The SEC’s Fair Notice Farce, Starring William Hinman

By Roslyn Layton. July 19, 2021. (Forbes)

Covering the U.S. Securities and Exchange Commission’s (SEC) ill-conceived enforcement action against Ripple Labs is never dull, and last week offered another development in the case. When the agency accused the San Francisco-based software company of seven years of unregistered securities trades by its distribution of the XRP digital currency, it unwittingly opened the door to replacing the SEC’s antiquated Howey Test for defining securities. Moreover, it appears that the judge agrees with the defense’s argument that the SEC failed to provide fair notice to Ripple (or any market participant) that XRP was, in the agency’s view, a security since 2013.

Throughout the pre-trial phase of the case, Ripple’s legal team has demonstrated that the SEC denied fair notice not just on XRP, but cryptocurrencies in general. When Ripple filed an intention to present a fair notice defense, the SEC launched a series of desperate filings to stop Ripple, knowing that if that defense is permitted, the trial case against Ripple will be dead on arrival.

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Ripple Labs Can Question Former SEC Official in Suit Over XRP

By Chris Dolmetsch. July 15, 2021. (Bloomberg)

Ripple Labs Inc. can question a former Securities and Exchange Commission official about the agency’s policy decisions as the company fights a lawsuit accusing it of misleading investors about its XRP cryptocurrency, a federal judge ruled.

The SEC sued Ripple, co-founder Christian Larsen and Chief Executive Officer Bradley Garlinghouse in New York last year, saying they had created a “vacuum” that allowed them to sell XRP into a market with limited information they chose to share. The agency alleges that the two men personally profited by about $600 million and ignored legal advice that the cryptocurrency could be considered an investment contract and therefore a security. It accused them of selling the virtual tokens without registering them as such.

Ripple has said the SEC can’t regulate XRP because, as a virtual currency used in international and domestic transactions, it’s a medium of exchange and not a security.

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SEC v. Ripple Key Hearing Today: John Deaton Offers Line of Questioning

By Rick Steves. July 15, 2021. (Finance Feeds) Judge Sarah Netburn will hold a hearing today to discuss the SEC’s motion to quash the deposition of former SEC Division of Corporation Finance Director, William Hinman. The scheduled telephone call, which was deemed “bad for Ripple” by attorney Jeremy Hogan, is expected to clear the way for the deposition on July 19 following Ripple’s re-notice as the defendant grows impatient.

The SEC argues that Ripple and its co-founders are unable to demonstrate “exceptional circumstances” for the testimony of a high-ranking government official. John E. Deaton, the attorney who has previously filed a Motion to Intervene in the name of XRP holders, admitted that it is “a big deal to subpoena a former high-ranking official for a deposition in order to answer for his actions while in office”. But Hinman’s actions were clearly material for a precedent-setting case such as SEC v. Ripple, he stated, arguing in favor of the deposition. Commenting ahead of today’s hearing, Mr. Deaton offered a “quick, but not exhaustive, review of what XRP holders and crypto holders and investors, in general, deserve to know should William Hinman be permitted to testify under oath”.

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The SEC’s Baseless Utility Argument Lacks Utility

By John E. Deaton, Founder and Host, CryptoLaw.

The SEC’s lawsuit against Ripple has been flawed from its inception. But few claims in the suit are more egregious than the allegation that XRP lacks utility, or that every XRP holder has engaged in a “common enterprise” with Ripple. These two allegations combined with the SEC’s central argument in their complaint, that Ripple’s offerings and sales of XRP represented dealings of unregistered securities, indicate that the Commission has failed to or chosen not to properly understand the fundamentals of crypto. Unfortunately, the community of XRP holders are paying the price.

Senior SEC Trial Counsel, Jorge G. Tenreiro’s statementnow, the court referenced a utility for XRP. We dispute whether that utility actually exists, your Honor,” during a March 19 hearing stands on even weaker ground than the SEC’s earlier claim regarding Section 5 violations. However, it became clear that Magistrate Judge Sarah Netburn was more informed than the SEC had anticipated, based on her assertion that her understanding of “XRP is that not only does it have a sort of currency value, but it also has a utility, and that utility distinguishes it, I think, from Bitcoin and Ether.” If Judge Netburn and millions of XRP holders, along with companies like Ripple, BitPay, Spend the Bits, Japan’s SBI and others all recognize the utility of XRP, it seems the SEC is the outlier.

