Tag: Jay Clayton

Danger for U.S. Crypto Markets Rises As SEC’s Credibility Falls

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By Hassan Tyler. (RealClear Markets). November 30, 2023.

The conviction of Sam Bankman-Fried for the fraud that destroyed the once mighty digital asset exchange FTX may have been a low point for public opinion on the cryptocurrency industry. But a potentially game-changing upside event for crypto could be coming soon which could bring trillions of dollars in reliable capital into the emerging industry. Bloomberg’s James Seyffart reports a high likelihood that the first spot exchange-traded fund (ETF) for cryptocurrencies in the United States could be approved by January.

This story of two extremes is reflexive of the federal agency tasked with regulating it and calls into question whether the Securities and Exchange Commission (SEC) can act appropriately and carry out its mission under current leadership.

SEC Chairman Gary Gensler, according to his public schedule, met with Bankman-Fried and his top brass several times to discuss regulation. Rep. Tom Emmer (R-MN), a senior Republican on the House Financial Services Committee, said his office has received reports that Gensler “was helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly.” According to the court record, Bankman-Fried’s fraud and theft of customer funds was in full bloom at the time of those meetings. But Gensler was too busy at the time waging an all-out war on crypto companies like LBRY, Ripple, and Coinbase, none of whom are accused of fraud.

Gensler inherited an SEC that was covered in doubts on its crypto regulation in the previous administration. The agency under his predecessor, Jay Clayton, put out guidance on crypto trading that gave a free regulatory pass for the trading of Ethereum’s native token, ether. William Hinman, Clayton’s director of corporation finance, gave a high-profile speech in 2018 laying out the SEC’s reasoning why “we believe that current offers and sales of ether are not securities transactions”. But on his last day in office, Clayton filed the Ripple lawsuit despite Hinman’s guidance applying to XRP as well as ether. Instead of clarity, it caused confusion and fear.

Read the full piece by Hassan Tyler here: RealClear Markets.

The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit

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By Hassan Tyler. (RealClear Markets). September 5, 2023.

Over the last two Administrations, successive chairmen of the Securities and Exchange Commission (SEC), from both political parties, have led the agency through an erratic and confusing approach to regulating cryptocurrencies. What both chairmen had in common was a decision to not use rulemaking and public engagement to write a clear playbook for market participants, but to aim discretionary lawsuits at specific crypto companies and crypto trading exchanges to regulate the market instead.

Unfortunately, one of the SEC’s highest profile crypto lawsuits has backfired by pulling back the curtain to show several officials ignoring the law and apparent conflicts of interest as they picked winners and losers in the nascent industry.

Last month, Ripple Labs notched a landmark legal victory against a December 2020 SEC enforcement action where the agency alleged the cryptocurrency XRP qualifies as an investment contract in Ripple and that all sales, including on the secondary markets, are unregistered securities. Judge Analisa Torres ruled that only early institutional sales of the XRP token that were specifically packaged as investment contracts fall under the SEC’s jurisdiction. 

Read the full piece by Hassan Tyler here: Real Clear Markets: “The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit”

The SEC Fought the Law and the Law Won

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By Roslyn Layton. July 27, 2023. (DC Journal).

After three years, the cryptocurrency case of the century — SEC v. Ripple — ended victoriously for the people the U.S. government is supposed to protect: consumers and small investors. 

The case pitted the Securities and Exchange Commission against a leading U.S. crypto innovator. It also tested America’s leading financial regulator against 90 years of federal law and jurisprudence.

Fortunately, the law won. The ruling by Judge Analisa Torres of the Southern District of New York schooled the SEC in the law that created the agency and leaned into the 1946 Howey Supreme Court decision that defines the SEC authority. A security under the Howey test exists only when there is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Hence, most of the purchases of XRP cryptocurrency were not securities trades.

Unfazed by the enormous public attention on the case, Torres focused specifically on the SEC’s accusations against Ripple and its two senior executives about their sales of the XRP cryptocurrency dating back a decade and strictly applied the law.

Read the full article here.

