The SEC’s crackdown on cryptocurrencies continues, with Chairman Gary Gensler accusing the industry of suffering from a “lack of regulatory compliance, not a lack of regulatory clarity.” But in the agency’s attempt to outsmart digital assets by classifying them as securities, they are facing significant opposition from an unlikely source — the SEC of the past.
Gensler recently claimed that all digital assets other than BitcoinBTC can be considered securities and thus can be subject to securities law. But what haunts the agency in its legal campaign against cryptocurrency are past statements and internal documents that are likely to offer a very different opinion. The SEC attempted to keep these documents under wraps in its lawsuit against Ripple Labs. But a federal judge ruled last week that it be made available to the public. The decision represents a huge win for Ripple and perhaps an even bigger win for the industry.
Hinman documentation dump
An important turning point in the SEC v. Ripple case is the agency’s internal deliberations regarding the now-infamous “Hinman letter”.
In 2018, William Hinman, director of the U.S. Securities and Exchange Commission, gave a speech saying that neither Bitcoin nor EthereumETH are securities — a declaration that seems to contradict recent statements by the SEC on the issue. Complicating matters for the SEC, Judge Annalisa Torres denied the agency’s request to close documents related to Hinman’s letter. Its decision will give the public a look under the hood of the SEC’s rulemaking process as it relates to digital assets. It’s a huge blow to the country’s largest financial regulator.
Because the Hinman documents could shed light on the SEC’s thinking about cryptocurrency like never before.
Force the hand of the SEC
So far, the SEC has been eager to play its crypto cards close to the fund, allowing it to take a hard line against any digital asset that isn’t Bitcoin. But with the release of the Hinman documents, Judge Torres is effectively asking the SEC to show its hand. The documents potentially reveal dissenting opinions within the agency’s own ranks as to which cryptocurrencies are securities and why. In doing so, they are likely to support Ripple’s cause.
“We know that some senior SEC officials have argued that there is a reasonable basis to conclude that XRPXRP was not a security,” said John Deaton, former federal prosecutor and founder of CryptoLaw. “And if the SEC officials believe that XRP is not a security, it is reasonable for Ripple to believe the same.”
In fact, the SEC recently released court documents reference communications, including an email that says there are “reasonable grounds to conclude that XRP does not meet all of the elements.” Howey analysis and is therefore not a “security” for the purposes of federal securities laws.
If the Hinman documents reveal more evidence of internal communications that contradict the SEC’s current stance on regulating digital assets, it could be problematic for the agency — both in court and in the court of public opinion. At the same time, it could bolster Ripple’s argument that the lack of regulatory clarity surrounding digital assets has caused the company to lack fair notice of what is prohibited under current law.
Ripple Effects: Strengthening the Coinbase Status
In the same vein, the Hinman documents could also bolster Coinbase’s future lawsuit against the SEC. Arguably, Coinbase has a stronger fair notice argument than XRP. This is because the SEC approved Coinbase’s IPO in 2021 — and it did so knowing full well that the company’s business model was to list digital assets similar to XRP without a broker-dealer license to sell the securities.
This raises the question: Why would the SEC approve the IPO of a company selling digital assets to retail investors if the agency believes those assets are unregistered securities? Either the SEC had failed in its responsibility to protect investors — or the internal consensus at the time was that these digital assets were no Unregistered securities. Whatever the case, both the public and the cryptocurrency industry deserve to know.
I look forward
Whether it’s the Hinman documents, the Coinbase IPO, or even Gensler’s earlier praise for a token he now considers a security, the SEC can’t escape past statements and actions that run counter to its current positions. And the weight of those contradictions is becoming increasingly apparent to the Court.
Case in point: Justice Torres determined that the emails and documents related to Hinman’s letter were “court documents,” meaning she could likely rely on them in making her final decision.
If Judge Torres ultimately rules in favor of Ripple, the decision would provide an important legal precedent for the industry. It would preclude digital assets similar to XRP from being automatically classified as securities by the SEC. This would force the agency to reverse its regulatory-by-enforcement approach driving crypto investment abroad.
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