Last week, Ripple notched another procedural victory as part of its ongoing legal defense against the U.S. Securities and Exchange Commission, which sued the crypto firm and several of its executives in 2020 for the unregistered sale of $1.3 billion worth of XRP.
On Sept. 29, a U.S. District Court judge ruled to release emails and other correspondence written by former SEC Corporation Finance Division Director William Hinman related to a speech where he said ether (ETH) was not a security because, like bitcoin, it was “sufficiently decentralized.”
These communications are a cornerstone of Ripple’s legal strategy in a case that is nearing the two-year mark. Instead of settling with the agency, Ripple seeks to prove the SEC has taken an unclear, contradictory and arbitrary approach to regulating crypto. If it’s successful, the case could set an important precedent for the crypto industry.
“The final version of Hinman’s speech discussed a concept that is central to the Ripple founders’ defense theory – whether assets that function solely as a means of exchange in a decentralized network are not a security, even if they could be packaged and sold as a security,” Liz Boison of Hogan Lovells, wrote in an opinion last week.
Though Hinman’s actual speech, delivered at the Yahoo Finance All Markets Summit in June 2018, is public, the SEC has repeatedly sought to hide early drafts and other documents related to it from Ripple. At the very least, the SEC’s aversion to transparency here is unsportsmanlike – and the investing public at large is better off having access to them.
However, while the SEC will now have to produce Hinman’s documents, it’s unclear if any of this will have meaningful bearing on the case. In fact, the judge released the documents precisely because they reflect the personal opinions of one employee, not the agency at large.
The SEC filed suit against Ripple and its current and former CEOs, Brad Garlinghouse and Chris Larsen, respectively, in December 2020, claiming that Ripple’s “rolling” sales of XRP represented an investment contract and securities offering. Ripple has used these sales to fund operations and, including in all likelihood, its expensive legal defense.
The lawsuit was filed shortly before Chairman Gary Gensler took charge at the SEC, presaging his more aggressive approach to reining in the crypto industry. Ripple argues that the SEC has “picked two winners” – BTC and ETH – in the digital asset industry and is unfairly targeting the payments-focused company. (XRP, which was delisted from a number of crypto exchanges after the agency filed suit in 2020, rallied 9% on the recent news.)
The SEC argued that Hinman’s correspondence was protected by attorney-client privilege and was not deliberative in the case. Kik, the messaging company that was sued by, and settled with, the SEC after its initial coin offering (ICO), also sought access to these documents.
Critics have argued the SEC "regulates by enforcement" rather than by clearly communicating how cryptocurrencies and tokens should fit into existing securities rules. The situation is made more complex by who the SEC has sued, and what tokens it deems aboveboard and why.
It’s unlikely there’s a “smoking gun” in Hinman’s correspondence that will clear all this up – for the industry or Ripple. But it’s worth noting Hinman quit the SEC after his infamous speech to work for Andreessen Horowitz, a firm with ties to the Ethereum Foundation. And, notably, both the SEC and Ripple have asked the judge to make a ruling based on available evidence – without bringing the case to trial.
At stake in the Ripple case is a standard that could be applied to other token projects. If the company wins, there could be standing for continuing token sales to fund decentralized project development – though it will ultimately fall upon the legal system to determine what XRP buyers thought they were buying.
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