Why the XRP Army Keeps Fighting

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By Jeff Wilser. June 13, 2023. (CoinDesk).

XRP’s uber-passionate supporters believe the SEC unfairly targeted Ripple for securities violations while mysteriously giving Ethereum a free pass. Do they have a point?

Brad Kimes is a professional drummer. For 30 years he played in various bands — rock, funk, blues, R&B, you name it. Between gigs, he worked as an aspiring entrepreneur, and he invented a baby playpen that you could use on the beach. He found suppliers in China. Kimes soon became a global importer, and to make cross-border payments, he was forced to use the clunky international banking system called “SWIFT.”

SWIFT was not swift. It was slow and costly. “There’s no tracking ID,” says Kimes. “And when the payment gets there six days later, you find out there’s a currency manipulation that had taken place. And you have to pay the difference.”

To Read the Full Article, click here.

Ripple Wins Battle For ‘Hinman Documents’ in Bitter SEC Case

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By Sebastian Sinclair. May 17, 2023. (Blockworks).

Ripple has secured a small victory against the US Securities and Exchange Commission (SEC) — shutting down the agency’s motion to seal internal files known as the “Hinman Speech documents.”

Those documents consist of SEC drafts and emails relating to a speech given by William Hinman, former Director of the SEC’s Division of Corporation Finance, more than four years ago. 

Hinman’s speech reportedly indicated the agency did not consider ether a security at the time. Ripple lawyers have fought to learn more about how Hinman came to that conclusion, which could impact XRP’s own classification.

According to Tuesday’s filing, the SEC made an attempt to justify the need for confidentiality, contending their lack of relevance to the summary judgment motions and potential disclosure could significantly harm the agency’s interests.

Judge Analisa Torres disagreed in the filing, which triggered an 8% rally for XRP.

“Regardless of whether the court ultimately determines that the Hinman Speech Documents are admissible, or whether the court relies on the documents in ruling on the summary judgment motions, they are judicial documents subject to a strong presumption of public access because they are ‘relevant to the performance of the judicial function and useful in the judicial process.’”

Read the full article here.

SEC Crypto Litigation Ventures Into Dangerous Legal Territory

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By John E. Deaton.

The US Supreme Court issued the landmark SEC V. Howey decision in 1946, laying out a specific definition of what constitutes a security. Those justices couldn’t have guessed how complex digital commerce over encrypted lines of computer code would fit in almost a century later.

The Securities and Exchange Commission under Chairman Gary Gensler has its own idea of how cryptocurrencies should be regulated today, but bears little resemblance to that decision—and it’s straying into dangerous legal territory in court.

The Howey case involved orange groves sold by a Florida resort to tourists in a scheme where the investors earned passive income from the resort’s management and commercialization of the oranges. The so-called Howey test says a transaction is a security if it is an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others. All three prongs of the test must be met.

Hundreds of federal cases that followed found unregistered securities in the packaging and sales of whiskey, condos, chinchillas, oil and gas, and beavers. A scheme to sell any asset, including cryptocurrencies, could easily fit into this test. All modern securities law is built on it.

Ripple and XRP

But this isn’t what the SEC has been arguing for two years in the biggest unregistered securities enforcement action to date against a crypto company. The suit was filed against US software company Ripple Labs, which sells a digital payment solution for banks, and includes cryptocurrency XRP as a bridge asset to settle cross-border payments in seconds for almost no cost.

Since 2013, the company has also sold billions of XRP tokens it holds to various crypto exchanges who resold them on the secondary markets to millions of retail holders.

Over the last decade, the XRP ledger grew as a decentralized permissionless distributed ledger with a variety of uses by other companies and individuals. The XRP token eventually rose to having the third-highest market cap for any cryptocurrency in the world.

I am an XRP holder and trial lawyer, so I read the SEC’s complaint as soon as I heard about it. I expected to see the SEC pointing to a scheme of specific early sales by Ripple of XRP, which met the Howey test. That would’ve made sense. But I was shocked to read that the SEC was arguing that all sales of XRP have always been and would always be securities, because “the very nature” of the digital asset is to be a security and nothing else. The token itself is “the embodiment” of an investment contract in Ripple, they argue, even on the secondary markets with no involvement of the company, including mine.

