Ripple vs. SEC: Could newly released documents tip the balance?

May 20, 2023 Coin Telegraph

The court case between SEC and Ripple Labs has been ongoing for nearly two and a half years, but a summary judgment ruling could be made any day.

The ongoing case of the Securities and Exchange Commission v Ripple Labs could have a significant impact on the future of cryptocurrency regulations.

Ripple first popped up in 2012 with the promise of providing financial institutions and other entities with faster, more affordable clearance of cross-border fund transfers. To that end, Ripple created the XRP Ledger and a cryptocurrency called XRP (XRP) to function as its native coin and facilitate transactions.

On Dec. 22, 2020, the SEC sued Ripple, alleging that the firm selling XRP represented an unregistered securities offering.

Ripple co-founder and former CEO Chris Larsen and current CEO Brad Garlinghouse were also named in the SEC’s charges.

Most entities on the receiving end of SEC enforcement actions choose to settle. In this case, however, Ripple chose to fight the charges — at great expense — and take the matter to court.

Ripple argued that XRP does not satisfy the Howey test, which is used to determine whether an investment contract exists — and, therefore, whether a transaction is a security transaction. It also said that if XRP was, in fact, a security, the SEC had failed to give it fair notice under U.S. securities laws.

Enter the Hinman documents

The “Hinman documents” refer to a 2018 speech given by former SEC Director William Hinman and documents associated with writing it.

In the speech, Hinman said that Ether (ETH) should not be considered a security given its decentralized nature, stating:

“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.”

This was considered a landmark speech, as it signaled to the crypto industry that it could be possible for cryptocurrencies to transition from securities when they are first created to commodities once they are sufficiently decentralized.

This could have an impact on Ripple’s fair notice defense, which comes into play if Judge Analisa Torres finds that Ripple did indeed sell unregistered securities.

@attorneyjeremy1 is correct and this is why Ripple’s Fair Notice Defense should be viewed as an insurance policy. If the Judge finds Ripple violated Section 5 b/c these specific sales constituted investment contracts, Ripple argues the jury must decide if Ripple had fair notice.
— John E Deaton (@JohnEDeaton1) May 18, 2023

Ripple requested the documents in discovery, and the request was granted on Oct. 21, 2022. While the documents could be used as a part of Ripple’s defense, the SEC has attempted to keep them sealed on multiple occasions, arguing that they are irrelevant to the court’s summary judgment decision.

But on May 16, Judge Torres ruled that the Hinman documents are “judicial documents” subject to a strong presumption of public access and denied the SEC’s motion to seal.

Another win for transparency! Unredacted Hinman emails to be publicly available soon - stay tuned as the lawyers work through the mechanics to make that happen. https://t.co/o6puPypRHd https://t.co/qmaLVeQaP8
— Brad Garlinghouse (@bgarlinghouse) May 16, 2023

Notably, the court did not state whether the documents will be relied upon when it decides on the summary judgment motions of each party; but given the statements of those who have seen the documents, it appears likely they will negatively affect the public image of the SEC.

I’ve always felt good about our legal arguments, and I feel even better now.
I always felt bad about the SEC’s tactics, and I feel even worse about them now.
— Stuart Alderoty (@s_alderoty) October 20, 2022

Additionally, there are questions about whether Hinman had a conflict of interest when making the speech, as he worked at a law firm that is a member of an Ethereum advocacy organization before and after working for the SEC— and the documents may provide additional details around this.

Speaking during a Twitter Space shortly after the ruling, lawyer and CryptoLaw founder John Deaton predicted the documents will be:

“Disturbing, but not as shocking as maybe people think it’s going to be because there’s been, quite frankly, such a big buildup for it. [...] I believe when these emails come out, that the conflicts of interest will be even more highlighted.”

What does the latest ruling mean for the case?

While it’s still too early to tell what the ultimate outcome of the case will be, the court also denied certain motions to seal from Ripple, which included references linking Ripple’s revenues with XRP sales and the amount of compensation offered to trading platforms, among others.

In the Twitter Space, Deaton highlighted these sections as evidence likely to hurt Ripple’s chances of a complete victory, adding:

“I think the chances of Ripple getting a complete victory are much slimmer after reading this than I felt before. I still don’t think the SEC is getting a complete victory either.”

Deaton theorized that the courts could decide to fine Ripple for its early sales of XRP — relating to the initial coin offering and other transactions aimed at boosting the network — but that secondary sales of XRP and the coin itself are not securities.

