The Crypto Uprising The SEC Didn’t See Coming

by Roslyn Layton. August 31, 2021. (Forbes).

When the U.S. Securities and Exchange Commission (SEC) filed its bombshell lawsuit against cryptocurrency innovator Ripple Labs in December 2020, it didn’t expect blowback. But during the pre-trial phase, Ripple’s legal team has put the SEC itself on trial after years of conflicting and confusing guidance on the rules for cryptocurrencies. No one expected the tsunami of legal, political and social media action from retail cryptocurrency investors, outraged by the betrayal from an agency claiming to protect their interests. The meltdown of the SEC’s credibility with this $2 trillion global investor community exposes a costly SEC miscalculation.

Indeed, official Washington has been back-footed by the size, scale and diversity of the crypto investor class and the industry they support. Lampooned by mainstream media and the U.S. government for years, the crypto community has built a media ecosystem that connects millions of investors, consumers, developers and entrepreneurs across the globe. It’s fitting that the pioneers of the blockchain economy would apply consensus protocols to their communication. This decentralized social media apparatus has proven powerful — just ask Congress after the backlash of the infrastructure bill over a badly written crypto tax provision. When the Ripple lawsuit was filed, that ecosystem galvanized an independent battlefront unexpected by the SEC.

Read the Full Article Here.

When We Face the Government, the Crypto Community Must Unify and Rise

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

The apparent defeat over the crypto tax reporting measure in the infrastructure bill was a vivid warning.  The U.S. government doesn’t know what it’s doing on crypto, but it’s taking action anyway.  A $2 trillion economic sector is too ripe a target for a government that has spent the last decade ignoring its extraordinary birth and expansion around the globe.  But their ignorance to the potential of these technologies has become dangerous, and no digital asset is safe anymore.

From Bitcoin Maxis to the XRP Army, there finally was a realization that we’re all in danger without a clear regulatory framework, one which puts guard rails around the regulators just as much as it does around the scammers and the criminals. I’ve said it over and over since last year – the SEC v. Ripple case is the most impactful SEC enforcement action in a generation because the agency is coming after all of us, not just XRP. They made a mockery of standards for due process and fair notice and erased $15 billion in value for the investors they said they were protecting in a case that had no allegations of fraud. Many in the XRP Army express resentment towards Ethereum because of the notorious William Hinman speech on Ether in 2018. Hinman classified the 2018 speech as personal opinion and went on to claim that the SEC has never declared ETH not to be a security in a recently filed sworn affidavit.

As the case against Ripple drags on it’s becoming increasingly clear that the SEC is more than ready to come after ETH without any warning for its 2014 ICO. Regulators can give speeches in front of a room of 1,000 market participants giving their blessing to a digital asset and then slap a lawsuit on any company and any investor the very next day and laugh at you for thinking the speech meant anything as they issue subpoenas for your bank records. SEC Chairman Gary Gensler offers no coherent message on the assessment of existing clarity in crypto. Concurrently,  U.S. senators who claim to support democratization of global finance also claim to support a ban on decentralized finance in all its forms and want to tighten the centralized control of money.

Everyone in the U.S. crypto space needs to see the big picture, and it’s this: we have to get out of our crypto bubble and start ensuring that our voices are heard by elected Members of Congress in every state and every district. They must be given notice that starting immediately, and tomorrow, and next week, that the crypto community is not some anarchic fringe or group of “shadowy super-coders”. We are people from all walks of life who believe in this technology and how it will transform the economy for the better.  We use digital assets of all kinds for a variety of important uses. We get paid in these coins, and we buy groceries and pay bills with them. We are building companies that use them to allow banks, companies and everyday consumers move money around the world in an instant at almost no cost, with better security and transparency than the banks. We are also investors, of course, and we want laws against scammers and fraudsters. The crypto community is not involved in crime and terrorism – we are law enforcement’s best allies in catching those people and bringing them to justice. We are that first group of true believers that every huge innovation needs to get off the drawing board and into the mainstream economy, sharpening all the benefits and working through all the bugs, building markets for how to use it and build on it.

That is the reality of our community that has been missing for the last decade in Washington, and it’s the only thing that is going to turn our situation around there. A million screaming tweets of incoherent anger are worth less than one sincere conversation with your elected representative about what crypto means to you, how you use it and what you need from them. It isn’t partisan, it isn’t ideological and it isn’t even complicated when it comes down to you and your story. 

