The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit

By Hassan Tyler. (RealClear Markets). September 5, 2023.

Over the last two Administrations, successive chairmen of the Securities and Exchange Commission (SEC), from both political parties, have led the agency through an erratic and confusing approach to regulating cryptocurrencies. What both chairmen had in common was a decision to not use rulemaking and public engagement to write a clear playbook for market participants, but to aim discretionary lawsuits at specific crypto companies and crypto trading exchanges to regulate the market instead.

Unfortunately, one of the SEC’s highest profile crypto lawsuits has backfired by pulling back the curtain to show several officials ignoring the law and apparent conflicts of interest as they picked winners and losers in the nascent industry.

Last month, Ripple Labs notched a landmark legal victory against a December 2020 SEC enforcement action where the agency alleged the cryptocurrency XRP qualifies as an investment contract in Ripple and that all sales, including on the secondary markets, are unregistered securities. Judge Analisa Torres ruled that only early institutional sales of the XRP token that were specifically packaged as investment contracts fall under the SEC’s jurisdiction. 

Read the full piece by Hassan Tyler here: Real Clear Markets: “The SEC Chooses to ‘Regulate’ Cryptocurrencies Via Lawsuit”

The Hinman Documents Reveal a Deceitful SEC

By Roslyn Layton, PhD. June 13, 2023. (DC Journal).

In February, I filed a motion to intervene in SEC v. Ripple Labs, the first big crypto enforcement action filed in December 2020 by the Securities and Exchange Commission (SEC). I have written two dozen stories about the serious implications of the case, particularly on the sweeping regulatory overreach at the heart of the SEC’s arguments and the naked power grab it represents.

The agency spent most of the last two years fighting Ripple’s attempts to obtain internal SEC emails and documents on the drafting of a 2018 speech given by then-Director of Corporation Finance William Hinman where he introduced a long list of “what we look at” when determining whether a digital asset is a security.

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Why the XRP Army Keeps Fighting

By Jeff Wilser. June 13, 2023. (CoinDesk).

XRP’s uber-passionate supporters believe the SEC unfairly targeted Ripple for securities violations while mysteriously giving Ethereum a free pass. Do they have a point?

Brad Kimes is a professional drummer. For 30 years he played in various bands — rock, funk, blues, R&B, you name it. Between gigs, he worked as an aspiring entrepreneur, and he invented a baby playpen that you could use on the beach. He found suppliers in China. Kimes soon became a global importer, and to make cross-border payments, he was forced to use the clunky international banking system called “SWIFT.”

SWIFT was not swift. It was slow and costly. “There’s no tracking ID,” says Kimes. “And when the payment gets there six days later, you find out there’s a currency manipulation that had taken place. And you have to pay the difference.”

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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 E. Deaton.

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/  

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.

Ripple, SEC make final bids for a quick win in XRP lawsuit

By Jody Godoy. December 5, 2022. (Reuters).

Ripple and the U.S. Securities and Exchange Commission accused one another of stretching the law, as they argued for a ruling on whether the XRP, the world’s seventh-largest cryptocurrency, is a security.

Both sides urged U.S. District Judge Analisa Torres to rule in their favor without sending the case to trial in papers filed on Friday.

The final round of briefs seeking summary judgment brings the case closer to a ruling that could further define what digital assets are considered securities in the U.S.

The judge could grant either side a win without a trial, or decide to narrow the issues that go before a jury.

Ripple’s founders created XRP in 2012. The SEC sued the San Francisco-based company and its current and former chief executives in December 2020, alleging they have been conducting a $1.3 billion unregistered securities offering since the token’s creation.

Ripple argued in its brief that the SEC was seeking a ruling that XRP was an investment contract, but “without any contract, without any investor rights, and without any issuer obligations.”

Read the full article here.

Ripple accuses SEC of ‘shameful’ conduct after obtaining key Ethereum emails

By Jeff John Roberts. October 24, 2022. (Fortune)

Ripple provided a lively end to an otherwise sleepy week in crypto when its CEO and general counsel took to Twitter to tweak the Securities and Exchange Commission after the company obtained confidential emails the agency had fought to keep secret. The emails concern a 2018 speech in which a former senior official at the SEC declared that Ethereum was not a security on the basis of a novel legal test—a test the agency chose not to apply when it sued Ripple in late 2020.

We still don’t know the content of those emails, but the fact that the agency fought hard to conceal them suggests they contain unflattering information related to the SEC’s erratic and arbitrary behavior when it comes to the crypto industry. Ripple’s executives, who have seen the emails, used even harsher language to describe the agency, saying “the shamefulness…will shock you” and implying it has been operating in bad faith.

Read the full article here.

Calendar of former official provides insight into SEC regulatory intent, Satoshi stumble

By Eleanor Terrett , Charlie Gasparino. September 29, 2022. (Fox Business)

The meeting schedule of a former official of the Securities and Exchange Commission provides a detailed roadmap into the agency’s thinking as it began to weigh how best to reign in the burgeoning digital-asset business, but it could also buttress the growing sentiment that Wall Street’s top cop unfairly targeted a leading crypto outfit in its crackdown.

The itinerary of former SEC Director of Corporation Finance William Hinman hasn’t been reported before, and it shows the SEC casting a wide net in seeking advice from key crypto officials, including the person they thought was crypto’s founding father, the elusive Satoshi Nakamoto, FOX Business has learned.

From 2017 through 2020, Hinman was at the center of the agency’s crypto regulation efforts under former SEC chair and Trump appointee Jay Clayton. During those years, the commission began to navigate its regulatory authority over the business, which was growing exponentially and posing problems for government officials worried the anonymous nature of the blockchain would finance illicit activities. 

Read the full article here.

Ripple vs. SEC: 189 Page Hinman Calendar Revealed Covering His Entire Tenure

By Lele Jima. September 28, 2022. (The Crypto Basic)

Eleanor Terrett, a Fox Business journalist, shared some interesting information about the public calendar of SEC’s Bill Hinman, covering his entire tenure at the commission. 

“I have received a copy of Bill Hinman’s public calendar covering his entire tenure while at the @SECGov,” Terrett said.  

Some of the interesting details of Hinman’s public calendar include a series of meetings he had with Ethereum-related officials.

Hinman’s Meetings with Ethereum

According to Terrett, in the first two years of Hinman’s time in office, four meetings were scheduled with Ethereum blockchain software company ConsenSys and other officials related to the leading blockchain project.

On March 29, 2018, at 12:30 PM, Hinman had a scheduled meeting with ConsenSys and Amy Starr, an official of the SEC Corporation Finance.

A week later, the former SEC Corporation Finance director had a scheduled meeting with the title “ETH.” Another meeting dubbed “Ether” was also scheduled for Hinman on April 12, 2018, at 4:30 AM. On April 23, 2018, at 5 PM, Hinman had a scheduled meeting with Ethereum co-founder Joseph Lubin.

Read the full article here.