Tag: SEC v. Crypto

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

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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.

The SEC’s High-Stakes Vendetta Leaves the Country Worse Off

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By Jared Whitley. May 23, 2023. (Townhall).

Blockchain technology is the next generation of technical evolution born from American innovation – much like the first radios, computers, or the once quaintly named world wide web. The technology likely won’t replace the U.S. dollar but it will transfer a lot more power over financial transactions into the hands of individuals – which was the whole idea when it was invented many years ago after the financial crisis. 

Naturally, the big banks who finance the Democratic Party don’t like that, and the point-man in their war on crypto is Securities and Exchange Commission Chairperson Gary Gensler. 

Both tensions and blood pressure are on the rise as the crypto industry anticipates summary judgment in the SEC v. Ripple Labs lawsuit. There have been reports that a ruling in the high-stakes case could be settled any day. 

The SEC, in what’s become a pattern, slapped a lawsuit on the payments software company back in 2020, claiming they had been selling the XRP token to crypto exchanges without registering them as securities. Ripple counters that the XRP assets are commodities, and the XRP buyers are not investors in their company. The company’s software product uses XRP as a bridge currency for instantly settling cross-border payments without fees.

Read the full article 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.

Leak Reveals Secret Democratic Plan For A Game-Changing U.S. Crypto Crackdown That Could Hit The Price Of Bitcoin And Ethereum

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By Billy Bambrough. May 12, 2023. (Forbes).

Bitcoin BTC -1.2%, ethereum and other major cryptocurrencies have been grappling this year with a U.S. crypto crackdown that some think could “destroy all value of bitcoin.”

The bitcoin price has climbed over the first few months of 2023 but remains far from its late 2021 all-time highs, with traders hailing a “new market regime.” The fate of ethereum and other cryptocurrencies are meanwhile hanging in the balance as U.S regulatory agencies battle for control of the market.

Now, a leaked memo circulated to Democratic House financial services committee members has revealed the “key messages” lawmakers were told to stick to that could see almost all cryptocurrencies categorized as securities.

The document, passed to committee members by the Democratic party ahead of Wednesday’s joint House hearing on crypto policy, was leaked by Fox Business reporter Eleanor Terrett on Twitter. “The problem isn’t ambiguity—it’s mass non-compliance with existing laws,” the memo reads. “We can’t invent new accommodating regulatory structures simply because crypto companies refuse to follow clear rules of the road.”

Read the full article here.

SEC Crypto Litigation Ventures Into Dangerous Legal Territory

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By John Deaton. May 2, 2023. (Bloomberg Law).

US attorney John Deaton analyzes the impact of SEC v. Ripple and SEC v. LBRY on the agency’s enforcement around digital assets, where it pushes the boundaries of U.S. v. Howey, and how it redefines investment contracts and common enterprises.

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/  

Why the Politics of Crypto Feels Different This Time

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By Noelle Acheson. April 26, 2023. (CoinDesk).

Last week’s appearance by Securities and Exchange Commission Chair Gary Gensler before the House Financial Services Committee was his first in more than a year, and his first since the current Congress took over. The political shift in the House of Representatives to Republican control rapidly became glaringly obvious as the tone was markedly hostile. The agency’s approach to digital assets was a key point of contention.

As with most congressional hearings, the event was largely about making political points and grandstanding for the cameras. But it felt significant in that it revealed the scale of Republican dissatisfaction with Gensler’s administration, suggested several points that are likely to become campaign platforms, and publicly weakened the SEC chair’s credibility. That, in turn, could prompt some modifications to the agency’s approach.

Normally the public doesn’t care too much about financial regulation. But the rhetoric witnessed last week indicates that politicians could start to make sure they do. No longer is it just about financial disclosures and settlement rules: It is rapidly becoming about individual freedom and U.S. pride.

Read the article here.

It’s Time for Tough Questions to Gary Gensler About Crypto

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By Todd Tiahrt. April 17, 2023. (Real Clear Markets).

When federal regulators seriously overreach, the other two branches of government have the duty to hold them in check. That’s the way the Founding Fathers intended our system to work.

The Securities and Exchange Commission (SEC) is the latest regulator that has gone way past the mark by waging a war on cryptocurrency technology. The Agency has filed an avalanche of enforcement actions and warnings against companies big and small in the crypto space, claiming they are selling securities that should have been registered like stock offerings. It’s time that Congress fulfil their constitutional duty and rein in the SEC.

The heart of the issue revolves around claims by SEC Chairman Gary Gensler that many crypto companies are non-compliant and in violation of federal securities laws. He believes they should “come forward and register” their tokens, whether they issued them or not, and asserts that all sales involving these tokens are securities transactions, even between parties completely unrelated to the companies being targeted. The reality is quite different.

Evidence has come out in several cases that show the SEC’s legal arguments are ridiculous. Crypto tokens that have a utility are not like stocks and don’t give their users any voting rights in a company, so they are not securities and Gensler has no right to regulate them. Furthermore, the SEC can’t punish secondary market holders of cryptocurrencies for the actions of an unrelated company like it is trying to do in case after case.

Read the full article here.

Barney Frank Was Right About Signature Bank

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By The Editorial Board. March 20, 2023. (Wall Street Journal)

We never thought we’d write that headline. But on Sunday the Federal Deposit Insurance Corp. announced that New York Community Bancorp’s Flagstar Bank will assume all of Signature Bank’s cash deposits except for those of crypto companies. This confirms Mr. Frank’s suspicions—and ours—that Signature’s seizure was motivated by regulators’ hostility toward crypto.

Mr. Frank alleged last week that regulators seized Signature, whose board he served on, “to send a message to get people away from crypto.” It increasingly appears that way. Reuters reported last week that the FDIC was requiring any buyer of Signature to give up all crypto business at the bank. The FDIC denied this.

But the agency’s statement says that “Flagstar Bank’s bid did not include approximately $4 billion of deposits related to the former Signature Bank’s digital-assets banking business.” That means crypto companies will have to find another bank to safeguard their deposits. Many say that government warnings to banks about doing business with crypto customers is making that hard.

Read the full article here.

Commissioner Peirce on the SEC’s ‘unimaginative’ approach to regulation

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By Davis Quinton and Frank Chaparro. February 20, 2023. (The Block).

SEC Commissioner Hester Peirce opposes her agency’s recent targeting of Kraken’s staking program in the US. 

“If investor protection is about just shutting programs down or preventing people from purchasing certain things — that’s a very unimaginative form of investor protection,” Commissioner Peirce said.

In this episode, Commissioner Hester Peirce discusses how the SEC’s recent enforcement action towards Kraken is emblematic of the agency’s broader attempt to regulate the crypto industry in the US through enforcement actions.

Read the full article here.

Crypto Firm Paxos Faces SEC Lawsuit Over Binance USD Token

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By Vicky Ge Huang, Patricia Kowsmann and Dave Michaels. February 12, 2023. (Wall Street Journal).

The Securities and Exchange Commission has told crypto firm Paxos Trust Co. that it plans to sue the company for violating investor protection laws, according to people familiar with the matter, the latest move in the agency’s escalating campaign in crypto enforcement.

The SEC’s enforcement staff issued a letter to Paxos known as a Wells notice, which the agency uses to inform companies and individuals of a possible enforcement action, according to the people.

The notice alleges that Binance USD, a digital asset that Paxos issues and lists, is an unregistered security, according to the people.

Read the full article here.