This goes beyond anything the 1933 Securities Act and over 250 federal appellate and Supreme Court decisions about securities law ever imagined. The SEC’s argument is the equivalent of the oranges in Howey being “the embodiment” of the scheme to sell the groves. If that’s the case, how does a corner grocer register an orange with the SEC?

All US exchanges immediately suspended XRP trading in fear of SEC reprisal, locking up the tokens of innocent retail holders as the value plummeted by $15 billion. The collateral damage done to these holders that the SEC claimed to be defending was staggering.

I organized a class of over 75,000 retail XRP holders and gained amicus curiae status in the case. Our reasons are pretty logical. The vast majority attest they’d never heard of Ripple Labs when they acquired the token for their own purposes.

These lines of computer code they obtained can’t be an investment contract or a common enterprise with a company they’d never heard of, and nothing in the law—before or after Howey—supports that idea.

Judge Analisa Torres in the Southern District of New York is taking her time with a ruling in the Ripple case because she must understand the stakes, particularly on appeal. The questions to be decided go to the foundations of modern securities law, and what assets can and can’t be included in it. Torres also knows the current US Supreme Court has been knocking down regulators that overreach the powers Congress specifically granted them.

Similar Suits Follow

Other crypto companies from Coinbase to LBRY started facing similar SEC lawsuits. Gensler’s public statements on crypto grew sharper. The larger objectives became clear. He inherited the Ripple case from his predecessor, but he’s made its legal theory the centerpiece of an expansion of regulatory power in court, not through rulemaking or legislation. That has drawn Congress’ ire.

I’m all for clear rules and regulations to protect people. But the SEC is exploiting legal uncertainty about crypto to radically redefine what constitutes an investment contract and a common enterprise in the US. The legal and economic consequences could be enormous and that will only harm people.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

John Deaton is an American attorney acting as amicus counsel for retail digital asset holders in a number of high-profile federal SEC enforcement cases on crypto, most notably SEC v. Ripple (SDNY) and SEC v. LBRY (DNH).

Reproduced with permission. Published May 2, 2023. Copyright 2023 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/  

SEC v. Ripple: Did The Government Fail To Prove Its Case?

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By Hassan Tyler. January 19, 2023. (ValueWalk).

The saga for what Forbes has called “ the cryptocurrency trial of the century” looks as if it is about to enter its closing stages. Final briefs on summary judgment were filed in November of last year by the U.S. Securities and Exchange Commission (SEC) and the payments software company Ripple Labs in SEC v. Ripple .

Nearly two years of arguments are now in the hands of Judge Analisa Torres of the Southern District of New York, who is expected to rule sometime in the first quarter of this year.

SEC v. Ripple

The issue revolves around how Ripple uses the XRP token and its decentralized ledger as a tool for its cross-border payments software that it sells to international banks and money transmitters. The company and two of its executives sold large amounts of the token to exchanges starting in 2013, which fed a substantial secondary market for the cryptocurrency and an ecosphere for the XRP Ledger for businesses and individuals without the involvement or permission of Ripple.

Read the full article here.

A Question for Congress: Why Didn’t the SEC Stop FTX?

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By Hal Scott and John Gulliver. January 18, 2023. (Wall Street Journal).

The Securities and Exchange Commission brought an enforcement action last week against the cryptocurrency brokerages Genesis Global Capital and Gemini Trust. As with the failure of crypto exchange FTX, the SEC is late to the game—likely too late for the 340,000 U.S. customers affected by Genesis’ decision to halt all withdrawals.

Genesis’ financial problems stem from large holdings with FTX, and it is unlikely to be the last crypto firm caught in FTX’s wake. Who is to blame and what can be done to protect U.S. retail investors in crypto?

Rep. Patrick McHenry, the new chairman of the House Financial Services Committee, can answer that question by investigating the SEC’s failure to prevent the FTX disaster. The harm to U.S. investors from the alleged theft of FTX customer assets by Sam Bankman-Fried is likely to be enormous. FTX’s global operations held more than $8 billion in customer assets, and there were 2.7 million U.S. customers of FTX’s U.S. operations alone. FTX customers have had their assets frozen in bankruptcy and now face large losses. They deserve to know why the SEC failed to be the “cop on the beat.”

