIVILEGED I CONFIDENTIAL Perkins j

Coie
October 19, 2012
TO: Chris Larsen and Jed McCaleb

OpenCoin Inc.
FROM: Dax Hansen

Keith Miller
Carla Reyes
RE Legal Analysis and Recommendations Regarding Ripple Network
J. INTRODUCTlON
OpenCoin Inc., dba Ripple ("Company"), is developing a decentralized, open, global, peer-to-
peer, crypto currency payment network ("Ripple etwork") and a new crypto currency ("Ripple
Credits"). You asked us to review the proposed features of the Ripple Network and Ripple
Credits and to provide recommendations for mitigating relevant legal risks. We provided you
our in itial analysis in a memorandum dated February 8, 2012. Thereafter, you provided a revised
business plan, detailed in the "Opencoin Features Overview," and asked us to provide additional
analysis. We look forward to discussing this analysis with you after you have had a chance to
review this memorandum.
11. DESCRIPTION OF THE RIPPLE NETWORK
Based on the "Opencoin Features Overview" and our conversations with Chris Larsen and Jed
McCaleb ("Founders"), we understand the following :
• the Ripple etwork will be an open source protocol and open source client software
program developed and released to the public free of charge under a non-control software
license, such as the l\{[T license, and downloaded and used by end users of the Ripple
etwork (the "Ripple Client Software");
• the Ripple etwork will track ownership of Ripple Credits and transactions conducted
using Ripple Credits and Third Party Ripple Currencies (described below) in a distributed
public ledger (the "Ripple etwork Ledger ") accessib le to end users through the Ripple
Client Soft:\vare;
• a finite number of Ripple Credits will be created and distributed. In contrast to the
similar existing decentralized c1ypto currency network, Bitcoin, Ripple Credits will not
be "mined" by end users. At introduction of the Ripple etwork, all Ripple Credits
available for distribution will exist and be assigned to several ledger addresses owned by
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PRIVILEGED I CONFIDENTIAL
Founders and Company, the for-profit corporation established by Founders. Ripple

Credits will be distributed and sold as desc,ibed below;
• Ripple Credits must be used as "stamps" to pay the nominal transaction fees associated
with using the R ippl e Network. Ripple Credits "stamps" will be destroyed after use;
• Ripple Credits may also be accepted by end users of the Ripple etwork as payment for
goods and services (e.g., accepted by merchants selling Internet or mobile games, or used
for affiliate marketing, on line gambling, tippi ng, and/or donations);
• the Ripple 1 etwork will also incorporate an improved version of the open source
monetary system fo rmerly known as Ripple (" Original Ripple System"). The Original
Ripple System is a "financial system that recognizes existing trust relationships between
human beings and works within that structure." 1 Each Original Ripple System user
identifies other users from whom they are willing to accept promises to repay and assigns
a value, in one or more currencies, of the amount they expect the other users to be ab le to
repay. The Original Ripple System then allows any u er to negotiate tran sactions with
any other user based on chained promises to pay;
• incorporating the Original Ripple System into the Ripple · etwork will allow end users to
use currencies other than Ripple Credits ("Th ird Party Ri pple Currencies") on the
Ripple Network, thereby allowing for more robust transactions;
• Transactions conducted on the Ripple Network using Third Party Ripple Currencies are
retlected in the Ri pple etwork Ledger, but are not settled unless completed using Ripple
Credits;
• Prior to the public launch of the Ripple Network, Founders will contribute the Ripple
Client Software and a majority of Ripple Credits to Company and will retain a portion of
Ripple Credits as individuals;
• Founders will not accept investment in Company in exchange for the issuance of Ripple
Credits; instead, investors wi ll receive stock in Company;
• Company will employ a team of individuals dedicated to promoting the Ripple Network,
improving the Ripple Cli ent Software and the Ripple Network, and conducting outreach
efforts with law enforcement entities;
• because the Ripple Network will be an open source protocol , once released, Company
will have no control over its operations or transactions initiated through the Ri pple
etwork. Anyone wi ll be able to download the Ripple Client Software, participate in and
use the Ripple etwork, and build upon its open source protocol;
1 '·Why RippleT. available al , http://ripplepay.com/essay/.
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• Company will control the distribution of Ripple Credits, which it will distribute to end
users/consumers for no consideration;
• although neither Company nor Founders will sell R.ipple Credits to end users/consumers,
they may occasionally sell R.ipple Credits on a wholesale basis to exchanges and other
business entities;
• the method for obtaining R.ipple Credits will be made generally known to the public;
• Founders and Company will clearly disclose to the public how many Opencoins Founders
retained indi vidually and how many Ri pple Credits Company retained for wholesale to
exchanges and other business entities;
• Company will not benefit financially from the transactions that occur on the Ripple
etwork; and
• Company will not accept, hold or transmit money or monetary value on behalf of any
user of the R.ipple Net.vork.
If this description is inaccurate in any way, please let us know, and we can update our analysis
and recommendations.
III. SUMMARY OF CO CLUSIONS AND RECOMMENDATIONS
1. Conclusions
a. Ripple Credits that are purchased, even if only on a secondary market, might
be prepaid access, but Company and Founders are unlikely to be considered
providers or sellers of prepaid access if their activities are limited to those
described in the assumptions above. There is a risk that Ripple Credits will be
subject to regulation as "prepaid access" under the Bank Secrecy Act, which
regulates providers and sellers of prepaid access. Even though Company and
Founders do not plan on selling Ripple Credits on a retail basis at the time of
distribution, Ripple Credits may be resold in a secondary market and may
therefore fall within the definition of prepaid access, which is "access to funds or
the value of funds that have been paid in advance and can be retrieved or
transferred at some point in the future through an electronic device or vehicle .. . "
Because R.ipple Credits represent a value, which a holder can retrieve or transfer
at a later date to make purchases or trade, if Ripple Credits are paid for, they will
likely be considered prepaid access. However, if designated prepaid access, it is
unlikely that Company or Founders will be considered the provider of the prepaid
program because, under the current model, Company and Founders do not
unde1take activities considered to denote "principal oversight and control."
Similarly, Founders and Company are unlikely to be considered sellers of prepaid
access if they only sell Ripple Credits to exchanges and other business entitie on
a wholesale basis and never accept consideration from end users/consumers in
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exchange fo r Ripple Credits. It is important to note that the "principal oversight

and control" analysis has never been tested by FinCEJ\Tin practice, and therefore
reliance thereon is not without risk. To obtai n more certai nty, Company should
not distribute Ripple Credits, or should transition to an automated distri buti on
process as soon as possi ble, in order to more clearly quali fy for the program
manager exemption.
b. Although we believe th:1t a compelling argument can be made that Ripple

Credits do not constitu te "securities" under the federal securities laws, given
the lack of applicable case law, we bel ieve that there is some risk, albeit
small, that the Securities and Exchange Commiss ion ("SEC") disagrees with
our analysis. The more that Founders and Company promote Ripple Credits
as an investment opportunity, the more likely it is that the SEC will take
action and argue that Ripple Credits are "investment contracts" and thus
securities under the federal securities laws. If Ri pple Credits are purchased and
sold in the secondary market, individuals purchasing Ri pple Credits may do so
with the expectation of increased value caused by increased demand and limited
supply. Although we understand this rationale to be incidental to the pri mary
purpose, to the exten t that Ripple Credits are purchased wi th an expectati on of
profit because of the efforts of Company, Founders and/or others promoti ng the
Ri pple Credi ts, there is a risk that Ri pple Credits wil l constitute investment
contracts and be subject to federal securities regulation. As discussed in more
detai l below, we beli eve this risk can be minimized through careful marketing
efforts and/or by obtaini ng a no-action letter from the SEC.
c. Ripple Credits may become commodities. If people develop contracts for

future delivery of Ripple Credits, they will likely be considered commodi ties
under the Commodities Exchange Act. Futures contracts for Ripple Credits, if
developed, will be subject to regulation and enforcement by the Commodity
Futures Trading Com mission.
d. Euhan ges will likely be designated money transmitters or currency

exchangers, and Company faces some risk for being similarly categorized .
Exchanges that faci litate Ripple Credits purchase and sale transactions between
users likely wi ll be deemed money transmitters under federal and state money
transmitter laws to the extent they accept payment from user A to transfer to user
Band accept Ripple Credits from user B to transfer to user A Exchanges also
may be deemed currency exchangers. While these exchanges will not exchange
the cutTency of one country for the currency of another, they may be used to
exchange the currency of country A for Ripple Credits and immediately exchange
Ri pple Credits fo r the currency of country B. ln substance, this transaction is no
di fferent than exchanging the cutTency of count1y A directly for the cuITency of
country B, and may result in regulatory scrutiny. Additionally, under state money
transm itter laws, Ri pple Credits may be considered payment instruments,
resulti ng in any party that sell s or issues Ripple Credits being treated as a money
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transmitter. Under the current model, Company and Founders would not likely be
considered the "issuer" of Ripple Credits, because they are not the maker or
drawer of Ripple Credits and are not liable for payment on Ripple Credits. or
will Company accept, hold or transmit money or monetary value on behalf of any
user of the Ripple etwork. However, the fact that Founders and Company will
sell Ripple Credits on a wholesale basis to exchanges and other businesses
triggers a risk of regulation as a money transmitter under state law because state
statutes do not appear to offer an exception for sales on a wholesale basis.
However, such regulation is limited to those entities "engaging in the business of'
money transmission , and arguably neither Company nor Founders will sell Rippl e
Credits as their business. As a result, although Company and Founders are at low
risk of regulation under federal money transmitter laws, they face some risk of
regulation under state money transmitter laws.
e. Ripple Credits are unlikely to be regulated under counterfeiting laws. While

commonly referred to as an alternative or crypto "currency," it is unlikely that
Ripple Credits will be regulated under the federal laws regulating the issuance of
coinage. Ripple Credits will not be metal coins or bars, and, we understand, will
not be designed to be confused with currency of the Un ited States or any other
country . These characte,istics will reduce the risk of Ripple Credi ts violating
anti-counterfeiting and other currency laws.
f. Founders and Foundation may be subject to illegal gambling regulations.

