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.

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

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

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

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 whiskeycondos, 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/  

Operation Choke Point 2.0

By Andrew Langer. April 4, 2023. (Real Clear Policy)

In 2014, the Wall Street Journal blew the lid off the Obama-Biden Administration’s “Operation Choke Point”, where the Department of Justice and bank regulators colluded and overreached their authority to close legal businesses that were deemed “undesirable”.  They did it through pressuring banks and credit card payment processors to close the accounts of people and companies that had not violated any laws, without any proof of wrongdoing. It’s happening again today, on a much bigger scale, against legal U.S. companies that use crypto technology for their product offerings.

It was illegal then. It’s illegal now.

As I have previously written, we are still in the infant stages of cryptocurrencies and associated crypto tech. Cryptocurrencies and the underlying technology don’t neatly fit into the related – but ultimately, different – legal categories and classifications for the agencies that regulate securities, commodities, currencies and all other aspects of commerce. 

Congress and the federal government should have moved a long time ago to set out a regulatory framework that addressed this, so that American innovators could know how to legally operate and consumers could be protected from harm. It didn’t happen, and that has provided an opening for a panicked Administration to launch another illegal war on American businesses they don’t like and distract the public from their own economic mismanagement.

Read the full article here.

SEC’s Coinbase Fight Puts Exchange, Crypto Survival on the Line

By David Jolly. March 27, 2023. (Bloomberg Law).

The SEC’s decision to target Coinbase Global Inc. for enforcement actions sets the stage for a protracted legal battle that threatens the top US crypto exchange and potentially the entire US digital assets sector, legal and industry analysts say.

Coinbase revealed last week that the Securities and Exchange Commission had served it with a Wells Notice, a notification that the agency is planning to recommend enforcement action for alleged securities law violations. Already reeling from its increasing exclusion from the traditional financial system, the US crypto industry sees the Coinbase action as a signal that the SEC—and its determined chairman, Gary Gensler—intend to regulate the industry out of business.

“It is hard to look at what’s happening at the federal regulatory level and not see it’s an existential threat,” said Sheila Warren, CEO of the Crypto Council for Innovation. “Between challenges around obtaining basic banking services, making payroll, to open hostility from this SEC, operating in the US is not for the faint of heart.”

Read the full article here.

A New York Court Is About to Rule on the Future of Crypto

By Joel Khalili. March 21, 2023. (Wired).

THREE DAYS BEFORE Christmas 2020, the US Securities and Exchange Commission charged Ripple, a company based in San Francisco that provides the infrastructure for cross-border payments, and two of its executives with conducting a $1.3 billion unregistered securities offering by selling a cryptocurrency, XRP. The same day, Ripple announced it would “fight.”

After more than two years of protracted legal conflict, all of the evidence has been heard, and there remains nothing left but for Judge Analisa Torres of the Southern District of New York to issue a verdict. Those with a stake in the outcome, which will reverberate throughout the crypto sector, have been attempting to divine when a judgment might land, based on the judge’s past ruling patterns. Some believe a resolution is only days away. 

Read the full article here.

SEC Commissioner Says Her Colleagues Performed a “Shorthand Analysis” of XRP

Byy Lele Jima. February 9, 2023. (Crypto Basic).

In a recent tweet, XRP-Pro attorney John Deaton knocked the SEC for arguing that XRP represents both the common enterprise and the expectation of profit prongs of the Howey Test. Deaton expressed surprise that the SEC could reach such a conclusion despite not evaluating each transaction individually.

“The SEC doesn’t go transaction by transaction and argues that #XRP embodies or represents both the common enterprise and expectation of profits prongs of the Howey test,” said Deaton.

The founder of Crypto Law backed his comment by saying that even SEC Commissioner Hester Peirce (sometimes called Crypto Mom) admitted that her colleagues made a wrong call in evaluating XRP as a security.

Read the full article here.

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

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.

SEC Spin Doctors Trying To Hide Crypto Regulation Disaster

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.