In 2008, after Bernie Madoff’s Ponzi scheme was revealed, SEC Chairman Christopher Cox promptly initiated an internal investigation into the commission’s failures to uncover the fraud. Gary Gensler, the current chairman, has so far failed to do the same. Madoff’s evasion of applicable SEC regulations was a surprise. FTX’s state of nonregulation was the reddest of flags. Madoff was largely cheating rich sophisticated investors. FTX’s retail investors were left helpless.

Read the full article here.

SEC Spin Doctors Trying To Hide Crypto Regulation Disaster

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By Roslyn Layton. January 8, 2022. (Forbes).

Over the last two U.S. administrations, the U.S. Securities and Exchange Commission (SEC) has promoted an all-encompassing policy of “regulation by enforcement” for U.S.-based digital asset markets like Coinbase and the enterprise blockchain industry that develops fintech solutions like Ethereum, Ripple, Stellar and Circle. Two successive chairmen – Jay Clayton and Gary Gensler – said that every digital asset except bitcoin is a security and should register at the SEC like a stock. The details end there, unless you end up on the wrong side of an SEC lawsuit. The SEC banks on a quick settlement from the parties it charges. Parties which dare to challenge the SEC need financial reserves, superstar lawyers, and years of patience for litigation to play out court. This “enforcement” produces little clarity for the market or protection of investors, which is the ostensible point of the regulatory exercise.

Read the full article here.

The FTX Scandal: Accountability and Regulatory Clarity Are What We Need Now

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By John E Deaton

I started CryptoLaw to provide everyday investors with a “clearinghouse of information, news and analysis on key U.S. legal and regulatory developments for digital asset holders”. After the massive fraud at FTX was exposed, something that unfolded right under the nose of the Securities and Exchange Commission (SEC), I am only more passionate about continuing this work for the digital asset holders.

It still seems that we don’t have anyone protecting us. Now more than ever we need to press Congress to hold bad actors and government agencies accountable for what they’ve done and what they failed to do.

Sam Bankman-Fried defrauded millions of customers and investors of billions of dollars while he was the toast of Washington. SEC Chairman Gary Gensler has been claiming “the rules are clear” on crypto and that his agency has the authority to regulate the whole space. He said FTX should have been registered, and that would have somehow prevented this from happening. But when lawmakers from his own political party ask him what compliance and registration actually means, they get no answers, only more talking points.

Gensler repeats over and over that for retail holders and investors, like those defrauded by Bankman-Fried, the solution is for exchanges to “come in and register” but the details end there. If Gensler is telling the truth that the “rules are clear”, then he failed miserably at enforcing them. His Enforcement Division has spent much of its resources suing Ripple and LBRY in long, non-fraud cases that failed to protect a single investor while the FTX fraud was happening right under its nose.

Through the “decentralized justice” of hundreds of digital asset holders investigating government documents, we learned that Gensler and the SEC met with Bankman-Fried at least three times. Good journalists and Congressional offices took that information and discovered that the subject of those meetings was a regulatory deal that would recognize FTX as a sanctioned crypto exchange. Gensler refuses to answer questions or release notes and documents from those meetings that will clarify what was discussed, or why the fraud was never detected.

Bankman-Fried is a fraud. He’s been arrested and will face prosecution and likely a long prison sentence. But that’s only part of what went wrong here. The SEC’s mission statement is “to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.”. In this instance, and in the crypto overall, Chairman Gensler and the SEC failed on every point.

Accountability and regulatory clarity are the two most important things that we need now. The bipartisan hearing of the House Financial Services Committee on December 13 was a positive step forward, where it seemed most of the committee members agreed that they have to step in and write the rules that Gensler has refused to produce. The also promised to investigate Gensler’s repeated misfires and distractions that do little or nothing to protect anyone. Those lawmakers need our support, collaboration and pressure to get it done.