Promoting Ripple Credits for use in Internet gambling may lead Ripple Credits to
be categorized as gambling devices under state gambling laws. A person is
subject to criminal penalties for manufacturing gambling devices in violation of
state laws. Additionally, if Ripple Credits are promoted for the purpose of illegal
gambling and tl1en used to facilitate illegal gambling, Company may be deemed
to violate the federal Unlawful Internet Gambling Enforcement Act and/or treated
as aiding an d abetting illegal gambling.
g. Acrnracy in promotion of the Ripple Network will be necessary to avoid

unfair and deceptive trade practices. Unfair and deceptive trade practices are
regulated on the federal and state levels . The language of the regulations is
broadly written to flexibly address instances where consumers are misled or
deceived . As such, it will be important that Founders clearly disclose the amount
of Ripple Credits they retained when they contributed the Ripple etwork to
Company, and that Company clearly disclose the amount of Ripple Credits that it
retained for wholesale to exchanges and other business entities instead of free
distribution to end users. As long as that information is clearly disclosed, there
does not appear to be anythin g inherently unfair or deceptive in the nature of the
Ripple etwork as proposed, but Founders and Company should carefully
evaluate promotions and marketing of Ripple Credits to assure that users are
aware of risks, as well as benefits, associated with the use of Rippl e Credits.
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h. Founders and Company may face risk related to aiding and abetting illegal
activities perpetrated using Ripple Credits. If Ripple Credits are promoted as a
means of engaging in questionable or illegal online commerce, including but not
limited to Internet gam bling, copyright infringement, or purchasing
pharmaceuticals illegally, Company could be accused of aiding and abetting
illegali ty. loreover, even if Company does not actively promote such uses, it
could become caught in the crosshairs of regulators who do not understand that
after the ini ti al distribution of Ripple Credits, Company has no control over the
Ripple etwork, nor does it have any direct fi nancial interest in third-party
transactions in which Rippl e Credits are used.
i. Use1·s of Ripple Credits will have obligations to comply with state and federal
tax laws relating to transactions involving Ripple Credits. Transactions using
Ripple Credits will be subject to state sales taxes like any other transaction for
goods and services . lncome that a person receives in the form of Ripple Credits
will be reportable income for state and federal income tax purposes. Users of the
Ri pple etwork should be aware that they will be subject to the same tax
Liabi liti es using Rippl e Credits as they would be in other circumstances.
2. Recommendations
In light of the conclusions summarized above and analyzed below, we recommend that the
Founders and Company take the steps below to further reduce the regulatory risks associated
with the Ripple etwork. Even if Founders are willing to take the steps below, regulatory risk
cannot be completely eliminated because existing laws and regulations can be broadly applied or
interpreted to apply to emergi ng payment systems such as Ri pple Credits.
a. Do not sell Ripple Credits on a retail basis to end users and/or consumers,
and limit sales of Ripple Cred its on a wholesale basis to exchanges and other
business entities. Company and Founders will be unlikely to come within the
definition of a sell er of prepaid access because the current model contemplates
that they will only sell Ripple Credits on a wholesale basis to exchanges or other
business entities. Sal es to end user and/or consumers, however, will end
Company and Founders' eligibility for this exemption. Therefore, Company and
Founders should not sell Ri pple Credits on a retail basis to end users and/or
consumers. Further, to mitigate risk that Founders and, more importantly,
Company will be regulated as money transmitters, Founders and Company should
limit their sales of Ripple Credits on a wholesale basis to exchanges and other
business entities such that neither Founders nor Company can be characterized as
engaging in the business of the selling payment instruments.
b. Company should not control distribution of Ripple Credits, or should

transition to an automatic distribution method soon after launch of the
Ripple etwork. Under the current model, some risk remains that Ripple Credits
could be determined to be prepai d access and FinCEN might seek to regulate
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Company as the provider of that prepaid access. For the reasons summarized
above and further elaborated below, if Company would like greater certainty that
it will not be regulated as a provider of prepaid access, it should limit its activities
to that of a program manager, which would prevent it from controlling
distribution of Ripple Credits.
c. Take steps to avoid misleading purchasers or recipients of Ripple Credits as

to their value or the risks associated with them. Whether Ripple Credits are
ultimatel y determined to be a security, prepaid access, currency, or any other
product, Company should be careful in its approach to promoting and marketing
the Ripple Network and Ripple Credits. Jt will be important that Company and
Founders do not mislead participants, particularly with regard to the liquidity and
expectations concerning the value or safety of Ripple Credits.
d. Avoid stating or implying that Ripple Credits are equivalent to or compete

with U SD or any other type of government issued currency. United States
government regulators of currency appear to be most concerned about fraud and
confusion that results from the issuance of a currency that appears similar to or is
represented in some way as United States dollars. There remai ns a risk that
government regulators are also concerned with private currencies that become
prominent ru1d influence the value ofUSD, however, there has not been case law
suggesting that this is their primary concern and the statutory language does not
support enforcement action related to this broad competition concern.
e. Do not advertise Ripple Credits for use in illegal Internet gambling. Both
state and federal laws regulate Internet gambling, and there are specific
requirements for companies that offer Internet games. either Founders nor
Company should promote Ripple Credits for use in illegal activities, and in
particular should not promote the use of Ripple Credits as consideration in illegal
Internet gambling.
f. Do not promote Ripple Credits as being an investment opportunity. Actively

promoting the trading of Ripple Credits as an investment opportunity or its
potential to increase in value could result in regulatory scrntiny or accusations that
Ripple Credits are investment contracts, and hence securities subject to the federal
securities laws. Founders and Company should make clear that its mission is to
facilitate online commerce and not speculative investment trading.
g. Do not promote the Ripple Credits for illegal or questionable uses, and
educate the public and users that Company docs not oversee or otherwise
control the use of the Ripple Credits. Actively promoting the use of Ripple
Credits for illegal or questionable purposes, or even overempl1asizing the
anonymity of the transactions, could result in regulatory scruti ny or accusations of
aiding and abetting, i.e., knowingly facilitating, illegal activity . Founders and
Company should make clear that its mission is to facilitate legal, legitimate online
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commerce. Moreover, if Ripple Credits become a popular mechanism for

consummating illegal transactions, government entities may focus their efforts on
Company under a mistaken belief that it controls or oversees these transactions
because individual wrongdoers are difficult and costly to locate and prosecute.
For this reason, Founders and Company should make a conceited effort to
publicize the fact that they do not control or oversee third party transactions using
Ripple Credits, nor do they have any direct monetary interest in them.
h. Do not use Ripple Credits in lieu of payment to employees . To the extent that
Company employs indi viduals to desisrn, engineer, develop, promote, market, or
maintain any aspect of the Ripple etwork, payment of these individuals must
comply with state wage and hour laws. Employees cannot be paid in Ripple
Credits.
V. LEGAL ANALYSIS
1. Federal Money Services Business Laws
a. Prepaid Access
I. Whether Ripple Credits are "Prepaid Access"
The regulations promulgated by the Financial Crimes Enforcement Network ("FinCEN ") under
the Bank Secrecy Act ("BSA") require providers of prepaid access to (i) register with FinCE as
a money services business;2 (ii) develop an anti-money laundering policy / (iii) implement
customer identification procedures;4 (iv) implement transaction record keeping;5 and (v) report
suspicious activity.6 "Prepaid access" is defined as "access to funds or the value of funds that
have been paid in advance and can be retrieved or transfen-ed at some point in the future through
an electronic device or vehicle, such as a card, code, electronic serial number, mobile
identification number, or personal identification number."7
If Ripple Credits are not "prepaid access," Company will not be subject to the prepaid access
regulations under the BSA . However, the phraseology that defines "prepaid access," namely,
"funds or the value of fu nds," is not defined in the BSA regulations. This leaves FinCEN a large
measure of discretionary regulatory power in determining what constitutes prepaid access.
Nevertheless, according to the Merriam-Webster Dictionary, "fund," refers to "a sum of money
or other resources whose principal or interest is set apart for a specific objective."8 In other
portions of the definitions of a money services business, the BSA regulations refer to funds in a
2 31 C.F.R. § !022.380.
3 31 C.F.R. § !022.2 IO.
" id at~ I022.2 IO(d)(l)(iv).
5 31 C.F.R. § !022.420.
6 31 C.F.R. § 1022.320.
7 31. C.F.R. § 10 10. lOO(ww).
8 .lvferriam -Webster Dictionary (2012). htlp://www.mcrriam-webster.com/dictionary/fund
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list that includes currency and monetary instruments.9 The definition, as well as references
within the BSA regulations, suggests that "funds" refer to some amount of monetary value. The
val ue offunds would therefore be access to a value equivalent to such monetary value. Ripple
Credits will not be denominated in USD, meaning the relative value between the Ripple Credits
and the USD paid to purchase the Ri pple Credits could vary over time. However, FinCEN's
position that prepaid devices redeemable for telephone minutes or songs, 10 which similarly may
have val ue that varies against the USD, suggests that such variation against a speci fied monetary
val ue may not be relevant to the analysis. As such, the risk will always exist that FinCEN may
try to categori ze Ripple Credits as prepai d access under this prong of the definition, namely that
Ripple Credits provide access to the value of funds .
In addition to requiring that the prepaid device provide access to funds or the value offunds, the
definition requires that the funds or value of funds be paid in advance. The "paid in advance,"
provision will limit the application of the regulation of prepaid access to the extent that Ripple
Credits are not purchased. Company will give Ripple Credits away to end users and/or
consumers for no consideration. However, Ripple Credits will still be distributed wi th the intent
that later they will be purchased and resold through an exchange or through acceptance in
commerce. Furthe r, Founders and Company potentially will sell Ripple Credits to exchanges
and other business entities on a wholesale basis. It therefore remains possible that FinCEN will
take the position that although initially not paid in advance by consumers/end users because they
are di stri buted without return considerati on , later sales of Ripple Credits by and to exchanges or
other secondary markets, which coll ect payment in advance, make Ripple Credits prepaid access.
There are also certain arrangements involving the provision and sale of prepaid access that do
not constitute "prepaid programs," and therefore would not require compliance with the prepaid
access regulations. These exceptions involve restricting the use and transfer of the prepaid
access and limiting values of prepaid access held in a given account on a given day. 11 Ripple
Credits will likely be considered open loop because the Founders intend Ripple Credits to be
accepted by a wide range of domestic and international merchants and other parties. Closed loop
prepaid access is "access to funds or the value of funds that can be used only for goods and
services in transactions involving a defined merchant or location (or set of locations), such as a
specific reta.iler or retail chain, a college campus, or a subway system," 12 and prepaid access that
does not fall within the definition of "closed loop" is open loop . To qualify for the open loop
exemption from a prepaid program, each Ripple etwork ledger address would have to be
limited such that it could not have a maximum value in excess of $1,000 and no more than
$1 ,000 could be "loaded, used or withdrawn" on any day, and the Ripple Credits could not be
transmitted internationally, transferred between or among users, or have additional funds loaded
9 31 C.F.R. § LO I 0.1 OO(ff)(I) (referri ng to a dealer in foreign exchange as "a person tlm l accepts tlte currency. or
other monetary instnnnents, funds. or ot her inst.nnnents denominated in currency ...").
10 Department of Treasury Financial Crimes Enforcement Netwo rk, Frequent(y Asked Questions l~nal Rule -
Deflniiion and Other Reg11/a1ions Relaling to Prepaid .4ccess (Nov. 2. 2011), available at
http://www.fince1tgov/ncws_room/nr/html/20111 102 .html.
" 3 l C.F.R. § 1010. I0O(ff)(4)(iii).
12 31 C.FR. § IOIO. IOO(kkk).
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from non-depository sources. 13 Given the current model for the Ripple Network, as an
international open payment system without centralized controls, it is unlikely that Company
would be able to implement the restrictions necessary to make the Ripple Network fall within
one of these exemptions.
2. Whether Company or Founders are t.he "provider" of prepaid access
Where a product is categorized as prepaid access, the entity deemed to be the provider of that
prepaid access is subject to the requirements of the BSA . The provider of prepaid access is "the
participant within a prepaid program that agrees to serve as the principal conduit for access to
information from its fellow program participants." 14 Acknowledging that some prepaid
programs will not have a participant volunteer to act as the provider, FinCE has indicated that
in the absence of registration, the provider will be "the person with principal oversight and
control over the prepaid program ." 15 The determination of the person who exercises "principal
oversight and control over the prepaid program is a matter of facts and circumstances." 16 The
factors FinCEN will consider include which entity: (a) organized the program; (b) "set[s] the
terms and conditions of the prepaid program and determin[es] that the terms have not been
exceeded;" (c) "detennin[ es] the other businesses that will participate in the prepaid program,
which may include the issuing bank, the payment processor, or the distributor;" (d) "control[s] or
direct[s] the appropriate pm1y to initiate, freeze or terminate prepaid access;" and (e) "engag[es]
in activity that demonstrates oversight and control of the prepaid program ." 17
Given the current proposal, there is a low risk that Company or Founders will be considered the
provider of prepaid access if Ripple Credits are detennined to be prepaid access . Under the
current model , the Founders created the Ripple Network (including the Ri pple Client Software)
and contributed the Ripple Client Software, Ripple Network and Ripple Credits to Company.
Although Company will control the initial distribution of Ripple Credits, once the Ripple
Network is open sourced, neither Founders nor Company will set the terms and conditions for
use of the Ripple etwork. Further, the Third Party Ripple Currencies functionality and the
open source nature of the software allows for creativity and innovation within the Ripple
Network , which suggests that the users of the software themselves determine when the terms of
the etwork have been exceeded and how to treat a user who exceeds the terms (i .e., not trade
with them through Third Party Ripple Currencies). Sim il arly, on ly users can direct that Ripple
Credits not be accepted by other user in the Ripple etwork, and only users can determine
whether to tenninate access to IOUs through the Third Party Ripple Currencies Finally, there
are no other businesses involved in the program, only the software and its users.
As a result, the primary basis on which Founders or Company could be designated the provider
of prepaid access stems from the catch-all provision and whether FinCE would view any of the
functions the Founders or Company plan to undertake as "activity that demonstrates oversight
" J I C.F.R. § I010. l()()(f't)(4) (iii)(D).