If the above scenario happens AND the Judge agrees w/Ripple that the jury must then decide whether those early sales should be excused because Ripple lacked fair notice that XRP sales were effectively illegal (unregistered), it can only be described as a TOTAL VICTORY for Ripple.
— John E Deaton (@JohnEDeaton1) May 18, 2023

Deaton’s thoughts on the subject were given further credibility when former SEC securities lawyer Marc Fagel added his voice to the Twitter Space, saying that he generally agreed with everything that had been said but that the SEC’s suit was worded in a way that focused on the tokens issued by Ripple and not secondary market transactions.

Fagel added that he thought Torres “would be overstepping to make a ruling on secondary sales,” but he believed they were helpful in the SEC’s case, as they illustrate how a secondary market would not have been created without Ripple issuing securities while promoting the network.

...is good and bad news IMO. A complete Ripple win would have given J. Torres an out to NOT order production. Same goes for SEC. Doesn't automatically mean neither can win outright but, as I have predicted, still think these are both low probabilities. Could compel SEC to...2/3
— Fred Rispoli (@freddyriz) May 16, 2023

Could the case finally be reaching its conclusion?

In a May 17 Twitter thread, prominent pro-crypto lawyer Fred Rispoli suggested that the summary judgment ruling is already written and could be issued “any day now,” while also agreeing that a split decision was the most likely.

Deaton noted during the Twitter Space that he believes Judge Torres knows how she will rule but added that guessing how much is written “in its final form” would be pure speculation.

He also agreed that the decision could come down at any time, but he added that it could take another month or longer.

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SEC believes Filecoin is a security, Grayscale warns investors

May 17, 2023 Coin Telegraph

Coin Telegraph

The regulator has asked Grayscale to withdraw its application for a Filecoin Trust product, saying its underlying asset "meets the definition of a security."

The United States Securities and Exchange Commission (SEC) believes Filecoin’s native FIL token is a security, crypto asset manager Grayscale Investments has revealed.

According to the May 17 announcement, Grayscale lodged an application with the regulator to launch a Filecoin Trust product on April 14, which would provide investors with indirect exposure to the underlying FIL token.

In a comment letter from SEC staff on May 16, the regulator then warned Grayscale that FIL “meets the definition of a security” under federal law and asked them to withdraw their application for the Trust product.

Grayscale stated that under its view, Filecoin is not a security and will be sending an explanation to the SEC for its reasoning.

“Grayscale does not believe that FIL is a security under the federal securities laws and intends to respond promptly to the SEC staff with an explanation of the legal basis for Grayscale’s position.”

Grayscale noted that it “cannot predict” whether or not the SEC will be persuaded into accepting its explanation, and may “seek accommodations” for the registration of the Trust. Alternatively, the investment firm warned that it may be forced to dissolve the Trust in its entirety.

This update from the SEC marks a continuation of the watchdog’s crackdown on crypto products, which has recently come down hard on a number of U.S. crypto exchanges.

On Feb. 9 the SEC fined U.S.-based crypto exchange Kraken for “selling unregistered securities” and ordered the exchange to shut down its staking-as-a-service program.

More recently on March 22, Coinbase, the largest publicly traded crypto exchange in the U.S. received a Wells Notice — a legal document that typically precedes enforcement action — from the regulator, for “potential violations of securities laws.”

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

This is a developing story, and further information will be added as it becomes available.

SEC revises $22M punishment against LBRY, seeks $111K instead

May 15, 2023 Coin Telegraph

SEC revises M punishment against LBRY, seeks 1K instead

Coin Telegraph

The SEC originally wanted LBRY to pay millions of dollars in penalties, but now concedes the defunct firm can’t pay up that amount.

The United States securities regulator is seeking to revise its $22 million punishment against decentralized content platform LBRY, acknowledging it is unlikely to be able to cough up the funds to be able to pay it.

In a May 12 filing in a New Hampshire District Court, the Securities and Exchange Commission (SEC) sought an amendment to its request for remedies in its successful case against LBRY.

Instead of seeking the original $22 million — the amount it claims LBRY gained from the sale of its token LBRY Credits (LBC), the SEC has asked the court to impose a fine of $111,614, citing LBRY’s “lack of funds and near-defunct status.”

The request also asks to stop LBRY from “conducting future unregistered offerings of crypto asset securities.”

“The Commission acknowledges LBRY’s representations that it is defunct, ceasing operations, and without the funds to pay a larger fine, and recognizes that a defendant’s ability to pay is a factor when imposing a civil penalty,” the SEC said in the filing.

Millions of dollars spent for a fine of $111,614.00 and a company financially ruined. That helps the world. https://t.co/GhvCS0Az7s
— bill morgan (@Belisarius2020) May 12, 2023

The SEC first filed a civil suit against LBRY in March 2021 alleging the firm’s LBC sales were unregistered securities offerings. It asked for $22 million in disgorgement and for the court to order LBRY to halt any further LBC sales.