The open-source nature of XRP allows users throughout the world to use the token to pay for goods and services without any connection to or reliance on Ripple. According to Cryptwerk, over 1,300 companies currently accept XRP for payment across industries from business services to tourism and travel. After filing our Motion to Intervene in the Ripple case on behalf of XRP holders, I have been contacted by over 19,000 XRP holders from around the world, many of whom receive paychecks in XRP and use XRP-powered debit cards to shop for groceries and pay for gas. These people are not in “common enterprise” with Ripple, despite the SEC’s claims.

The SEC’s argument that there is no XRP without Ripple is not just flawed, it makes no sense. For many XRP holders, the SEC’s lawsuit was the first time they had ever heard of Ripple, leaving many of us to ask: What’s Ripple?

There has been no shortage of valuable insights from these retail holders who the SEC pretends to be defending. For example, one poll by Stedas Crypto found that of the 400 respondents, over 90% said that they did not think they were buying shares or some other ownership in Ripple when they acquired XRP.

If all of this wasn’t enough, then just look at recent cryptocurrency market movement and trends. China intensified a crackdown on crypto mining inside its territory and the bitcoin hashrate plunged 50%. The price of bitcoin fell 43%, dragging down prices in all the major coins including XRP. This fluctuation in XRP’s price could not be linked in any objective way to actions taken by Ripple or its executives. But what does the SEC argue?  It says that XRP has no utility other than serving as an investment contract with Ripple and all holders have entered into an investment contract where the value of this “investment” is determined by the actions of Ripple and its two top executives. Former SEC Chairman Jay Clayton, who filed the lawsuit against Ripple on his last day in office, also declared that bitcoin is not a security because its ledger is decentralized. And yet here we have the Chinese government demonstrating its tremendous influence over both the price of bitcoin with one action and, in quick succession, the prices of many other leading coins including XRP.

Now, the SEC referenced a utility for its case against Ripple and its executives. We dispute whether that utility actually exists, your Honor.

SEC Assault On Ripple Provokes Wider Debate

By Roslyn Layton. June 30, 2021. (Forbes)

The Securities and Exchange Commission’s (SEC) bombshell lawsuit against fintech startup Ripple Labs is now a cause célèbre in the cryptocurrency community, but its sweeping implications about regulatory overreach against innovation is provoking principled debates in some of the country’s most influential policy circles. The Federalist Society’s Regulatory Transparency Program (RTP), an organization dedicated to fostering discussion and understanding of regulation, featured experts in an event titled SEC v. Ripple Labs: Cryptocurrency and “Regulation by Enforcement” last week.

In December, the SEC sued Ripple and two of its top executives for seven years of distributions of the cryptocurrency XRP which the agency labeled as illegal unregistered securities trades. Ripple offers a global payments platform for some 2 million users worldwide for the XRP token and its fully decentralized ledger. The company ferociously disputes the allegations by making clear that the regulatory agency allowed billions of XRP tokens to circulate freely on global cryptocurrency exchanges for seven years without making such a determination, despite being asked in public and in private for that specific clarity for years. The SEC also alleges that XRP’s only utility is to be an investment contract in Ripple and that all XRP holders depend on Ripple’s actions to obtain a return on their holdings. The suit seeks to enjoin the registration of XRP as a security and preclude Ripple’s executives from participation in the market. 

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SEC v. Ripple Labs: Cryptocurrency and “Regulation by Enforcement”

Check out The Federalist Society’s Regulatory Transparency Project’s Deep Dive podcast featuring John Berlau, John Deaton, Carol Goforth, and Roslyn Layton on YouTube. The four, hosted by Curt Levey, discuss the ongoing lawsuit and its potential impacts.