14 3 1 C.F. R. § I010. l00([0(4) (i).
15 31 C.F.R. § 1010.100(fl)(4)(ii).
16 3 l C.F.R. § I0J0. I0O(ff)(4)(ii).
P 31 C.F.R. §1010.100(1:l)(4)(ii)(A)-(E).
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and control of the progran1 ." Specifically, Company will control distribution of Ripple Credits,
both Company and Founders intend to later sell in secondary markets on a wholesale basis, and
Company will employ a team of individuals dedicated to promoting the Ripple etwork,
improving the Ripple Client Software and other aspects of the Ripple Network, and conducting
outreach effo11s with law enforcement entiti es. Despite these activities, Company and Founders
do not have principal oversight and control over the fundamental aspects of the Ripple etwork.
The Ripple etwork is, at its core, a peer-to-peer open source software system that operates on a
decentralized ledger. o one, not even Company or Founders, can control the ledger or the
software that runs it. Users exchange Ripple Credits with each other based on their own
determinations of trustworthiness, can exchange other currencies on the Ripple 1etwork, and can
innovate within the open source protocol. The value of Ripple Credits will vary with the choices
of the Ripple etwork's users-Company and Founders will not have principal oversight and
control over their value. Further, once Founders have relinquished control of the Ripple
Network to Company, they will be further protected by the formation of the corporate entity, so
long as they do not engage in any activity that might cause a court to later pierce the corporate
veil.
The "principal oversight and control" standard bas not been tested. In light of the resulting
uncertainty regarding FinCEN's potential appli cation of the test, Company could request an
opinion in advance from FinCEN that Ripple Credits do not con titute prepaid access and/or that
Company and FoL111ders are not providers of prepaid access. However, if Company did so, there
is a significant risk that FinCE will (a) try to place Ripple Credits and Company into a
regu lated category, notwithstanding the clear argument that the principal oversight and control
test does not apply, (b) decline to render an opinion, given the complexity of the analysis, and
tell Company to determine for itself how to categorize Ripple Credits and Company ' s activities,
(c) ask Company to provide additional information to help FinCEN develop an opinion and leave
Company and Founders in limbo for a significant amount of time, or (d) ask Company to
develop a way to impose controls on Ripple Credits and/or the Ripple etwork. Ultimately,
whether Company requests an opinion in advance or not, the risk ofFinCEN asserting a way to
regulate Ripple Credits is significant. There al so have been numerous a11icles suggesting the
possibility that bitcoins will be classified as prepaid access. 18
3. Whether Company or Founders are "sellers" of prepaid access
In addition to regulating providers of prepaid access, the BSA also regulates sellers of prepaid
access. SeUers of prepaid access include "any person that receives funds or the value of fonds in
18 See, e.g.. Director Freis: FinCEN's New Rule adaptable to 'internet .~vstem.' Bitcoin Money (Oct. 5. 20 1I)
available at http://www.bitcoiruuoncy.com/post/ l l0741 08719/fi.nccn-frcis-prcpaid-acccss-spcccil (describing the

conccm llial bilcoin may be encompassed willun prepaid access rule because it is designed Lo be teclu1ology neulral
and be adaptable to a range of products, including an internet system (citing Remarks by James H. Freis, Jr. Director
Financial Crimes Enforcement Network, Money Transmitter Regulators Association 2011 Annua.1 Conference (Oct.
5, 20 11 ))); Timol11y B. Lee, Major Bi/coin exchange slwls down. blaming regulation and loss ofjim ds, ars technical
(Feb. 15, 2012), available al hllp://arstcclm.ica.com/tcch-policy/ncws/2012/02/ruajor-bitcoin-c xchangc-shuts-<lown-
blaming-regulation-and-loss-of-funds.ars: Jeremy Quittner, For Banks, Digital Currency Poses Tl,reat and
Opportunitv, Bank Technology ews (Jan. 13, 2012) (quoting Steve Hudak, a spokesman for FinCEN).
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exchange for an initial loading or subsequent loading of prepaid access if that person sells
prepaid access offered under a prepaid program that can be used before verification of customer
identification. "19 FinCEN has determined that the "[d] istribution of prepaid access products to
other businesses for further distribution or sale to end users/consumers by those other businesses
is not the type of activity intended to be covered by the Rule. "20 This exception exists because
"[t]he definition of 'seller' is intended to address sales to the end user/consumer of the prepaid
access product, not to apply to businesses in the di stribution channels that move the prepaid
access products to the market. 11 21
Under the current model , Company will distribute Ripple Credits to end users without accepting
funds in return. Further, Company will only sell Ripple Credits to exchanges and other business
entities on a wholesale basis. Similarly, Founders will only sell the Ripple Credits of which they
retained personal ownership to exchanges or other business entities on a wholesale basis. As a
result, it is unlikely that either Company or Founders will be considered sellers of prepaid access
because they will never distribute Ripple Credits in exchange for funds from an end
user/consumer. The exchanges and other business entities engaging in the sale of Ripple Credits
on a secondary market will , however, likely be considered sellers of prepaid access . Sellers of
prepaid access have the same regu latory requirements as providers of prepaid access with the
exception of registering as a money services business.
Jn any event, the definition of seller focuses on receiving "funds or the value of fund s in
exchange for an initial loading or subsequent loading." This language was a change from the
definition in the proposed mle that categorized a seller of prepaid access as a person that receives
funds or the value of funds "in exchange for providing prepaid access ... directly to the person
that provided the funds or value, or to a third party as directed by that person." Additionally, in
the guidance for the proposed ruJe, FinCEN indicated in a footnote that "load" and "reload," as
used in the prepaid access context, refer to the initial provision of value and all subsequent
provisions of value to a prepaid access program. Company does not load or subsequently reload
Ripple Credits with funds or the value of funds . As a result, the cumulative effect of selling
Ripple Credits only on a wholesale basis to exchanges and business entities and the fact that
Ripple Credits are never loaded with value, is to make it unlikely that Company or Founders wi ll
be considered sellers of prepaid access.
By calling for the distribution of Ripple Credits without exchange of consideration, the current
model reduces the risk that Ripple Credits will be considered prepaid access under the Bank
Secrecy Act regulations, although it rem ains possible. In any event, Founders and Company will
likely not be considered providers or sellers of prepaid access.
b. Money Transmitter
193 I C.F. R. § IOI0.100(£[)(7).