The SEC won the case in November 2022, the preceding Judge also ruled LBC was a security.

The SEC said the smaller penalty was a compromise between “the need to balance the deterrence from a penalty with LBRY’s inability to pay.”

In a December filing, LBRY claimed the SEC’s request for $22 million wasn’t reasonable as it was “vastly” overstated and failed to “deduct any of LBRY’s legitimate business expenses.”

LBRY said the SEC’s calculation of the sum was “based on rough, back-of-the-envelope math” and the amount it sought was “simply not supported by the record.”

In December 2022, around a month after the SEC won the case a month prior, LBRY said it “will likely be dead in the near future” due to being “killed by legal and SEC debts.”

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

Terraform Labs seeks to dismiss class action arguing US laws don’t apply

May 5, 2023 Coin Telegraph

Coin Telegraph

Federal securities laws only apply in the United States, but the protocols were developed overseas, argues Terraform Labs.

Terraform Labs is seeking to have a class action lawsuit against the firm dismissed, arguing the United States securities laws referenced are not applicable to its foreign-developed protocols.

On May 3, Terraform Labs requested a California federal judge dismiss an investor suit brought by Nick Patterson that claimed the company sold unregistered securities and misled investors.

The firm’s attorneys, Dentons, argued that federal securities laws do not apply since the protocols were developed and used outside of the United States.

*Excerpt from dismissal motion, Case No. 3:22-cv-03600. Source: Law360*

The Terra/Luna ecosystem collapsed in May 2022, wiping out billions from the crypto markets. The crash has sparked a raft of lawsuits against the firm, associated entities such as the Luna Foundation Guard, and company founder Do Kwon.

In June 2022, this particular class action was filed, claiming that the Terra tokens (UST and LUNA) were securities, among other allegations.

According to Law360, Terraform’s dismissal motion argued that federal securities laws and the mail and wire fraud accusations in the suit only apply domestically.

“The federal securities laws do not apply because the SAC [Second Amended Complaint] does not allege that any of the protocols at issue were developed domestically.”

The same argument also applies to the suit’s RICO (Racketeer Influenced and Corrupt Organizations) allegations, which claimed the firm’s goal was to reap profits at retail investors’ expense, according to Terraform.

Nick Patterson, who filed the suit on behalf of investors, did not adequately plead that mail and wire fraud allegations occurred domestically, it argued.

The motion also states that the plaintiff failed to identify the location of digital wallets containing his Terra tokens, which negates any “domestic injury” claims, according to Terraform.

Terraform and Do Kwon were sued by the Securities and Exchange Commission in February, with the regulator claiming they orchestrated a multibillion-dollar securities fraud.

In April, a South Korean court ruled that LUNA was not a security under the country’s Capital Markets Act.

On April 25, Terraform Labs co-founder Hyun-seong Shin and nine individuals associated with the firm were indicted in South Korea.

They were reportedly indicted on charges of fraud, breach of trust and embezzlement and referred to trial following almost a year of investigation.

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

SEC Chair Gary Gensler Straying Into Dangerous Territory With Ripple Lawsuit, Says Pro-XRP Lawyer

May 4, 2023 The Daily Hodl

Gary Gensler links crypto with cash in viral 2018 video — Crypto Twitter reacts

April 26, 2023 Coin Telegraph

Coin Telegraph

The 2018 MIT professor Gary Gensler didn’t think most ICOs triggered U.S. securities laws.

The crypto community is calling out the hypocrisy of Gary Gensler, the head of the United States securities regulator, after a 2018 video emerged of him stating that cryptocurrencies are on par with commodities or cash and are not securities.

The video came from a “Blockchain and Money” class in the Fall Semester of 2018 taught by Gensler, a former professor at the Massachusetts Institute of Technology (MIT) before he became chair of the Securities and Exchange Commission (SEC).

On the topic of initial coin offerings (ICOs), Gensler said that "three-quarters of the market are not ICOs or not what would be called securities" and named the U.S., Canadian and Taiwanese markets as the "three jurisdictions that follow something similar to the Howey Test."

"Three-quarters of the market is non-securities, it's just a commodity, cash,crypto,” Gensler then said.

The below clip is from a Fall 2018 Graduate MIT course called "Blockchain and Money"

Gary Gensler - the current President of the SEC, was the professor.

The Hypocrisy speaks for itself

"So we already know in the US and in many other jurisdictions that 3/4 of the market… pic.twitter.com/rjRWeq5P8X
— zk- (@ZK_shark) April 25, 2023

While Gensler briefly acknowledged that ICOs may spark a securities debate, he concluded that “three-quarters of the market is not particularly relevant as a legal matter.”

