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The Hinman docs: Implications for XRP, SEC credibility and more

The Hinman documents have been available to Ripple for over two years, and their public release has been eagerly awaited by many, but some were disappointed by the lack of any real bombshells.

The Hinman documents were finally unsealed and made publicly available on June 12 after a lengthy back and forth between Ripple and the United States Securities and Exchange Commission (SEC), but what exactly do they reveal?

The documents are extensive, and while they can be found in public resources like the Public Access to Court Electronic Records (PACER) or CourtListener, lawyer James Filan tweeted on June 13, compiling them into two URLs.

Speaking to Cointelegraph soon after the unsealing, pro-XRP lawyer and founder of CryptoLaw John Deaton shared his belief that “the documents themselves don’t impact the judge’s underlying analysis of whether XRP (XRP) was offered/sold by Ripple as an investment contract, or XRP’s status in the secondary markets in the United States.“

This is considered a key defense of Ripple during its legal battle with the SEC. But those keeping a close eye on the case will know that the documents were not expected to do so, despite the then SEC chair Jay Clayton referencing the speech as “the approach we take to evaluate whether a digital asset is a security,” the 2018 speech carried disclaimers that it was the personal views of the then director of corporation finance William Hinman, which “does not necessarily reflect those of the Commission.”

With the Hinman documents being such a hot topic, many other crypto lawyers have also wondered what the documents might mean for XRP and Ether (ETH).

A “nothingburger?”

After the documents were unsealed, many onlookers, such as Gabriel Shapiro, general counsel for crypto firm Delphi Labs, took to Twitter calling them a “nothingburger,” which had no impact on the case between Ripple and the SEC.

Pro-XRP lawyer and Hodl Law founder Fred Rispoli had a different take when appearing on the Thinking Crypto podcast on June 15. He suggests they are “explosive” because although “we all knew there’s a revolving door” between regulators and private firms — and “behind the scenes dealings” — the public rarely gets a chance to see it as clearly as it’s displayed in the emails.

In other words, while the documents might not help Ripple regarding an XRP security determination, it does impact the SEC’s credibility. It sheds further light on why Hinman gave the speech despite protests from other SEC divisions.

The documents also highlight what appears to be an acknowledgment from Laura Jarsulic — an attorney with the SEC’s Office of General Counsel — that tokens on a sufficiently decentralized network might exist in a “regulatory gap” where the tokens are “not a security because there’s no ‘controlling’ group,” but “there may be a need for regulation to protect purchasers” as occurs with credit cards and medication.

Comments from Jarsulic. Source: Hinman documents

This might be significant, as current SEC chair Gary Gensler has repeatedly said that he believes all cryptocurrencies except for Bitcoin (BTC) are securities and that rules for crypto already exist.

A boost to Ripple’s fair notice defense

Ripple’s fair notice defense refers to the argument that the SEC had not provided it with sufficient notice before suing it for committing securities fraud in December 2020.

However, the defense is generally not perceived to be strong, as longstanding court precedent — i.e., the Howey test that determines whether a transaction qualifies as an investment contract or security — is regarded as fair notice.

But in the interview with Cointelegraph, Deaton suggested that the documents support Ripple’s argument that the speech sowed market confusion and hindered the ability of market participants to determine exactly what constitutes a security under the Howey test, saying:

“The documents do assist Ripple (and others) in arguing that the speech caused greater confusion in the markets, causing market participants to lack adequate notice of what was prohibited by existing law.”

The SEC’s credibility

The Hinman documents show the conversations between various SEC members as they sought to get the speech ready for public release.

As pointed out by Ripple’s chief legal officer Stuart Alderoty in a Twitter thread on June 13, the emails also highlight that Hinman had received feedback from other divisions of the SEC, noting that some of the factors he used when determining that Ether was not a security had no legal basis.

Deaton’s CryptoLaw hosted a panel on June 14, joined by fellow crypto lawyer Jeremy Hogan and former SEC securities lawyer Marc Fagel, who worked at the agency for 16 years.