20FinCEN, Frequent~y Asked Questions - Final Rule - Definitions and Other Regulations Relating lo Prepaid
Access, at}, available at http ://www .fincen .govlnews_room/ nr/pdfl20 111 l02 .pdf
21 Id.
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In addition to regulating providers and sellers of prepaid access as money services businesses,
the BSA regulations regulate money transmitters. A money transmitter is a person (a) that
accepts "currency, funds, or other value that substitutes for currency from one person" and
transmits "currency, funds, or other value that substitutes for ctlffency to another location or
person by any means" or (b) is "engaged in the transfer offunds _,,22 The regulations expressly
exclude from the definition of a money transmitter someone who only "provides the delivery,
communication, or network access services used by a money transmitter to support money
transmission servicest1 23 Founders and Company have a low 1isk of being considered money
transmitters under the BSA regulations because they do not accept Ripple Credits from one party
to "transmit" to another, but rather the Ripple Network will be a tool that allows users to
"transmit" (transfer) the Ripple Credits themselves. The introduction of the Original Ripple
System into the Ripple etwork does not alter this analysis. The Original R ipple System is a
"financial system that recognizes existing trust relationships between human beings and works
within that structure. "24 Each Original Ripple System user identifies other users from whom they
are willing to accept promises to repay and assigns a value, in one or more currencies, of the
amount they expect the other users to be able to repay. With this network of trust in place, the
Original Ripple System then allows any Ripple Network user to negotiate transactions with any
other user based on chained promises to pay channeled through the social Ripple paths . In other
words, the Original Ripple System increases the capability of the Ripple Ietwork to allow for
more complex transmissions, but, like the Ripple Network, is not itself the money transmitter.
Exchanges that facilitate Ripple Credits purchase and sale transactions have a greater risk of
falling within the category of a money transmitter and being subject to the BSA regu lations for
money services businesses.
c. Currency Exchanger
Lastly, the BSA regulations include foreign currency exchangers as money services businesses
subject to anti-money laundering regulation. A foreign currency exchanger is "a person that
accepts the currency, or other monetary instruments, funds, or other instruments denominated in
the currency, of one or more countries in exchange for the currency, or other monetary
instruments, funds, or other instruments denominated in the currency, of one or more other
countries in an amount greater than $1 ,000 for any other person on any day in one or more
transactions, whether or not for same-day delivery."25 Because this category of money services
business expressly contemplates that it is the currency of a country exchanged for the currency of
another country, exchanges that operate and exchange Ripple Credits for the currencies of
different countries may be able to claim that they fall outside of the definition because the Ripple
Credits will not be a currency of any particular country. However, exchanges may face risk that,
while not directly exchanging the currency of one country for the currency of another, Ripple
Credits are simply being used as an instrument to create the same result. If this is the case,
regulators may categorize Ripple Credits exchanges as currency exchangers.
22 3 I C.F. R. § lO IO(m(S).
23 3 1 C.F.R. § IOJO(fl)(S)(ii)(A) .
24 "Why Ripple?", available at. http://ripplepay .com/essay/.
25 31 C.FR. § IOIO(fl)(l ).
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2. State Money Transmitter Laws
Most states regulate entities that transmit money and require that they are licensed and bonded.
Most states include "selling or issuing payment instruments" within the definition of money
transmission. 26 Payment instruments are typically defined as "a check, draft, money order,
traveler's check, or other instrument for the n·ansmission or payment of money or monetary
value .. "27 Many states define "monetary value" as "any medium of exchange, whether or not
redeemable in money ."28 Ripple Credits may be considered an instrument for the transmission
or payment of monetary value, which would result in any person who sells or issues Ripple
Credits being a money transmitter. If Ripple Credits are characterized as payment instruments,
Company and Founders may be at risk of regulation under state money transmi tter statutes
because they will sell Ripple Credits, and Company will distribute Ripple Credits.
As to the sale of Ripple Credits, although Company and Founders will onJy sell Ripple Credits
on a wholesale basis to exchanges and other business entities, and not to end users or consumers,
it is unclear if this limitation will insulate Company and Founders from regulation. States do not
appear to offer an exemption for such sales in the same way that FinCEN accords such an
exemption under the prepaid access rules. Furthermore, although most states provide
exemptions for payment instruments that can be redeemed only for the goods and services of the
issuer, Ripple Credits will not qualify for thi s exemption because they are not redeemable solely
for the goods and se,vices of an issuer. 29 As further elaborated below, there is no issuer of
Ripple Credits within the meaning of state money transmitter laws. However, any risk faced by
Company and Founders under the money transmitter statutes is mitigated by the fact that those
statutes generally regulate entities "engaging in the business of'' money transmission (i .e., the
business of selling payment instruments). 30 Severa.I state courts have interpreted "en~aging in
the business ot'' as requiring regular sales of something, rather than just a single sale. 1 Clearly,
the threshold for what rises to the level of engaging in the business of selling payment
instruments will vary from state to state. As a result, to reduce risk of regulation under state
money transmitter statutes, Company should minimize its sales of Ripple Credits, even on a
wholesale basis to exchanges and other business entities as much as possible, so that it cannot be
characterized in engaging in the business of selling Ripple Credits. In that light., the risk faced
by Founders under state money transmitter statutes is less than that faced by Company, as any
26 See, e.g , Ariz. Rev. Stat. Ann. § 6-1202; Cal. Fin. Code § 2003(0).
27 See, e.g . Cal. Fin. Code§ 2003(q) (emphasis added); Alaska Stal. § 6.55 .990(19) (emphasis added).
28 See, e.g. , S.D. Sess. Laws§ 51A-1 7-l(l2) (emphasis added); Cal. Fi11 Code§ 2003(m) (emphasis added); N.C.
Gen. Stat§ 53-208.2(12) (emphasis added).

"19 See, e.g. , Ga. Code Ann. § 7-l -680(a)(l); NJ . Stat Amt § 17:15C-2.
30 See, e.g. , Cal. Fin. Code§ 2030; Mass. Gen. Laws§ 4; S.D. Sess. Laws§ SIA-1 7-4; N.C. Gen. Slat§ 53-208.3.
31 See, e.g., J,forris 11. Goodwill Indus .. Inc .. No. C2-95-l9, 1995 WL 465348. *4 (Minn. App. Aug. 8, 1995) ("We
conclude that a one-time sale of fixtures such as the clothing racks at issue here does not constitute 'engaging in the
business' of setting that product. "); Lanier"· Ciry o/Bos/011. 95 F. Supp. 2d 17, 19 (D. Mass. 2000) (sale outside
Fcnway Parle of single ticket at face value is not engaging in the business of reselling): l\lPS LLC "· St11bh11b . o. 06-
4874-BLSI , 2009 \VL 995483. *9 (Mass. Super. Jan. 26, 2009) ("It appears that to be engaged in the business of
reselling. one must. at the very least. wish 10 sel.1 more than one ticket for a profit, but it is not clear how many sales
or prospective sales arc needed to become so engaged.)
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sales Founders make will be as private, individual owners of Ripple Credits, not as a business
enterprise.
"Issue" is not usually defined in the state money transmitter statutes, but California has defined it
with respect to a payment instrnment as "the entity that is the maker or drawer of the instrument
in accordance with the California Commercial Code and is liable for payment. "32 Because
neither the Founders nor Company is liable for payment on Ripple Credits, there is a strong
position that, at least in California, they are not money transmitters on the basis of issuance of
Ripple Credits.
It is also common for states to include within the definition of a money transmitter someone who
accepts money for the purpose of transmission or tra nsmits money.33 Similar to the analysis
under the Federal money transmitter definition, Founders and Company have a low risk of being
considered money transmitters because they do not accept Ripple Credits or money from one
party to transmit to another nor, in any instance, do they transmit money. However, exchanges,
which allow people to buy and sell Ripple Credits directly from one person to another, have a
greater risk of falling within the category of a money transmitter because they will transmit both
Ripple Credits and money between the buyers and sellers.
3. Securities
a. The Definition of a Security
Under the Securities Act of 1933, the term security means:
any note, stock, treasury stock, security future, security-based swap, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit-sharing
agreement, collateral-trust ce1tificate, preorganization certificate or subscription,
transferable share, investment contract, voting-trnst certificate, certificate of deposit
for a security, fractional tmdivided interest in oil, gas, or other mineral rights, any put,
call , straddle, option, or privilege on any security, certificate of deposit, or group or
index of securities (including any interest therein or based on the value thereof), or
any put, call, straddle, option, or privilege entered into on a national securities
exchange relating to foreign currency, or, in general, any interest or instrument
commonly known as a "security," or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, ruiy of the foregoing.34'
An instrument that does not fall within one of the traditional types of securities may nonetheless
be regulated as a security ifit constitutes an "investment contract." An investment contract has
32 See, e.g , Cal . Fin. Code § 2003(k).

33 See Draft Unifom1 Money Services Business Act§ 102(17)(8) ( 1999). The following states include the language
"or transmitting, " in tlieir definition of money transm ission: Arizona, Colorado, Connecticut, Georgia, Jdaho,
Ulinois, Indiana, Maine. Minnesota, New Jersey. Oregon. and Tennessee.
3'1 15 U.S.C. § 77b(a)(l) ); see also Reves v. Ernsr & Young. 494 U.S. 56. 61 (1990) (noting Congress's goal of
enacting "a definition of'securily' sufficiently broad to encompass vinually aoy instrument that might be sold as an
investment.").
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been defined by the Supreme Court to involve (a) an investment of money with the expectation
of profits (b) in a common enterprise (c) derived solely from the efforts of others.35
b. Application of the Howey Test- Investment of Money with the Expectations

of Profits
In determining whether an investment of money was made with the expectations of profit, courts
will look to "whether an investor 'chose to give up a specific consideration in return for a
separable fi nancial interest with the characteristics of a security ."' 36 The issue here will turn on
the motivations of those obtaining Ripple Credits. If a person obtai ns Ripple Credits primarily to
purchase goods or services, then they are less likely to be deemed securities. How secondary
markets promote the use of Ripple Credits, and the type of consideration they receive may place
Ri pple Credits in a different position .
Generally, parties \viii debate whether or not investors expected to profit solely from the efforts
of others. The Supreme Court recognized that an "expectation of profi ts" exists where there is (i)
capital appreciation from the original investment, and (ii) partici pation in earnings resulting from
the use of investors' funds ."37 In such a case, the investor is att racted solely by prospects of a
return on his investment. By contrast, where a purchaser is motivated by a desire to use or
consume the item purchased or to occupy the land or develop it, the "investment" will not be
deemed to be a security. In applying this standard, courts wi ll look at the representations used to
induce use of the instrument. ' 8 Founders and NewCo, therefore, should steer clear of promoti ng
Ripple Credits as an investment opportunity or as a speculative investment trading vehicle.39
Although the language in Howey suggests that the expectations of profits must be solely from the
efforts of others, appellate courts have uniformly declined to apply such a restrictive standard.
Rather, the standard later outlined by the Supreme Comt in Forman is more appropriate here.40
We understand that the primary reason for purchasing Ripple Credits is to facilitate online
commerce, not to engage in speculative investment trading. As such, given the commercial
nature here, Ripple Credits should not be considered securities.
35 See S.E.C. "· 1-V.J. f-low ey Co. , 328 U.S. 293, 299 (1946}.
36 S.£.C. 11. SG Lid. 265 F.3 d 42 , 48 (lsl Cir. 200 I} (quoting 1nlemalionaf Brolherhood of Teamsters v. Daniel, 439
U.S. 551. 559 (1979).
3' S.EC. v. SG l td .. 265 F.3 d 42. 53 ( Isl Cir. 200 1} (citing United !lousing Foundation, Inc. v. Porman. 421 U.S.
837, 852 ( 1975}).