Several members of the crypto community were stunned by Gensler’s remarks.

Coinbase CEO Brian Armstrong commented a mere “Wow” in response to an April 26 Twitter post shared by cryptocurrency researcher “zk-SHARK.”

Wow https://t.co/gQZ7pRWacM
— Brian Armstrong ️ (@brian_armstrong) April 26, 2023

Erik Voorhees, the founder of crypto trading platform ShapeShift asked "When does someone get arrested for fraud?" in an April 25 Twitter post to his 658,900 followers.

When does someone get arrested for fraud? https://t.co/5BtU2sT5x2
— Erik Voorhees (@ErikVoorhees) April 25, 2023

Farokh Sarmad, the founder of Web3 podcast Rug Radio called Gensler “disgusting” in a tweet to his 346,200 followers, while a systems engineer, named “JD” called on the SEC Chair to provide an explanation behind the change in opinion.

Not everyone saw eye to eye though.

U.S. lawyer Preston Byrne explained that professors and law enforcers work in “different capacities” and Gensler shouldn’t be held to the same views he had back then.

I see a lot of people giving Gary Gensler a hard time over this but it’s important to note the different capacities in which he’s speaking. As a professor, he can talk about what things are in the abstract. As a law enforcer, he’s required to enforce the laws as they’re written. https://t.co/mYhd7Hm8I9
— Preston Byrne (@prestonjbyrne) April 26, 2023

Another U.S. lawyer, Jonathan Schmalfeld, who specializes in blockchain technology, challenged Byrne’s opinion by stating that Gensler’s interpretation of the Howey Test shouldn’t change by virtue of his capacity. The response prompted a second explanation from Byrne:

“I mean when I talk with clients about this stuff there are three answers, what I think the law is, how I think enforcers will interpret it, and what the law ought to be. Right now he’s limited to giving only one of those answers by virtue of his position.”

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?

SEC’s ‘brute force’ crypto regulation attempt is ‘bad policy’ — Paradigm

April 21, 2023 Coin Telegraph

Coin Telegraph

The venture capital firm pointed out the fundamental differences between crypto assets and securities.

Criticisms of the United States Securities and Exchange Commission (SEC) are mounting as the agency remains unrelenting in its war on crypto.

On April 21, Web3 venture capital firm Paradigm published a policy piece on the problems with SEC registration.

It claimed that SEC chair Gary Gensler’s “attempt to brute force crypto assets that may not even constitute ‘securities’ into an ill-fitting disclosure framework is bad policy.”

The firm, which invests hundreds of millions into crypto and Web3 startups, said the SEC fails to provide crypto asset users and investors with the information they need.

It also denied the SEC’s claims it offers crypto entrepreneurs a viable path to compliance.

Paradigm points out the current disclosure policy was developed in the 1930s, long before the internet. It claims current policies are “tailor-made for centralized companies issuing securities” and that crypto markets are fundamentally different.

Gensler’s SEC wants to brute force crypto into an ill-fitting disclosure framework

In our latest piece, we show why this is a bad policy that fails to give crypto users and investors the info they need, or provide entrepreneurs w/ a viable path to complyhttps://t.co/jOpxYJSl6U
— Rodrigo (@RSSH273) April 20, 2023

The firm noted that securities provide the holder legal rights against a centralized entity, however, there are no “legal rights” with most cryptocurrencies but “technological abilities in a protocol.”

Additionally, crypto assets can be completely independent of their issuer and maintain full functionality without their input.

Crypto assets can also be traded peer-to-peer and on a fundamentally different technology stack, unlike traditional securities and stocks which trade on an “archaic system full of intermediaries.”

The venture firm concluded that the financial regulator needs to modify its current disclosure regime to incorporate new technologies and asset classes.

“Unsurprisingly, without major changes to the SEC’s current disclosure regime, the SEC is unable to effectively regulate crypto asset markets.”

Paradigm is not the only crypto industry representative that has been critical of the SEC and its policies.

Congressman Warren Davidson has also been vocal about the agency and its chief “cop on the beat.”

On April 16, the pro-crypto politician introduced legislation “to correct a long series of abuses” aiming at replacing Gensler with an Executive Director that reports to the Board.

In an April 18 hearing on oversight of the SEC, Gensler was grilled by the chair of the House Financial Services Committee, Patrick McHenry. “Clearly an asset cannot be both a commodity and a security,” said McHenry as Gensler refused to determine what he considers the classification of Ether (ETH).

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

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