Bitnomial Exchange, LLC (Bitnomial), a designated contract market (DCM) registered with the Commodity Futures Trading Commission (CFTC), has launched a legal offensive against the US Securities and Exchange Commission (SEC), challenging the agency's attempt to exert authority over the futures exchange's self-certified XRP futures contracts.1 The lawsuit, filed by Katten on behalf of Bitnomial in the US District Court for the Northern District of Illinois, seeks declaratory and injunctive relief against the SEC's attempt to classify XRP futures as security futures. The futures exchange contends that the SEC's position creates an untenable situation, forcing Bitnomial to choose between abandoning its plans to list XRP futures or risking enforcement action by proceeding.

Bitnomial's Self-Certification of XRP Futures

The lawsuit details Bitnomial's efforts to list XRP futures contracts through the CFTC's self-certification process.2 On August 9, Bitnomial filed a self-certification with the CFTC to trade XRP futures on its exchange.3

Among other things, Bitnomial's XRP futures would be a physically settled, margined futures contract based on the price of 100,000 XRP. Each contract would enable market participants to buy and sell the obligation to deliver or receive 100,000 XRP on a specific future date at a specific price. The physical delivery of XRP would be anonymous and completed through a clearinghouse regulated by the CFTC. After the filing, the CFTC requested additional information but did not stay the listing, effectively authorizing Bitnomial to proceed under CFTC regulations.4

However, as alleged in the complaint, the SEC intervened, asserting that XRP futures are security futures subject to federal securities laws.5 The SEC's position allegedly stems from its view that XRP itself is an "investment contract" and, therefore, a security under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act).6 This interpretation would require Bitnomial to register as a national securities exchange with the SEC before listing XRP futures — a step Bitnomial argues is unnecessary and beyond the SEC's authority.

Bitnomial contests the SEC's position, arguing that the agency is overstepping its statutory authority and that XRP futures are not security futures and should fall under the exclusive jurisdiction of the CFTC.7

Regulatory Status of XRP

Central to Bitnomial's argument is the recent decision in SEC v. Ripple Labs, Inc.8 In that case, the District Court for the Southern District of New York rejected the SEC's argument that all sales of XRP constituted sales of investment contracts. The court found that "XRP, as a digital token, is not in and of itself a 'contract, transaction[,] or scheme' that embodies the Howey requirements of an investment contract."9 The court also ruled that Ripple's programmatic sales of XRP on digital asset exchanges, which were blind bid/ask transactions, did not constitute sales of investment contracts.10

Bitnomial contends that since XRP is not inherently a security (and thus a non-security commodity), and anonymous sales of XRP on the secondary market are not sales of investment contracts, XRP futures cannot be classified as security futures.

No Way Forward

Bitnomial's complaint also highlights a critical regulatory catch-22. The futures exchange argues that compliance with the SEC's interpretation is not feasible, as XRP is not registered as a security with the SEC—a prerequisite for listing single stock security futures. Current regulations require the security underlying a single "stock" security futures product to be registered pursuant to Section 12 of Exchange Act.11 However, XRP is not registered as a security, and Bitnomial lacks the authority to register it.

This situation underscores a significant gap in the regulatory framework for digital assets. While the CFTC and SEC have previously issued joint orders permitting certain unregistered securities (such as debt securities) to underlie security futures products,12 no such exemption exists for digital assets like XRP.

Relief Requested

The lawsuit seeks two primary forms of relief. First, Bitnomial requests a declaratory judgment that XRP futures contracts are not security futures under the Exchange Act. Second, the exchange seeks permanent injunctive relief to prevent the SEC from asserting jurisdiction over XRP futures or pursuing any investigation or enforcement action against Bitnomial related to listing, trading, purchasing, or selling XRP futures on its exchange.

The complaint emphasizes that the question of whether XRP futures are properly classified as security futures under the Exchange Act is a purely legal question that can and should be resolved by the court. Bitnomial argues that it has no other recourse absent relief from the court, as there is no process to appeal the SEC's position.