38 Id. ("In our view, these profit-related guarantees constitute a not-vcry-subllc fonn of economic inducement").
39 Reves, 494 U.S. at 6 1.
'° Forman . 421 U.S . at 852 ("the touchstone is the presence of an investment in a common venture premised on a
reasonable expectation of profits to be derived f.rom tl1e entrepreneurial or managerial efforts of others"); see also
S.E.C. v. Turner Enters., 474 F.2d 476. 482 (9111 Cir. J 973) (adopting a standard tbat examines "whether ll1c efforts
made by those other tl1an tl1e investor are Lhe undeniably significant ones. those essential managerial efforts which
affect the failure or success of the euterprise"): S.E. C. v. Koscot Interplanetary, Inc., 497 F.2d 473 , 479 (5th Cir.
1974}.
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c. Application of the Howey Test - Common Enterprise
Different circuits have examined the existence of a common enterprise differentl y. Many courts
have found that a common enterprise can arise from showing '"horizontal commonality': the
tying of each individual investor's fortunes to the fortunes of the other investors by the pooling of
assets, usually combined with the pro rata distribution of profits. "41 In examining horizontal
commonality, courts have looked at whether the instruments in question promise specific
returns.42
Should the value of Ripple Credits increase, each person who purchased Ripple Credits will be
proportionally better off, so all individual holders of Ripple Credi ts stand to receive gains
through an increased value in their Ripple Credits if the Ripple Network succeeds. Some
commentators have pointed out that Bitcoin does not have a common enterprise43 because there
is no centralized money-making entity that will be raising money, but rather many individuals
separately participating in a decentralized program.~4
The Ripple etwork has a greater risk of being seen as a common enterprise because there will
be a specific entity, Company, which is responsible for the distribution of Ripple Credits and the
promotion and marketing functions of the Ripple Network. The common enterprise risk
increases to the extent that there is an identifiable entity that is driving the promotion . However,
Ripple Credits themselves promise nothing and it appears that neither the Founders nor
Company will be collecting or retaining funds from the distribution of Ripple Credits, meaning
that the Ripple Credit's users' funds will not likely be pooled. Neither Founders nor Company
have promised any type ofreturn or appreciation in the value of Ripple Credits and it appears
that the business model of Company seeks to disperse, rather than pool, Ripple Credits' users'
funds throughout the open-sourced Ripple etwork. Given that Company will be marketing the
use of Ripple Credits, it may make sense to take precautions to ensure that in marketing the use
of Ripple Credits, Company employees do not promise appreciation in the value of Ripple
Credits or estimate appreciations in value should speculati ve in vesting occur.
d. Ripple etworks as otes or Currency
The 1934 Securities Act excludes from the definition of a security ''currency or any note ...
whjch has a maturity at the time of issuance of not exceeding nine months" 45 Courts have read
the exemption for sho1t tenn notes to be applicable to commercial paper, not investment
securities 46 While not all notes are securities, courts vvill apply a "famil y resemblance" test to
determine whether an instrument denominated as a note is in fact a security. First, courts will
·11 See Revak,,. Sl::.'C Really Corp., 18 F .3d 81 , 87 (2d Cir. 1994).
•1~ S.E.C. v. SG Lid. , 265 F.3d 42 , 48(lst Cir. 2001); sec also S.E.C. v. Jnfinily Group, 212 f .3d at 184-185 (3d Cir.
2000) (finding that funds were poole.d and that illve.slors in turn received transfer agreements promising high rates o:f
return).
43Reuben Grinberg, Bitcoin: An I,11101,a/ive Al1ernacive Dig ital Currency , 4: I Hastings Sci. & Tech. L.J. 191, 199
(2011) [hcrcinartcr Grinberg].
•~IGrinberg , 197.
45 15 U.SC. § 78C(a)(]0).
46 See Reves v. Ernst & Yo1111g, 494 U.S. 56, 74 (1990) (Steve ns, J. , concurring).
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look at the reasonable motivations of a buyer and seller to purchase the note to determine
whether the primary motivation is profit. 4 ' Next, the court will examine the "plan of
distribution" of the instmment to determine whether there is "common trading for speculation or
investment. "48 Finally, the court will look at both the reasonable expectations of the investing
public and whether another regulatory scheme significantly reduces the risk of the instrnment. 49
Some commentators have explained that, like commercial paper, currency generally does not
resemble a security because it is safe and liquid.50 Ripple Credits, however, unlike traditional
currencies, do not have these qualities of safety and liquidity because they v.~11 be neither backed
by the full faith and credit of a national government nor widely accepted as a means of exchange.
Rippl e Credits, therefore, may be encompassed within what the Supreme Court explained as
Congress's attempt to define a securi7i "sufficiently broad to encompass virtually any instrument
that might be sold as an investment." 1 Again, the motivation of a purchaser of Ripple Credits
and the promotion of Ripple Credits will be particularly relevant in determining whether the
instruments can be considered notes, and if so, whether they will be considered securities under
the federal securities laws.
e. Ways to Diminish the Risk that Ripple Credits are Deemed to be Securities
Although we believe that a compelling argum ent can be made that Ripple Credits do not
constitute "securities" under the federal securities laws, given the lack of applicable case law, the
Founders should consider seeking a no-action letter from the SEC. Obviously there are pros and
cons to seeking a no-action letter, including among others, the possibility that the SEC does not
grant or delays a decision. In any event, obtaining a no-action letter would provide further
comfort that Ripple Credits are not securities under the federal securities laws.
4. Commodities regulation
The Commodity Exchange Act ("CEA") regulates the sale of a commodity for foture delivery.
Commodity means "wheat, cotton, rice, corn, oats ... and all other goods and articles ... and all
services, rights, and interests .. . in which contracts for future delivery are presently or in the
future dealt in ."52 The CEA does not govern or apply in certain circumstances (other than
section Sb or 12(e)(2)(B)) to transactions in delineated financial instruments (i .e., currencies) that
are deemed to be "excluded commodities." The CEA provides an exemption for a transaction in
an excluded commodity if: (i) the agreement. contract, or transaction is entered into only
between persons that are eligible contract participants at the time at which the persons enter into
the agreement, contract, or transaction; and (ii) the agreement, contract, or transaction is not
executed or traded on a trading faci lity. Although an argument might be fashioned that Ripple
Credits are an excluded commodity under the CEA (which is unlikely as they are not backed by
the full faith and credit of a national government), their sale to the general public, even if only in
47 Id. a1 66.
48 / d.
•19Id. at 66-67.
50 See Grinberg 203.
51 Reves, 494 U.S. al 60-61 .
52 7 U.S.C. § 1A(4).
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secondary markets, would preclude reliance on the exemption noted above, potentially
subjecting certain transactions in Ripple Credits to federal regulation. While people will not
immediately deal in futures or options contracts for Ripple Credits, to the extent that Ripple
Credits mimic existing currencies, it is possible that futures or options contracts for Ripple
Credits will be developed, and Ripple Credits may therefore fall subject to federal regulation
under the CEA The U.S. Commodity Futures Trading Commission (the "CFTC") regulates and
enforces regulations relating to the sale of a commodity for future delivery. Statutorily, it is
unlawful for a person to cheat, defraud, make false reports or statements or otherwise willfully
deceive or attempt to deceive a person in connection with a contract or sale of any commodity
for future delivery 53 Additionally the CFTC requires registration from many parties engaged in
the buying, selling, and promoting of commodities furures, including clearing organizations, 54
data repositories,5) and intermediaries.56 Given the uncertainty of whether Ripple Credits would
be deemed commodities, and whether an active futures market for Ripple Credits will form,
Founders and Company face a relatively low ri sk related to CFTC enforcement, and such risk
can be addressed as it arises. If an active futures and options market in Ripple Credits does form,
and exchanges begin to deal in these contracts, then exchanges, as well as parties that promote
the sale of futures contracts for Ripple Credits, may be required to register with the CFTC and
face enforcement action for any inaccurate or deceptive promotion of Ripple Credits.
5. Federal Currency Regulation
a. Counterfeiting
It is illegal in the United States to make, utter, or pass "any coins of gold or silver or other metal,
or alloys of metals, intended for use as current money, whether in the resemblance of coins of the
United States or foreign countries, or of the original design." 57 1n 2011, after many years of
investigation and prosecution, Bernard von NotHaus was convicted of counterfeiting coin and
passing, publi shing and selling such coins when they were known to be false. 58 At the time of
the otHaus conviction, the DOJ issued a press release explaining that
Article I, section 8, clause 5 of the United States Constitution delegates to Congress