A community as big as ours, built around decentralized technology, should know it can’t rely on a handful of lobbyists or a group of influencers.  We need to get to work today, and every day forward. I don’t care which coin you favor or which crypto “tribe” you’re in – everyone needs to do this.

The first action you should consider is to find your House member and your two Senators on Twitter, and tweet at them that you are a constituent and crypto is important to you. Then tomorrow, if you really want to scare them, call the U.S. Capitol switchboard at (202) 224-3121 and ask to be connected to their office. When they answer, very calmly tell them your name, that you’re a constituent, and you need to talk to someone about crypto and why it’s important to you. Those Members of Congress may seem like they don’t do much, but every one of them employs people whose only job is to listen to you if you’re from their district or state. They are usually very nice, thoughtful people who have those jobs. They have to listen to you. If you’re not a U.S. citizen, then take your story directly to U.S. officials on social media or call the U.S. embassy in your country. The actions they are taking are impacting all of us, everywhere. They need to hear it and understand it.

In the end, if they don’t understand who we are and what this community is about, they will continue to blunder their way through screwing up one of the greatest economic innovations in history and opening the door for the truly shadowy figures of global finance to crush it and all the good it will bring to billions of people.

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.

Read the Full Article Here.

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.

Read the Full Article Here.

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”.

Read the Full Article Here.

The Hinman Deposition: A Review of What We Deserve to Know

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

Tomorrow (Thursday 7/15), Magistrate Judge Sarah Netburn is scheduled to hold hearing to discuss whether to grant the SEC’s motion to quash the deposition of former SEC Division of Corporation Finance Director, William Hinman. The judge may even issue an order on this pivotal matter during tomorrow’s hearing.

In its motion to quash the deposition and prevent Hinman from testifying under oath, the agency argued that Ripple, and executives Brad Garlinghouse and Chris Larsen could not demonstrate the “exceptional circumstances” needed to order the testimony of a high-ranking government official. However, an examination of the facts tell a very different story. For starters, Hinman is no longer a high-ranking government official. He is a private citizen. Surely, after investing millions of dollars in Hinman while he was serving at the SEC, Simpson Thacher would give him adequate time off to answer some questions.

Here is 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:

  1. Ethereum, Simpson Thacher and Millions of Dollars in His Bank Account: Before and after his tenure at the SEC, Hinman has been a partner at the law firm of Simpson Thacher, which sits on the Enterprise Ethereum Alliance, a coalition of organizations devoted to the business case for the Ethereum blockchain. In 2018, Hinman declared, “offers and sales of ether are not securities transactions” in a speech that is still available on the SEC’s website, sending its value soaring. Hinman received millions in payments from the firm while he was at the SEC, including when he prepared and delivered those remarks. If that was not a clear conflict of interest, then he needs to explain why under oath. According to the documented evidence, Hinman’s personal financial interests were clearly connected to that speech he gave.
  • Hinman’s ETH Speech and the Coinbase Listing of Ethereum Classic: Three days before the pivotal Hinman speech on ether in 2018, Coinbase announced the listing of Ethereum Classic on its exchange, an asset forked from the Ethereum blockchain that was widely anticipated to be declared a security, like ether itself.  (Ether was launched in an ICO in 2014, after all.) This immediately raised questions at the time among analysts about whether the SEC had privately given advance notice to Coinbase or the Ethereum Foundation of what Hinman was about to announce. Did the SEC tip off Hinman’s Simpson Thacher colleagues before the market got his speech? Let’s hear his answers under oath.
  • Hinman’s Meeting with the Ethereum Foundation After the ETH Speech: In the discovery phase, Ripple has apparently forced Hinman to admit he met with the Ethereum Foundation, Consensys and other very relevant market participants after his 2018 ETH speech. (The redactions in the July 1 filing don’t confirm it but the rest of the filing strongly points in that direction.) Why didn’t the market know about this before now? Did the man in charge of no action letters on cryptocurrency offerings discuss his ETH speech in private with these key market participants? Did they discuss rival coins? Let’s have him walk us through all of those conversations under oath.
  • And About the Whole “Just a Personal Opinion and Not Policy” Nonsense: Everything about the behavior of Hinman and the SEC before, during and after that infamous ETH speech clearly indicated that they knew the speech would move markets. The headlines in major business dailies clearly indicated that a senior SEC official was declaring that ETH is not a security. Hinman never personally corrected the record in any interview with the media or public appearance that I could find, nor did the actions of Coinbase three days before the speech or Hinman’s communications with market participants after the speech point to anything other than a policy statement from the official in charge of no action letters for the SEC. Later in 2018, he very clearly said in a Georgetown University School of Law speech that his ETH speech “got a lot of attention because it was the first time we had expressed to the world that we didn’t view ether as a security.” There was no disclaimer from him at Georgetown that “we” meant William Hinman. “We” meant the SEC, pure and simple. Hinman needs to be questioned under oath extensively about all the events leading up to the ETH speech – and afterward – to clearly paint a believable picture as to how this market-shaking speech was just his opinion as a private citizen.

