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

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.

Gary Gensler and the SEC Lose Again

By Editorial Board. (The Wall Street Journal). November 1, 2023.

Is Gary Gensler ever going to win a case? On Tuesday the Fifth Circuit Court of Appeals handed the Securities and Exchange Commission Chairman another legal defeat by scuttling the agency’s stock-buyback rule (U.S. Chamber of Commerce v. SEC.)

The SEC in May finalized a rule requiring public companies to disclose their daily share repurchases and the reason for buying back their stock. Mr. Gensler claimed companies might buy back their stock to boost executive compensation, which is sometimes tied to accounting metrics such as earnings per share.

A 2020 SEC staff study found scant evidence for Mr. Gensler’s suspicion, explaining that repurchases help issuers “maintain optimal levels of cash holdings and minimize their cost of capital” and “on average” have “a positive effect on firm value.” Nonetheless, Mr. Gensler claimed that investors would benefit from knowing why and when shares were being repurchased.

His real motivation appears to have been to shame companies and help his friends in the securities litigation bar sue companies over their buybacks. Companies faced potentially hefty legal bills defending against lawsuits challenging the motivation and timing of their share buybacks, especially if they resulted in higher executive compensation.

Read the full piece from the Wall Street Journal here: Gary Gensler and the SEC Lose Again.

How Ripple Execs’ Grit & Litigation Forced SEC To Back Down

By Aislinn Keely. (Law360). October 27, 2023.

The U.S. Securities and Exchange Commission called off a looming trial against executives of blockchain firm Ripple this month after counsel at Cleary and Paul Weiss made clear their clients were eager to have their day in court and intended to force the SEC to face a record of evidence that didn’t support the claim the defendants knowingly violated securities laws when they sold Ripple’s crypto token.

It’s rare for the SEC to drop a case once it has brought a complaint, and the regulator made headlines when it did just that, dismissing claims that Ripple co-founder Christian Larsen and company CEO Brad Garlinghouse “aided and abetted” sales of Ripple’s digital token XRP to institutions.

Martin Flumenbaum of Paul Weiss Rifkind Wharton & Garrison LLP, who represented Larsen, called the Oct. 19 dismissal an “unprecedented victory.”

Read more on the unprecedented victory here: Law360

In Landmark SEC Surrender, Ripple CEO Brad Garlinghouse and Executive Chairman Chris Larsen Are Cleared Of All Baseless Allegations

Business Wire. October 19, 2023.

Ripple, the leader in enterprise blockchain and crypto solutions, announced today that CEO Brad Garlinghouse and Executive Chairman Chris Larsen were cleared of all claims brought against them by the U.S. Securities and Exchange Commission (SEC). The SEC voted to dismiss charges with prejudice – a stunning capitulation by the government.

This victory is the third consecutive triumph for Garlinghouse, Larsen, and Ripple, coming on the heels of the July 2023 ruling that declared “XRP is not, in and of itself a security” and a subsequent October decision to deny the SEC’s request for an interlocutory appeal.

“For nearly three years, Chris and I have been the subject of baseless allegations from a rogue regulator with a political agenda,” said Ripple CEO Brad Garlinghouse. “Instead of looking for the criminals stealing customer funds on offshore exchanges that were courting political favor, the SEC went after the good guys – along with our entire company of innovators and entrepreneurs – who are building a regulated business based in the U.S. We look forward to the day this chapter is closed once and for all, now that the SEC has dropped the curtain on their absurd theatrics against Chris and me.”

Read the full article here.

Ripple Retort: Legal Team Opposes SEC Request for Ruling Appeal

By Martin Young. (Be In Crypto). August 17, 2023.

Ripple Refutes SEC Review 

Ripple chief legal officer Stuart Alderoty said

“There is no extraordinary circumstance here that would justify departing from the rule requiring all issues as to all parties to be resolved before an appeal.”

An interlocutory appeal occurs when a ruling by a trial court is appealed while other aspects of the case are still proceeding. Moreover, they are only permitted under specific circumstances, which are laid down by federal and state courts.

On Aug. 9, the SEC sent a letter to Judge Torres claiming an “Interlocutory review is warranted here.”

It requested the judge put the case on hold during the appeal. The reasons it gave were that multiple other pending court cases that could be affected depending on the appeal’s outcome.

On July 13, the court ruled that XRP was not a security when sold to the public on an exchange but was a security contract when sold to institutional investors.

Read the full article here.

When tackling crypto, the SEC should be wary of overreach

By Brooke Masters. (Financial Times). August 15, 2023.

For more than a century now, US watchdogs have policed the financial landscape, seeking to protect investors from potential fraud and the consequences of their own blind optimism.