the power to coin money and to regulate die value thereof. TIJ..is power was delegated
53 7 U.S.C. § 6B(a)(2).
54 7 U.SC. § 7a-l : 17 C.F.R. § 39 .3.
55 7 U.S.C. §24a; 17 C.F.R. § 49.3.
56 7 U.S.C. ii 6D; 7 U.S.C. 6K; 7 U.S.C. § 6N (intenuediaries required to register include ( i) liitures commission
merchants who solicit or accept orders for futures contracts and acccpl money, securities or property to margin.
guarantee, or secme any trades or contracts; (ii) introducing brokers who solicit and accept orders for futu res
contracts and docs not accept any money. securities or property to margin, guarantee or secure any trades or
contracts; (iii) conunodity pool operator who engages in operations of a collccti c i.nvcstmcnl vehic le and solicits or
accepts funds. securi ties or properties for the purchase of interests in the co lice live iovestment vehicle; and (iv) a
commodity trading advisor who, for compensalion, advi ses others or issues or promulgates analysis as to the value
or advisability of trading in any futures or opt.ions contracts).
5' 18 U.S.C. § 486.
58 Superseding Bill of Indictment, United Slates v. Bernard Von Notllaus, Docket No. 5:09CR-27 (W.D .N.C. Nov.
17, 2010); Verdict Fonn , United States v. Bernard Von Notf-faus. Docket o. 5:09CR27-V. (W .D.N.C. Mar. 18,
2011}.
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to Congress in order to establish and preser e a unifonn standard of value and to

insure a singular monetary system for al l purchases and debts in the United States,
public and private. Along with the power to coin money, Congress has the concurrent
power to restrai n the circulation of money which is not. issued under its own authority
in o rder to protect and preserve the constitutional currency for the benefit of all
citizens of the nation . It is a violation of federal law for individuals ... or
organizations ... to create private coin or cu_rrency systems to compete w ith the official
coinage and currency of the United States.' 9
While the press release suggests that the conviction was predicated on the illegality of creating a
competing currency, the legal basis for the conviction was countedeiting. The Liberty Dollars
included a$ sign, used the words "dollar," "USA," "Liberty," and "Trust in God ."60 It is likely
that the counterfeiting and fraud aspect of the Liberty Dollars, rather than the competition with
United States currency, led to the conviction .61 Because the language of the counterfeiting
statute exclusively addresses metal coinage or bars, it is likely inapplicable to the creation and
distribution of Ripple Credits, which will be constructed of a string ofcode orledger entry .
b. Stamp Payments Act
The Stamp Payments Act of 1862 ("Stam p Payments Act") states that, "whoever makes, issues,
circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum
than $1 , intended to ci rculate as money or to be received or used in lieu oflawfol money of the
United States, shall be fined under this title or imprisoned not more than six months, or both."62
Based on case law analyzing the Stamp Payments Act, one commentator has explained that it is
unlikely to apply to anything that "(l) circulates in a limited area, (2) is redeemable only in
goods, (3) does not resemble official U S. currency and is otherwise un likely to compete with
small denominations ofU.S currency, or (4) is a commercial check." 63 Professor Ronald Mann,
an expert in payment systems, has explained that the term "obligation" in the statute does not
limit the list, and has made a statement regarding Bitcoin, which has a similar form factor to a
coin, that it "is pretty clearly a 'token,' albeit an electronic one, l would argue it is covered [by the
Stamp Payments Act]. "64 Ripple Credits will circulate widely, be redeemable for any products in
which merchants will accept it, may compete with small denominati ons of U.S. currency, and is
not a commercial check. Because there is no requirement that merchants accept Ripple Credits,
it is unclear whether an "obligation" exists. There has not been a published court opinion
59 Press Release. U nited Slates Attorney's Office, Western District of ort h Carolina, Defendant Convicled of
Minling His Own Currency (March 18. 20 11 ), available at http://www.fbi.gov/charlotte/press-
releases/2011 /defendant-comricted-of-millli ng-his-own-currenC)' .
(,) Id.
61 Grinberg, 19 1; Seth Lipsky , Op-Ed., When Privme Money Becomes a Felony Offense: The Popular Revolt
Agamst a Declining Dollar Leads 10 a Curious Co11vic11on, Wall St. J. (}vlar. 31, 2011) available al
http://online. wsj .com/art.icle/SB I 00014240527487044258045762 203 83671608952 .html .
62 18 U.S.C. § 336.
63 See Grinberg. J.85 {c iting United States v. Van Aukcn. 96 U.S. 366 (187 8}, United Sillies v. Monongahela Bridge
Co. , 26 F . Cas. 1292 (W.D. Pa. 1863 (No. 15796); United States v. Roussopulous. 95 F.977 (D. Minn 1899), and
Stetioius v. United States. 22 F. Cas. 1322 (C.C .D.D.C. 1839) (No. 13387)).
"'Grinberg , 189 (quoting Maun).
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FOIA CONFI DENTIAL TREATMENT REQ UESTED BY RIPPLE LABS, INC. RPLI_SEC 0099482
Page 21 of 28
interpreting the Stamp Payments Act since 1899.65 Given the lack ofrecent prosecutions, and
the low risk that Ripple Credits create an obligation, Founders and Company face a relatively
low risk of enforcement under the Stamp Payments Act. 66
6. Illegal Gambling
Many states have anti-gambling laws that make it a misdemeanor to sell, transport or
manufacture a gambling device.67 Under these statutes, the term "gambling devices" is typicall y
broadly defined. For instance, in Colorado "gambling devices" include "any device, machine,
parapl~ernali~, ?r e1~ipm~nt that i~ used or usab~e in th~ playi.ng phases of anY_ professional
gambling act1v1ty," and in Washington "gambling devices" include "any device, mechanism ,
furniture, fixture, construction or install ation designed primari ly for use in connection with
professional gambling."69 Founders and Company incur some risk related to illegal gambling if
Ripp le Credits are categorized as gambling devices. While neither Founders nor Company can
control use of the Ripple Credits, the risk of Ripple Credits being a gambling device increases if
Founders and Company promote Ripple Credits for use in Internet gambling. Founders and
Company should not advertise the use of Ripple Credits for Internet gambling or any illegal
purpose. Additionally, under the Illegal Gambling Business Act "(w]hoever conducts, finances,
manages, supervises, directs, or owns all or part of an illegal gambling business shall be
fined . . or imprisoned ... or both. 11 70 While Founders and Company have not indicated intent to
conduct an illegal gambling business, there is a risk that Ripple Credits that are used to finance
illegal ~ambling wi ll be seized and forfeited, which could cause instability to the Opencoin
system. 1
The Unlawful Internet Gambling Enforcement Act regulates designated payment systems, which
are "system[s] utilized by a financial transaction provider that the Secretary or Board of
Governors of the Federal Reserve System, in consultation with the Attorney General, jointly
detennine, by regulation or order, could be utilized in connection with, or to facilitate any
restricted transaction." 72 A restricted transaction is a transaction or transmittal involving any
credit, funds, instruments, or proceeds in connection with a person's participation in unlawful
Internet ga mbli ng.73 Participant in a designated payment system are required to "establish and
implement written policies and procedures reasonably designed to identify an d block or
65 Grinberg, 190.
,;,; Please note tliat the pellllllies for violation are limited lo a fine and a maximum of six monU1S imprisomuenl. 18
U.S.C. § 336.
6 ' See, e.g.. Colo. Rev. Stat§ 18-10-105.
6ll Colo. Rev. Stat.§ 18-10-I02(3).

@ RCW 9.46.0241.
70 l8 U .S.C. § 1955.
n Id.
02 3 1 U.S.C. § 5362(3).
73 31 U.S.C. § 5362-5363 . Unlawful Internet gambling means "to place. receive, or otherwise knowi ngly transmit a
bet or wager by any means which involves the use, at least in part, of the Inte rnet where such bcl or wager is
uu.lawful under a ny applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated,
received, orotherwisc made." 31 U.S .C. § 5362(10).
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otherwise prevent or prohibit restricted transactions."74 The Department of Treasury and the
Board of Governors of the Federal Reserve System have identified designated payment systems
to include automated clearing house systems, card systems, check collection systems, money
transmitting, and wire transfer systems.75 Unless the identification of designated payment
systems is later modified, it is unlikely that the Ripple et\Vork, Founders or Company would
technically be subject to the blocking requirements of the Unlawful Internet Gambling
Enforcement Act because Ripple Credits do not fall within one of the designated payments
systems
The Unlawful lnternet Gambling Enforcement Act also regulates the abi lity for a person engaged
in betting or wagering to knowingly accept from another person in connection with unlawful
Internet gambling credit, an electronic fund transfer, a check, or proceeds from any other
designated payment system. 76 Unlawful Internet gambling means "to place, receive, or
otherwise knowingly transmit a bet or wager by any means which involves the use, at least in
part, of the Internet where such bet or wager is unlawful under any applicable Federal or State
law ... "77 The definjtion of a bet or wager excludes participation in a gam e or contest if the
participants do not stake or risk anything other than personal efforts or points or credits given by
the game's sponsor free of charge that can be redeemed only for participation in games offered
by the game's sponsor. 78 Because it is intended that Ripple Credits be redeemed in an open
marketplace, if an Internet gaming company, which was otherwise not engaged in Internet
gambling, gave away Ripple Credits and accepted them as payment to play games, the payment
of the Ripple Credits would constitute a wager (not falling within the exemption discussed
above), and may draw such company within the realm of unlawful Internet gambling. Founders
and Company should carefully evaluate any use of Ripple Credits in Internet gaming situations.
7. Consumer Protection, Unfair or Deceptive Trade Practices
Section 5 of the Federal Trade Commission Act ("FTC Act") prohibits "unfair or deceptive acts
in or affecting commerce."79 An act or practice is decepti ve if (I) there is a representation,
om ission, or practice; (2) the representation, omission, or practice is likely to mislead consumers
acting reasonably under the circumstances; and (3) the representation, omission, or practice is
material. 80 A r~resentation is material if it is of a kind usually relied upon by a reasonably
prudent person . 1 Express claims, or deliberatel y made implied claims, used to induce the
74 l2 C.F.R. § 233 .5 (tJ1ere is a safe harbor for compliance if a financial tnu1Saction provider participant "relies on
the policies and procedures of the designated payment system that arc reasonably designed to (i) Identify and block
restricted transactions; or (ii) Otherwise prevent or prohibit tlle acceptance of the products or services of the
designated payment system or participant in connection with rcsuict.cd transactions; and (2) such policies and
procedures of tJ1e designated payment system comply witJ1 tJ1c requirements of [the regulation].")
' 5 l2 C.F.R. § 233.3 .
76 31 U.S.C. § 5363 .
77 3 1 U.S.C. § 5362(IO)(A).
78 3 I U.S.C. § 5362(1)(E)(viii).
79 15 U.S.C. § 45(a)(IJ.
"° See FIC v. Gill, 265 FJd 944. 950 (9th Cir 200]).
' 1 FTC v. Amy 1i·avel Serv. Inc., 875 F.2d 564 (7th Cir. 1989).
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purchase of a particular product or service are presumed to be material. 82 Thus, if Founders or