During the panel, Fagel agreed that the email contained no real bombshells relevant to the case, but did highlight some potential conflicts of interest. He said on multiple occasions that he did not want to ascribe motivations to Hinman but added:

“I do try to see both sides of it. So I don’t like to leap to there’s something unethical here, although we can all agree that there’s some conflicted issues here and some really disappointing conduct here.”

Before and after working with the SEC, Hinman worked at a law firm called Simpson Thacher & Bartlett, which was a member of the advocacy organization Enterprise Ethereum Alliance that seeks to drive the use of Ethereum blockchain technology.

According to the watchdog group Empower Oversight Whistleblowers and Research, the group that initially filed the freedom of information request that led to the Hinman documents, Hinman “continued to receive millions of dollars from Simpson Thacher while working at the SEC.”

The implication, as expanded upon by Hogan during the panel, is that Hinman was essentially being paid off to give Ether a free pass and say in his speech that Ether was not a security, which some people have previously referred to as “ETHGate.“

Related: Ripple’s Alderoty calls for probe into Bill Hinman and his infamous speech

Hogan had a similar take, suggesting that the emails did not contain much that Ripple could actively use in the case, but indicated that Hinman should be more concerned about the contents of the emails rather than the SEC, particularly when his earlier drafts of the speech referred to it as the “Ether speech.”

Ether’s bolstered position

Deaton also said that he believes “the speech documents are good for Ethereum” and “could also help ERC-20 tokens like Dragonchain,” which are governed by the Ethereum blockchain:

“If the SEC claimed the network was sufficiently decentralized, then those tokens have even a better fair notice argument than Ripple.”

This was something also referred to in the Office of General Counsel’s comments, with the division sharing that it had “reservations about including a statement directly about Ether in the speech,” as “it would be difficult for the agency to take a different position on Ether in the future.“

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Coinbase new blockchain seen as ‘massive confidence vote’ for Ethereum

One Ethereum bull hopes the launch will help onboard a host of other crypto companies and financial institutions onto Ethereum.

The Ethereum community appears to have taken a bullish view of Coinbase’s newly announced layer-2 network, Base, which has been described as a “massive confidence vote” and a “watershed moment” for the blockchain network. 

Secured on Ethereum and powered by layer-2 network Optimism, Base aims to eventually become a network for building decentralized applications (DApps) on the blockchain. The layer-2 network is currently in its testnet phase, according to Coinbase CEO Brian Armstrong.

Members of the crypto community such as Ryan Sean Adams, host of the Bankless Show, believe the move “is a massive vote of confidence for Ethereum,” which could set a precedent for cryptocurrency companies and financial institutions to use Ethereum as the settlement layer of choice.

Coinbase has approximately 110 million verified users and has partnered with 245,000 companies in over 100 countries since it was founded in 2012. Its cryptocurrency exchange is the second largest in terms of trading volume, behind Binance according to CoinGecko.

“If Coinbase converts 20% of its 110m verified users to Layer 2 users in the coming years, this alone will 10x the total number of crypto native users,” Adams added.

Adam also commended Coinbase for opting to open-source Base and believes the new layer-2 network will bring about even more block space demand on Ethereum.

Meanwhile, Sebastien Guillemot, co-founder of blockchain infrastructure firm dcSpark, suggested that Coinbase made a wise decision to go with a layer 2 as opposed to an independent sidechain, noting that “almost all” cryptocurrency transactions and value locked on Ethereum resides on layer 2s these days.

Ryan Watkins, the co-founder of crypto-focused hedge fund Syncracy Capital, described the news in a Feb. 23 tweet as a “watershed moment” in the Ethereum rollup ecosystem. He added that there was “likely no one better” positioned than Coinbase to onboard the next 10 million users and institutions to Ethereum.

Not everyone was bullish though.

Gabriel Shapiro, general counsel of investment firm Delphi Labs, explained in a Feb. 23 Twitter post that launching a centralized layer-2 network “opens the door” to unwanted SEC scrutiny.