It’s laughable that, in their desperate effort to shield Hinman from being deposed, the SEC claimed that Hinman “does not have unique first-hand knowledge of “what was going on in the [Crypto] market.” However, these selected facts alone get to the heart of Hinman’s pivotal role in giving Ethereum the rocket fuel for its token’s trip to the moon, while he was personally collecting millions of dollars from an Ethereum-connected law firm. He and/or the SEC may have given notice to an exchange about his ETH speech in advance, while other market participants were in the dark. And now both Hinman and the SEC want us to believe the ETH speech should never have been interpreted as policy or any kind of notice about ETH’s status, in the same way that the SEC argued in the Ripple complaint in December 2020 that all of us should have known XRP was a security since 2013.

A deposition in federal court is limited to seven hours. Government documents indicate Hinman received over $15 million in payments from Simpson Thacher over the four years he worked at the SEC:

Investors lost over $15 billion in the wake of the SEC’s complaint against Ripple. Is a seven hour deposition too much to ask? Apparently, Hinman and the SEC, whose very mission is to protect investors, seem think so.

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.  Judge Netburn is not taking this question lightly. But when those actions were so clearly material to the central questions at dispute in a case as big and precedent-setting as SEC v. Ripple, it’s a damn good reason to reject the SEC’s attempts to shade Hinman and prevent the whole truth from coming to light.

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. 

Read the Full Article Here.

Hinman’s Revolving Door Now Swings to Andreessen Horowitz

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

Former SEC Director of Corporation Finance William Hinman continues his journey around the golden revolving door.  The man who helped take Alibaba public in 2014 as a partner at the Ethereum-connected law firm Simpson Thacher went into the SEC in order to give public regulatory clarity to only one cryptocurrency – ETH – to then exit the SEC and return to Simpson Thacher. Well, he was not finished.

Today, the tech venture capital giant Andreessen Horowitz announced Hinman has joined their firm as an advisory partner in their $2.2 billion “a16z crypto” fund.  The company said that Hinman “will provide valuable insights to us and our portfolio companies as well as play a key role in shaping the future regulatory environment in which we and they operate.”

Hinman’s new fund is among the largest crypto investment funds in history, about four times the size of Andreessen’s previous crypto fund. It’s easy to see why Andreessen would ask him to “shape the future of the regulatory environment” to turn their chosen investments into winners. Look at all he did to send the price of ETH soaring when he was a public official who happened to be receiving $15 million in payments from Simpson Thacher while in office.  ETH started soaring from around $477 the day before he gave his “ETH is not a security” speech in June 2018 as an SEC official, to over $4000 last month. Simpson Thacher also cashed in on Hinman’s 2018 speech when it took the Chinese crypto mining equipment maker Canaan into an IPO that raised $100 million in late 2019. The regulatory clarity for a mined cryptocurrency like ETH after Hinman’s speech certainly helped boost Canaan’s value, and the IPO certainly made Simpson Thacher richer – and Hinman, thanks to the millions they were paying him.

Hinman is no longer at the SEC, but the experience of riding the most brazen revolving door in recent memory must have some experiential value for his new firm. However, the folks at Andreessen Horowitz might consider the darkening cloud over their new advisory partner, particularly as the discovery phase of the Ripple case proceeds and depositions are ordered. Regardless of the ultimate case outcome, the questions around Hinman’s financial conflicts of interest while he served at the SEC will travel with him wherever he goes until they are answered.

If the SEC gets its way, those questions will remain outstanding, as the SEC has been fighting to prevent Hinman from facing deposition. This begs yet another question — is this fight worthy of taxpayer dollars? Surely Simpson Thacher can find a qualified attorney or two, so why should the taxpayers have to carry the water in preventing the truth from being exposed? 

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.