Company make material representations, whether express or implied, that are likely to mislead
reasonably prudent consumers, then the Founders or Company, as applicable, will likely face
liability under the FTC Act and applicable state consumer protection laws. 83
To minimize risk, Founders and Company should be careful about how and to whom they market
Ripple Credits. For example, when Founders or Company sell Ripple Credits to exchanges, they
should accurately desc,ibe the potential risk of purchasing the Ripple Credits.84 Further,
Founders should be certain that they clearly disclose that they retained Ripple Credits for
personal use at the launch of the Ripple Network, and how many Ripple Credits they retained.
Founders and Company should also note that if Founders and Company fail to comply with
applicable laws relating to Ripple Credits, and the government takes action that results in the
devaluation of Ripple Credits, consumers may claim that the promotion ofOpencoin by
Founders and Company, by failing to comply with applicable laws, was itself an unfair or
deceptive trade practice.
8. Aiding & abetting unlawful activity
As long as Company does not actively promote the use of the Ripple Credits for illegal or other
questionable purposes, there is minimal risk that its conduct will subject it to aiding and abetting
liability. evertheless, there is a ri k that Company could come under regulatory scrutiny if the
Ripple Credits become a popular tool for illegal online commerce, as governmental entities have
become increasingly aggressive in pursuing a.iding and abetting charges/claims against
companies involved in online commerce.
Aiding and abetting requires "first, that the principal committed the substantive offense charged,
and second, that the [defendant] accomplice became associated with the principal's criminal
endeavor and took part in it, ;ntending 10 assure ;is success. "85 "[A] defendant must willfully
and knowingly have associated him self in some way with the crime, and willfully and knowingly
have sought by some act to help make the crime succeed."86 To prove an "association" with a
crime, the government must provide both "proof of [defendant's] suffici ent participation in the
crime, as well as knowledge of it." 87 To prove that Founders aided and abetted a crime, the
government would have to prove that: (1) some principal committed the underlying crime; (2)
Founders knew it; and (3) Founders participated in it with the intent that the crime occur.
8~ 11io111pson Medic.al Co., l04 FTC. 648, 816 (1984).

><JSee FTCv. Tran.met Wireless·Corp., ·o6F. Supp. 2d 1247, 1267 (S.D . PL 2007);see also 15 U.S.C. § 53(b).
"'See Tran.met Wireless Corp .. 506 F. Supp. 2d at 1267 (noting that defendants violated Section 5 of the ITC Act
by making material misrepresentations regarding, inter alia, t11c potential earnings a cons umer was likely to achieve
bv purchasing Defendants' Internet kiosks).
85 United Srates v. Perez-Melendez. 599 F.Jd J 1, 40 (I st Cir. 20!0) (emphasis added) ; see also Uni ted Stares v.
Campa, 6i9 F.2d 1006, 1013 (1st Cir. l 982)("Proving beyond a reasonable doubt that a specific person is the
principal is not an element of lhe crime of aiding and abetting .. .Thc prosecution need only prove thal. t11c
substantive offense had been committed by someone.").
86 United States v. Bailey, 405 FJd l02, 110 (Isl Cir. 2005) (approving language from jury instruction).
8' United Siates v. Guerrero, 114 F.3d 332, 342 ( Isl Cir. 1997).
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To satisfy the knowledge requirement for aiding and abetting, the government must sbow the
defendant had "more than merely a general suspicion that an unlawful act may occur." 88 Thus,
the government would have to prove that Founders knew that Ripple Credits were being used to
faci litate illegal activities. To reduce this risk, founders and Company should be careful about
how Ripple Credits are promoted and should not target illegal activities as markets of Ripple
Credits.
Inferences of knowledge may also be drawn from evidence suggesting that the substantive c1ime
or scheme was apparent or foreseeab le to the defendan t, or evidence that a defendant was
willfully blind to illegal activities or consciously disregarded evidence ofit. 89 For example,
United Stales v. Lovin held that the evidence was sufficient to sustain a conviction against an
operator of websites that advertised prescription drugs and linked purchasers to doctors and
phannacists who filled prescriptions without in-person examinations. The court rejected the
defendant's argument that he did not know the doctors were filling prescriptions illegally,
reasoning that the operator had previously been involved with illegal drug distribution networks,
had talked to the conspiracy's ringleader about the need to avoid government scrutiny, and knew
the rate at which doctors were approvi ng orders.90 In contrast, if a defendant is not aware of a
c1ime or could not foresee it, he carmot be convicted. 91 To minimize risk of liability, Founders
and Company will want to establish as much di stance from any illegal indu ·tries as possible, and
they should make clear in their mission statements, user guidelines, or other publications that
they do not promote or condone use of the Ripple Credits for illegal activities, nor do they
directly oversee, control , or financially benefit from transactions in which the Ripple Credits are
used .
88 United Slates v. Rosario-Diaz. 202 F.3d 54. 63 (1st Cir. 2000).

><9See, e.g.. Uniled States v. Llinas, 373 F.3d 26. 31-'3 {1st Cir. 2004) (evidence was sufficie.nt to show defendant
knew about conspiracy where she was present at conversation about drug purchase and later drove co-conspirator to
purchase site): Uniled Slates v. Page, 521 F .3d JOI , 108--09 (1 st Cir. 2008) (defendant found to have knowledge of
conspiracy where co-conspirator used dmg dealer slang familiar to defendmn); Otero-Mendez. 273 F .3d at 52
(defendant properly convicted of aiding and abetting carjacking resulting in death where defendant knew principals
were carrying guns); Uniced States v. Spinnev, 65 FJd 231. 236-37 {1st Cir. 1995) (defendant accused of aiding and
abetting anned bank robbery was "on noLice of the likelihood" that weapon would be used in the robbery where
defendlmt had major role in pl,uming a daylight robbe1)'); Uni led Stales v. Hernamln, 218 F .3d 58, 66-08 ( I" Cir.
2000) (rejecti ng defendant's argument that he did not know he was tmnsporting dmgs where defendant drove truck
in a slow and cvasi vc manner).
90 2009 U.S. Dist. LEXIS 101567, • 9-12 (S.D. Cal. Oct.30.2009).
91 See, e.g., United States ,,_ Lovern. 200 9 U.S. App. LEXIS 29307, *6- 7 ( 10th Cir. Sept. 9. 2009). In this case, the
ope.ration involved a rogue phannacy that issued prescriptions over the Tntemer wi thout an in-person consultation.
The evidence showed that the technician may have known that the phannacy was filling prescriptions over the
Internet or filling fake prescripLions, and Lhal this conduct may have been illegal ; however, the govemmcnt
specifically charged the defendant with aiding alld abetting distribution by pharmacists outside tbe nonual scope of
their profession. Id. at *26-30. See also Uniled States v. Rosario-Diaz, 202 F.3d 54, 63-64 ( I st Cir. 2000) (vacating
convictions for aiding :md abetting and conspiracy lo commit carjacking resulting in death where defendants who
arranged a robbery could not [orcsec that the robbery would involve carjacking and murder): United Slates v.
Ogando, 547 F.3d 102, 108 (2d Cir. 2008) (reversing cab driver's conviction for conspiracy to import drngs. noting
that the fact that defendant had frequent contact with conspiracy members merely showed that he was "a livery cab
driver regularly used by members oflhis conspiracy.").
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Even if the government can prove knowledge, it is unlikely that merely creating a product that is
then used in illegal activi ties would be sufficient to show participation. A defendant can aid and
abet a crime by failing to take an action ont~ if that failure was "with the specific intent to fail to
do something the law requi res to be done." 2 Moreover, for aiding and abetting liabi lity to be
based on failure to act, there must be "a legal duty and not simply a moral duty ." Founders and
Company, by staying removed from illegal activities, advising against the use of Ripple Credits
for illegal activities, and educating the public about thei r lack of involvement in and control over
third party transactions, will significantly red uce their tisk of aiding and abetting illegal activity.
9. Tax Evasion
It is a felony to "willfully attempt in any manner to evade or defeat any tax'' impo ed by the
Internal Revenue Service.93 Furthermore, persons who conspire to "commit any offense against
the United States, or to defraud the United States, or any agency thereof in any manner or for any
purpose," are subj ect to fines and im prisorunent. 94 While F ounders and Company may not have
income tax exposure arising from the distribution of Ripple Credits, merchants, online retailers,
and others who accept Ripple Credits in lieu of payments in USD or currencies of other countries
will be respons ible for reporting the income tax associated with such receipts. Bartering income
is taxed at the fair market value of the goods and services exchanged, which would suggest that a
merchant accepting Ripple Credits for a good is responsible to pay income taxes on the fair
market value of the Ri~ple Credits, which is equal to the fafr market value of the good exchanged
for the Ripple Credits. Founders and Company should make clear to Ripple Network
participants that they will be responsible for tax liability associated with the acceptance of Ripple
Credits.
In addition to federal income tax, people buying, selli ng and exchanging Ripple Credits will be
responsible for state income tax and sales tax liability associated with such Ripple Credits.
While state laws vary significantly, state income tax liabil ity associated with the receipt of
Ripple Credits in a given year will be calculated, in most states, simil arly to the federal income
tax calculation . For state sales tax purposes, the Streamlined Sales and Use Tax Agreement
defines "Sales price" as "the total amount of consideration , including cash, credit, property, and
services, for which persona.I property or services are sold, leased, or rented, valued in money,
w hether received in money or otherwise ... "96 This agreemen t has on ly been adopted by some
states, and even in states where it has been adopted the definition of "sales price" may not be
uniform .
Similarly, although Founders and Company may not have income or sales tax exposure arising
from transactions involving Third Party Ripple Currencies, participants may be responsible for
sales, income and gross receipts taxes. It seems likely that most state and local governments
"-' Railey, 405 F. 3d at I IO n. 4 (approving language from jury instn1ctio11).