Related: Coinbase beats Q4 earnings estimates amid falling transaction volume

“A centralized L2 that trades lots of tokens any number of which could be alleged securities, or does lots of DeFi transactions that arguably might alleged to be regulated (securities swaps etc), opens the door to the SEC making new kinds of secondary market claims,” wrote Shapiro, adding:

“imo, this will accelerate the SEC's "secondary market" agenda re: blockchain securities issues, because they can't let an SEC registrant "get away with" potential violations & build up a legal arbitrage strategy right under the SEC's nose.”

Shapiro’s concerns come as the SEC has recently upped its enforcement efforts against several stablecoin issuers and staking service providers of late.

Regarding the launch of Base, the lawyer opined that it could be a “bad step for them” and inflict “collateral damage” on the rest of the ecosystem, particularly in the event that the SEC finds a vulnerability to expose:

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Terra lawsuit a ‘roadmap’ to attack other stablecoins: Delphi Labs

Delphi Lab's general counsel said the SEC was being "more thorough than usual" in its lawsuit against Terraform Labs and its co-founder Do Kwon.

The United States Securities and Exchange Commission’s (SEC's) lawsuit against Terraform Labs and its co-founder Do Kwon could be seen as an SEC “roadmap” to taking down other stablecoins, according to a lawyer.

Gabriel Shapiro, general counsel at investment firm Delphi Labs, explained to his 33,800 Twitter followers on Feb. 16 that the SEC’s arguments in its complaint against Kwon and Terraform were “more thorough than usual.”

Shapiro’s analysis follows the SEC’s Feb. 16 lawsuit against Kwon and Terraform alleging they “orchestrat[ed] a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.”

Shapiro suggested the case could serve as a “roadmap” for how the regulator may sue other stablecoin issuers in the future. He acknowledged the SEC made the case that Terra’s algorithmic stablecoin, TerraClassicUSD (USTC), constitutes a security:

“[The SEC] will allege that integration, promotion, marketing, commercial deals etc building the stablecoin ecosystems are ‘efforts of others’ that are ‘reasonably expected’ and can lead to profits in connection with the stables.”

He pointed out the SEC applied the four prongs of the Howey Test to argue that USTC, Terra Luna Classic (LUNC) — renamed from Terra (LUNA) — and Wrapped LUNA (wLUNA) all constituted securities under U.S. securities laws.

Delphi Labs General Counsel Gabriel Shapiro’s take on the SEC’s lawsuit against Terraform Labs and its CEO Do Kwon. Source: Twitter.

The SEC also argued that Terraform Labs breached U.S. securities laws by launching the Mirror Protocol, which allowed its users to create what Terraform called an “mAsset,” a crypto version of an asset that “mirrors” the price behavior of other assets such as stocks.

The regulator claimed Terraform Labs committed this securities-based swap through the MIR token — which Shapiro believes to be a “first” of all the cryptocurrency-related lawsuits filed by the SEC.

Shapiro noted the SEC’s claim that wLUNA constituted a “receipt” for a security was another “first.”

Delphi Labs General Counsel Gabriel Shapiro’s analysis on the SEC’s lawsuit filing against Terraform Labs and its CEO Do Kwon. Source: Twitter.

Ryan Sean Adams, the host of the crypto-oriented podcast Bankless, made a similar argument to his 221,300 Twitter followers on Feb. 16, noting that a legal victory against Terraform Labs would make it easier to go after other stablecoin issuers.

The Terra-linked tokens infamously crashed in May, 2022, which was in part triggered when USTC lost its peg to the U.S. dollar. As LUNC was closely linked to USTC, its price fell by virtually 100% and triggered a wider downturn in the crypto markets, wiping out approximately $40 billion from the crypto markets.

Related: Why the SEC wants to ban crypto staking and stablecoins under scrutiny — Watch The Market Report live

Kwon maintains that he is not “on the run,” and is believed to be residing in Serbia according to South Korean officials — who issued a warrant for his arrest.

Earlier in February, two South Korean prosecutors flew to the Balkan state to find Kwon, however, the search attempt was unsuccessful.

Cointelegraph contacted Terraform Labs for comment on the lawsuit but no immediate response was received.

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