Most of their efforts to ensure that investors get accurate information about what is happening to their money are focused on familiar products, such as stocks and bonds. But every so often an explosion of interest in new investments forces a debate about the regulatory perimeter and whether to expand it. This is one of those moments.

Right now, the US Securities and Exchange is fighting on multiple fronts to bring enforcement cases involving cryptocurrencies, while a completely separate lawsuit is seeking to upend more than 30 years of practice in the leveraged loan market.

The laudable goal is investor protection. The volatility of bitcoin and other tokens and the implosion of the FTX crypto exchange have cost investors billions; and a bankruptcy trustee is seeking to recover money for loan investors left holding the bag when a drug testing firm went belly up after being investigated for fraud.

Read the full article here.

How The SEC’s Charge That Cryptos Are Securities Could Face An Uphill Battle

By Maria Gracia Santillana Linares. (Forbes). August 14, 2023.

As the smoke clears from the first exchange of volleys between the Securities and Exchange Commission and the world’s two largest cryptocurrency exchanges, Binance and Coinbase appear to have run out high-caliber legal arguments in their defense.

The U.S. regulator sued the two companies in June, alleging they were operating as unregistered securities exchanges and facilitating trading in cryptocurrencies that should have been registered as securities. The agency has been staunch in its contention that most digital assets–except for bitcoin and possibly ether–are securities and subject to its oversight as are exchanges on which cryptocurrencies trade.

Binance and Coinbase beg to differ, and they offer several arguments. The most potent, according to lawyers following the case, has to do with whether cryptocurrencies are meant to provide their owners with profit derived from the labors of others. If they do not meet that definition, then they are not securities. That might be enough to torpedo the government’s civil suits against the exchanges or at least narrow the scope of which of the 19 tokens it cited in the actions really are any of the SEC’s business.

Read the full article here.

The SEC Fought the Law and the Law Won

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.

Ripple Proves the SEC Must Reevaluate Its Regulatory Approach

By John Deaton. July 17, 2023. (Bloomberg Law).

The SEC should take a federal judge’s rejection of its claim that all XRP sales are unregistered securities transactions as evidence it needs to change its regulatory approach to cryptocurrencies, says attorney John Deaton.

US District Judge Analisa Torres of the Southern District of New York issued a landmark ruling in SEC v. Ripple Labs Inc. on July 13, delivering a critical and hard-fought legal win to digital asset holders and crypto developers in the US. On the most important legal questions at stake, it was a total victory for them—and a devastating blow to the SEC’s ambition to bring an entire asset class under its thumb.

The SEC had alleged that all sales of Ripple’s XRP cryptocurrency are unregistered securities transactions in violation of Section 5 of the Securities Act. The regulator based this on a grossly overbroad legal theory that anyone who buys XRP in the world, by whatever means, is investing in the company Ripple.

“The XRP traded, even in the secondary market, is the embodiment of those facts, circumstances, promises, and expectations and today represents that investment contract,” the SEC told the court, in a breathtaking grab at regulatory turf over crypto via lawsuits rather than through rulemaking or legislation.

In the end, Judge Analisa Torres rejected the SEC’s theory, citing the generally accepted understanding of securities law established in the 1946 Howey decision, which defined a security as an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

Read the full article here.

From Ripple and XRP to Filecoin: The SEC is Simply Illogical

By John Deaton. May 26, 2023. (Blockworks).

If the crypto industry hadn’t yet appreciated the scale of the danger posed by the SEC’s legal theory at the heart of its long-running lawsuit against Ripple and the XRP token, it seems to have finally hit home for many when news broke about Grayscale’s attempted SEC registration of its Filecoin Trust. 

When you consider the Grayscale news, the SEC’s recent claim that Algorand constitutes an unregistered security, and the Coinbase Wells notice, the SEC’s war on crypto becomes clear.

As amicus counsel for 75,000 plus XRP holders, I’ve spent more than two years warning anyone who would listen about the outrageous arguments being made by the SEC. 

The SEC’s central theory in the Ripple case is that the XRP token itself is a security. The allegations are not limited to transactions offered by Ripple or its executives. The SEC is arguing all sales of XRP, regardless of the seller or the circumstances surrounding the sale, constitute the transfer of securities. From the very first one in 2013, onward into perpetuity — including on the secondary markets between parties who have nothing to do with nor even knowledge of a company called Ripple.

The SEC based this on the allegation that the “very nature” of a digital asset is to be a security and nothing else, making XRP “the embodiment” of an investment contract with Ripple no matter who holds it, uses it or sells it. 

Read the full article here.