93 26 U.S.C. § 7201.
94 18 U. S.C. § 37 1.
95 Internal Revenue Service, Bartering In come (July 11 , 201 ! ), available at
http ://www.irs.gov/businesses/sma ll/article/O,,id=J87904,00.htm1.

06 Streamlined Sales and Use Ta,x Agreement 136 (May 19, 2011 ).
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would treat Original Ripple System promises to pay similarly to the way they would treat
e.lectronic currency, stored value, or conventional debts. The recognition and transfer of Third
Party Ripple Currencies promises to pay should not themselves create a transfer tax liability;
however, to the extent Third Party Ripple Currencies promises to pay are made in conjunction
with a transfer of taxable goods or services, a transfer tax liability would arise. At least two
caveats apply to this general conclusion. First, if the Third Party Ripple Currencies promise is
denominated in a good or services that is subject to sales aod use tax (e.g., one hour of carpentry
se1vice or an iPhone 5) the settling of Ripple promises could create additional taxable events.
Second, there can be casual sale or other state exemptions which reduce the transfer tax burden
for individuals who are not engaged in busines Ripple's Frequently Asked Questions section
states that transactions "between private parties" are "normally OT taxable" in contrast to a sale
between a business and private person .97 While this is true insofar as many states have casual or
occasional sale exemptions that eliminate sales and use tax obligations on individuals maki ng an
occasional sale (e.g. a garage sale), most states will define an individual as a retailer and require
collection if the individual makes a certain number of sales (generally, three per year) or holds
herself out as making sales. Thus, even if a user is a private individual, he or she is likely subject
to sales tax coll ection responsibilities ifhe or she denominates his or her Third Pa1ty Ripple
CutTencies promises in a taxable good or service or sell those goods or services in more than a
few transactions each year.
In addition to sales tax issues, participants may run into issues with income and gross receipts
taxes . In the extreme example, individuals could speculate or invest in Third Party Ripple
Currencies promises. For example, buy a Third Party .Ripple Currencies promise to pay an
ounce of gold in exchange for a prom ise to pay USD $800 and resell that promise to pay an
ounce of gold for a promise to pay USD $850 (a gain of USD $50, assuming the creditworthiness
of the promises). Likewise, a promise to pay by a less creditworthy pa1ticipant might sell for a
discount compared to a promise to pay by someone with good credit. All such transactions in
intangibles can give rise to income and gross receipts tax to those engaging in the exchanges and
transactions.
In light of the foregoing, although Founders and Company are not subject to tax liability directly
from the transactions occurring in the Ripple Network, Company should advise users of Ripple
Credits to evaluate sales tax obligations related to accepting Ripple Credits and engaging in
transactions involving Third Party Ripple Currencies just as such users would evaluate sales tax
for transactions involving money .
10. Other Considerations
There are a num ber of other legal and non-legal issues that Founders and Company shoul d
consider when fonning the Opencoin product and structure, including the following :
a. Foreign Regulation. While this memorandum discusses United States

regulation, Founders and Company should consider the ri ks of violating simi lar
laws in all nations in which Ripple Credits are promoted, sold, and exchanged .
0' "ls Ripple Taxable?," available ar http://ripplc-project.org/Main/F AQ#ls_Ripple_ Utxable.
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For instance, Founders should consult with European counsel to determine

whether Ripple Credits will be considered e-money and therefore regulated and
requiring registration under the Electronic Money Institutions Directive ("E-
Money Directive"). The E-Money Directive defines electronic money as
"electronically, including magnetically, stored monetary value as represented by a
claim on the issuer which is issued on receipt offunds for the purpose of making
payment transactions .. . and which is accepted by a natural or legal person other
than the electronic money issuertl 98 The risk of regulation likely is low because
the val ue of Ripple Credits will be based on the Opencoin economy but not
backed by Founders or Company, and therefore there wi ll be no claim on the
issuer. However, the risk should not be completely ignored because there are
commentators who believe that crypto virtual currency, such as Opencoin, would
be subject to the £ -Money Directive."'J
b. Hackers/security. Founders and Company should consider risks associated with

security breaches or hackers breaking into the Ripple Network, li ke what occurred
with Bitcoin and Mt. Gox. While Founders and Company themselves may not
have specific disclosure obligations arising from a breach resulting in a release of
personal information, exchanges and other third party participants who aggregate
and store Rippl e Credits on behalf of individual s may face ri sk.
c. Promotional Ripple Credits and Expiration. To the extent that Ripple Credits
are considered prepaid access, Founders can issue unpaid, promotional Ripple
Credits, which could expire, provided that proper disclosure is made. To the
extent that Ripple Credits are considered prepaid access, they may also be
regulated by the Federal CARD Act as a "general-use prepaid card," which is "a
card, code or other device that is (i) issued on a prepaid basis primarily for
personal, family, or household purposes to a consumer in a specified amount,
whether or not that amount may be increased or reloaded, in exchange for
payment; and (ii) redeemable upon presentation at multiple, unaffiliated
merchants for goods or services, or usable at automated teller machines.111 00 If
Ripple Credits are general-use prepaid cards, then there wi ll be limitations on
expi1ing or imposing fees . However, Ripple Credits that are issued in connection
with loyalty, award or promotional programs may expire provided that the
expiration date is stated on the front of the card and it is indicated on the front of
the card that it is issued for a promotional, award or loyalty purpose. 101 Because
Ripple Credits will not be issued in the form of a card, disclosure would need to
be in a comparable location on tl1e user interface that the holders of Ripple Credits
view. Additionally, many state gift certificate statutes require issuers of
98 Directive 2009/ 1 IO/EC, Second Wectronic ,Honey Directive, TiL I, Art. 2, 3 (2009).
99 See, e.g., Edwin Jacobs, Bitcoin: A Bil Too Far?, Journal oflntcmct Banking and Commerce, vol. 16, no . 2
(A ugust 20 LI).
100 12 C.F R. § 205.20(a)(3).
10 1 12 C.F.R. 205.20(a)(4).
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79435-000 JIADMIN3!002299.6
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promotional gift certificates or cards to indicate the expiration date on the front of
the gift certificate or card, in capital letters, and in at least IO point font. 102
d. Employee Payment/Wage & Hour. Founders and Company will need to

compensate the dedicated team of developers and business people in compliance
with wage and hour requirements. Founders have indicated that Company will
employ a dedicated team of developers and business people who support the
Ripple Network Fou nders and Company will need to consider how this team will
be compensated Having a volunteer team or compensating the team with Rippl e
Credits will both likely result in the violation of state wage and hour laws. These
laws generally requi re employers to pay non-exempt employees minimum
amounts for hours worked. and these amounts can not generally be paid in
anything other than legal tender of the United States or something readily
conve1tible thereto. 103
102 See, e.g., Cal . Civ. Code Civ. § 1749.S(d) (clqilaining that consumer protection laws do not apply to gil't
certificates distributed pursuant to an award, loyalty, or promotional program without any money or thing of value
being exchanged iftbe expiration da tes are printed on the face . in capita l letters, in at least 10 point font).
103 See e.g., RCW 49.46.010(2).
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79435-000 JIADMIN3 !002299.6
FOIA CONFIDEN TIAL TREATMENT REQUESTED BY RIPPLE LABS , INC . RPLI_SEC 0099490

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Case 1:20-cv-10832-AT-SN Document 130-2 Filed 04/22/21 Page 1 of 29

PRIVILEGED I CONFIDENTIAL Perkins j

TO: Chris Larsen and Jed McCaleb

FROM: Dax Hansen

RE Legal Analysis and Recommendations Regarding Ripple Network

11. DESCRIPTION OF THE RIPPLE NETWORK

FOIA CONFIDENTIAL TREATMENT REQUESTED BY RIPPLE LABS , INC . RPLI_SEC 0099463

Founders and Company, the for-profit corporation established by Founders. Ripple

1 '·Why RippleT. available al , http://ripplepay.com/essay/.

III. SUMMARY OF CO CLUSIONS AND RECOMMENDATIONS

FOIA CONFIDENTIAL TREATMENT REQUESTED BY RIPPLE LABS , INC. RPLI_SEC 0099465

exchange fo r Ripple Credits. It is important to note that the "principal oversight

b. Although we believe th:1t a compelling argument can be made that Ripple

c. Ripple Credits may become commodities. If people develop contracts for

d. Euhan ges will likely be designated money transmitters or currency

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e. Ripple Credits are unlikely to be regulated under counterfeiting laws. While

f. Founders and Foundation may be subject to illegal gambling regulations.

g. Acrnracy in promotion of the Ripple Network will be necessary to avoid

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b. Company should not control distribution of Ripple Credits, or should

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c. Take steps to avoid misleading purchasers or recipients of Ripple Credits as

d. Avoid stating or implying that Ripple Credits are equivalent to or compete

f. Do not promote Ripple Credits as being an investment opportunity. Actively

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commerce. Moreover, if Ripple Credits become a popular mechanism for

1. Federal Money Services Business Laws

I. Whether Ripple Credits are "Prepaid Access"

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2. Whether Company or Founders are t.he "provider" of prepaid access

" J I C.F.R. § I010. l()()(f't)(4) (iii)(D).

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3. Whether Company or Founders are "sellers" of prepaid access

available at http://www.bitcoiruuoncy.com/post/ l l0741 08719/fi.nccn-frcis-prcpaid-acccss-spcccil (describing the

FOIA CONFIDENTIAL TREATMENT REQUESTED BY RIPPLE LABS , INC . RPLI_SEC 0099473

193 I C.F. R. § IOI0.100(£[)(7).

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2. State Money Transmitter Laws

Gen. Stat§ 53-208.2(12) (emphasis added).

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a. The Definition of a Security

Under the Securities Act of 1933, the term security means:

32 See, e.g , Cal . Fin. Code § 2003(k).

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b. Application of the Howey Test- Investment of Money with the Expectations

837, 852 ( 1975}).

c. Application of the Howey Test - Common Enterprise

d. Ripple etworks as otes or Currency

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5. Federal Currency Regulation

Article I, section 8, clause 5 of the United States Constitution delegates to Congress

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to Congress in order to establish and preser e a unifonn standard of value and to

b. Stamp Payments Act

6ll Colo. Rev. Stat.§ 18-10-I02(3).