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.

Is Ether a security? Why Ethereum might not be out of the water

By Steven Msoh. August 17, 2021. (Crypto News Flash).

Is Ether a security? This is a question that has been asked for years now, but to date, there has been no affirmative answer. A simple question it may look like from a glance, but the implications might be worth over $350 billion and could collapse an entire industry, given that Ethereum underpins many of today’s cryptocurrency projects. And while most people – from experts to price speculators – have considered Ethereum as exempt from being deemed a security, recent developments are putting doubts about the token’s status.

Hinman clarity, and why we can’t depend on it today

To date, the clearest direction has been given by William Hinman, the former director of corporate finance at the U.S Securities and Exchange Commission. Hinman was speaking at the Yahoo All Markets Summit in San Francisco in June 2018 when he made the clearest remarks yet as to whether the watchdog considers Ether a security.

Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.

Of course, Hinman also cleared Bitcoin from being a security. However, BTC and ETH were created and sold in different ways, making each coin’s case unique.

Read the Full Article Here.

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.

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? 

We Need A Ripple Test To Stop The SEC’s Overreach On Cryptocurrency

By Roslyn Layton. May 18, 2021. (Forbes).

The regulatory future of cryptocurrency seems destined to be decided by the courts, thanks to an ill-conceived lawsuit filed by the Securities and Exchange Commission. If Ripple’s arguments prevail in the Southern District of New York and on appeal, this case could give the Supreme Court a chance to review the 1946 Howey decision which set a standard for what constitutes a security. 

Courtroom Showdown

I’ve covered the SEC’s case against Ripple Labs case since it was filed by the SEC in December 2020 because it had all the hallmarks of classic enforcement overreach. Ripple and cryptocurrency investors have fought back with robust arguments while the SEC has stumbled and exposed its former leaders’ troubling conflicts of interest. It looks like something bigger than a mere lawsuit. The historical moment adds urgency to resolving whether XRP is a currency or security, a question which financial innovation makes difficult, but also demonstrates the SEC’s abuse of its authority.

The total market cap of all cryptocurrencies, including the XRP digital token at the heart of the Ripple case, tops $2 trillion dollars. The sum of these digital assets is now worth more than the total number of U.S. dollars in circulation. Global companies like Goldman Sachs and PayPal are racing to adopt the technology for consumer products. But more ominously, China has already rolled out a central bank digital currency (CBDC) called the Digital Yuan for domestic commercial and consumer use on a big scale. Mastercard has opened talks to act as a financial bridge for China to expand the Digital Yuan’s global network, export its applications and compete against both cryptocurrencies as the U.S. dollar in the emerging digital economy.

Read the Full Article Here.

Was there corrupt intent at the SEC?

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

You would think that blatant government corruption and self-dealing was the stuff of a Hollywood movie, but when you peel back the layers of the Ripple case, examine its origins, and review key facts related to some of its central figures at the Securities and Exchange Commission, a larger story emerges that can’t be ignored.

Former Chairman Jay Clayton, ex-Corporation Finance Director William Hinman, and former Enforcement Director Marc Berger took very specific actions while they were in office, related to very specific cryptocurrencies. In parallel, they have very specific financial interests related to cryptocurrencies, which were benefited by those actions, while millions of retail holders of a specific cryptocurrency were directly harmed. 

Those are the indisputable facts, and taken together they point very clearly to something very troubling behind the SEC’s filing of the Ripple case on Clayton’s last day in office. How can we look at these facts and just dismiss the idea of corrupt intent? 

Here is what we know, in detail:

  • Before joining the SEC, we know that both Clayton and Hinman earned massive fees to support Chinese tech giant Alibaba Group carry out its 2014 IPO on the New York Stock Exchange. Alibaba’s Alipay is the largest digital mobile payments platform in the world, and its New York IPO set the stage for China’s intended dominance in global digital payments.
  • By 2016, Chinese-controlled bitcoin miners had moved to control 65% of the bitcoin network hash rate.  Since bitcoin is a proof-of-work token, this gives China control of its network.
  • On May 9, 2017, William Hinman was named the Director of Division of Corporation Finance at the SEC. Upon his appointment to the SEC, Hinman left his post at the law firm Simpson Thacher – which sits on the Enterprise Ethereum Alliance and represents cryptocurrency-related financial interests – but continued to receive millions in financial payments from the firm.  In short, Hinman had a clear financial interest in any regulatory action by the SEC related to cryptocurrencies – while he was serving in a top SEC position!  This was something one former SEC ethics lawyer said was “a little unsettling.” (A little?) 
  • In 2018, Clayton publicly declared bitcoin not a security, sending the price of bitcoin soaring.
  • During a 2018 Yahoo Finance summit in San Francisco, Hinman declared that the Ethereum token, ether, is not a security.  The price of ether skyrocketed.
  • In 2019, Simpson Thacher led Chinese-based crypto mining company Canaan to their IPO. Canaan provides the technology used for mining bitcoin, and is publicly bullish on Bitcoin.  Hinman was still at the SEC when this happened, and still collecting checks from Simpson Thacher.
  • In early November 2020, then-Director of National Intelligence John Ratcliffe wrote Chairman Clayton to express his growing concerns over China’s dominance in crypto and the risk it poses for U.S. national security.
  • On December 4, 2020, Hinman resigned from the SEC.
  • On December 22, 2020 – Clayton’s last day in office – the SEC Enforcement division led by Berger filed its lawsuit against Ripple and its executives alleging that XRP sales over seven years were unregistered securities trades.  The complaint indicates “all sales” were illegal, therefore ensnaring millions of retail XRP holders who have never heard of Ripple but traded the digital currency for years.  The price of XRP plummeted.
  • On January 12, 2021, Acting Enforcement Director Marc Berger announced his resignation from the SEC, departing the agency at the end of the month.
  • As of March 2021, the People’s Bank of China (PBOC) had edged closer to the full-scale launch of their Digital Yuan, releasing millions of dollars of the digital currency in trials.
  • On March 29, 2021, Bloomberg reported that Clayton had accepted a position at One River Asset Management, a digital asset hedge fund focused exclusively on bitcoin and ether.
  • In its case against Ripple, SEC attorneys have been fighting tooth and nail not to adhere to the One River Asset Management subpoena, more than likely in an attempt to keep potentially incriminating evidence about Clayton’s compensation from coming to light.  
  • On April 15, 2021, Bloomberg reported that Berger was joining Hinman as a partner at Simpson Thacher.

Neither Clayton, nor Hinman, nor Berger, nor the SEC have disputed any of these facts or the chronology of how this all unfolded.  Any objective reading clearly suggests that these three had and/or currently retain financial interests linked to the officials’ actions they took at the SEC. 

Why haven’t these individuals, Simpson Thacher and One River been challenged to explain these facts? 

These facts suggest glaring improprieties, so why aren’t they being investigated? Given  cryptocurrencies total market capitalization swelling into trillions of dollars, if now is not the time to investigate, then when?

It is up to the millions of retail XRP holders, who were directly impacted by these actions, to demand answers if no one else will.

With Crypto, Congress, Not Agencies, Should Decide What’s Next

By Andrew Langer. April 27, 2021. (The American Spectator).

Alongside the public’s newly found fascination with cryptocurrencies (which only sometimes includes their attempts to try and understand what they are — a process for the teacher akin to trying to explain to an AARP member how to program a VCR back in the day), there is serious debate and discussion among scholars and policymakers about how to look at them and treat them for public policy purposes.

From a public policy perspective, the question centers essentially on assigning “crypto” to one of four different categories. Are they

  • Securities? Are they a tradeable “financial instrument” that create some kind of ownership right?
  • Commodities? Are they some kind of raw material gained through a resource-intensive extraction process?
  • Currencies? Are they some kind of unit of exchange backed by some kind of hard asset?
  • Something different entirely, requiring a whole new vocabulary or public policy approach?

All are being considered, and each approach has its adherents and detractors.

The most logical route would be to view cryptocurrency as an entirely new thing (which it is). It doesn’t easily fit into any of the preexisting categories — it’s somewhere, honestly, between a commodity and a currency. Many cryptocurrencies do require intense resource utilization, but they can immediately be used as a standard of exchange.

Read the Full Article Here.