Ripple vs. SEC: Could Newly Issued Documents Tip the Scale?

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

Ripple first emerged in 2012 with the promise of providing financial institutions and other entities with faster and more affordable clearing of cross-border money transfers. To this end, Ripple has created the XRP Ledger and a cryptocurrency called XRP (XRP) to act as the native currency and facilitate transactions.

On December 22, 2020, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, alleging that the company selling XRP is an unregistered securities offering.

Ripple co-founder and former CEO Chris Larsen and current CEO Brad Garlinghouse have also been named to the SEC’s filing.

Most entities on the receiving end of SEC enforcement actions choose settlement. However, in this case, Ripple chose to fight the charges — at great cost — and take the matter to court.

Ripple has argued that XRP does not meet the Howey test, which is used to determine whether an investment contract exists — and therefore, whether or not 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 US securities laws.

Enter Hinman documentation

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

In the speech, Hinman said that ether (ETH) should not be considered a security due to its decentralized nature, saying:

“Regardless of the fundraising that accompanied the creation of Ether, based on my understanding of the current state of Ether, the Ethereum network and its decentralized structure, the current offerings and sales of Ether are not securities transactions.”

This was a landmark rhetoric, as it signaled to the crypto industry that it is possible for cryptocurrencies to move from securities when they were first created to commodities once they become decentralized enough.

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.

Ripple requested the documents under discovery, and the request was granted on October 21, 2022. While the documents could be used as part of Ripple’s defense, the SEC has attempted to keep them sealed on multiple occasions, arguing that they are not relevant to the summary court ruling.

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

Notably, the court did not specify whether the documents would be relied upon when deciding motions by summary judgment for each party; But given the statements of those who have seen the documents, it seems likely that they will negatively affect the SEC’s public image.

Additionally, there are questions about whether Hinman had a conflict of interest when delivering the speech, as he worked for 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 on this.

Speaking through the Twitter Space shortly after the ruling, attorney and founder of CryptoLaw John Deaton and expect The documents will be:

Annoying, but it’s not as shocking as people think it would be because it was, quite frankly, such a big buildup to it. […] I think when these emails are sent out, the conflict of interest will be highlighted even more.”

What does the final judgment mean for the case?

While it is still too early to know the final outcome of the case, the court also rejected some motions for sealing from Ripple, which included references linking Ripple revenue to XRP sales and the amount of compensation provided to trading platforms, among others.

In the Twitter space, Deaton highlighted these sections as evidence that could potentially hurt Ripple’s chances of an outright victory, adding:

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

Deaton posited that the courts could decide to fine Ripple for its early sales of XRP — in connection with initial coin offerings and other transactions intended to bolster the network — but that those secondary sales of XRP and the currency itself are not securities.

Deaton’s thoughts on the matter were given further credence when former SEC attorney Mark Fagel added his voice to the Twitter Space, saying he generally agreed with everything said but that the SEC’s lawsuit was phrased in a token-focused way. Issued by Ripple and not a secondary market transaction.

Fagel added that he believes Torres would “overstep his bounds to make a ruling on secondary sales,” but believes it was helpful in the SEC case, as it shows how a secondary market could not have been created without Ripple issuing securities while touting the network.

Can the case finally come to an end?

On May 17 on Twitter, prominent pro-crypto lawyer Fred Rispoli suggested that a summary judgment ruling is already in writing and could be issued “any day now,” while also agreeing that a split decision is more 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 be issued at any time, but added that it could take another month or more.

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