Final Thoughts

The Bitnomial lawsuit highlights the ongoing regulatory challenges in the cryptocurrency space, particularly regarding the classification of digital assets and related financial products. A similar scenario emerged earlier this year involving Ether (ETH), where a special purpose broker-dealer announced that it would offer custodial services for ETH as a digital asset security.13 This move has made the regulatory status of ETH as a non-security commodity murky, even as the SEC in July approved several spot Ether Exchange Traded Products (ETPs) as commodity-based trusts.14

For Bitnomial, the ability to list XRP futures is at stake. The futures exchange argues that XRP futures should fall under CFTC jurisdiction as a commodity derivative, not a security future. This classification is crucial, as it determines the regulatory framework under which these products can be traded. If the SEC's position prevails and XRP futures are classified as security futures, it would significantly impact Bitnomial's business model, as the exchange would need to either abandon its plans to list XRP futures or face potential enforcement action. This situation creates a challenging environment for innovation and market development in the digital assets space.15

1 Bitnomial Exchange, LLC v. SEC, No. 1:24-cv-09904, ECF No. 1 (N.D. Ill. Oct. 10, 2024).
2 The CFTC self-certification process under Rule 40.2 allows designated contract markets (DCMs) and swap execution facilities (SEFs) to list new products for trading without prior CFTC approval. 17 C.F.R. § 40.2.
3 See Bitnomial Exchange, LLC, XRP US Dollar Futures Self-Certification (Aug. 9, 2024), https://bitnomial.com/exchange/regulation/24-003-regulatory-update.pdf.
4 Under CFTC Rule 40.2, the CFTC may stay the listing of a self-certified contract for false certification or amend the contract terms and conditions of such contract. 17 C.F.R. § 40.2(c).
5 Security futures are subject to the joint regulatory oversight of the CFTC and SEC. See 15 U.S.C. § 78c(a)(10); 15 U.S.C. § 77b(a)(1); 7 U.S.C. § 1a(31). Futures on non-security instruments are subject to the exclusive jurisdiction of the CFTC. See 7 U.S.C. § 2(a)(1)(A).
6 Foris DAX Inc. (d/b/a Crypto.com), has recently challenged the SEC's de facto rule classifying many digital assets to be themselves "investment contracts" and thus securities. Complaint for Declaratory and Injunctive Relief, Foris DAX Inc. v. SEC, No. 6:24-cv-00373, ECF No. 1 (E.D. Tex. Oct. 8, 2024).
7 See supra note 5.
8 SEC v. Ripple Labs, Inc., et al., 682 F.Supp.3d 308 (S.D.N.Y. July 13, 2023). See Katten's coverage of the Ripple Labs action here, here, and here. Note that the SEC on October 2, 2024, filed a notice of appeal in the Ripple Labs case to the Second Circuit Court of Appeals in Manhattan. Ripple Labs, No. 1:20- cv-10832, ECF No. 978 (S.D.N.Y. Oct. 2, 2024). The actual appeal has yet to be submitted. Ripple Labs filed a notice of cross-appeal on October 10, 2024. Id., No. 1:20-cv-10832, ECF. No. 979 (S.D.N.Y. Oct. 10, 2024).
9 Ripple Labs, 682 F.Supp.3d at 324.
10 Id. at 328-331.
11 CFTC Rule 41.21(a) provides that "[a] futures contract on a single security is eligible to be traded as a security futures product only if: (1) The underlying security is registered pursuant to section 12 of the Securities Exchange Act of 1934." 17 C.F.R. § 41.21(a).
12 Joint Order Modifying the Listing Standards Under Section 6(h) of the Securities Exchange Act of 1934 and the Criteria Under Section 2(a)(1) of the Commodity Exchange Act, 74 Fed. Reg. 61,380 (Nov. 24, 2009).
13 See Katten's coverage of this topic here and here. According to news reports, the special purpose broker-dealer has soft-launched its ETH custodial service to institutional clients. See Nikhilesh De, Doors Open at Prometheum as Much-Disputed Firm Tests Crypto Tokens as Securities, CoinDesk (Sept. 11, 2024), https://www.coindesk.com/policy/2024/09/11/doors-open-at-prometheum-as-much-disputed-firm-tests-crypto-tokens-as-securities/.
14 Order Approving a Proposed Rule Change to List and Trade Shares of the ARK 21Shares Ethereum ETF, Exchange Act Release No. 34-100224 (July 22, 2024), https://www.sec.gov/files/rules/sro/nysearca/2024/34-100224.pdf.
15 Note that multiple firms have already filed spot XRP ETP applications with the SEC. See Katherine Greifeld & Vildana Hajric, Wall Street Races to Launch Latest Cohort of Crypto Spot ETFs, BLOOMBERG (Oct. 8, 2024), https://www.bloomberg.com/news/articles/2024-10-08/wall-street-races-to-launch-latest-cohort-of-crypto-spot-etfs.
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