Ripple vs. SEC: Could Newly Released Documents Tip the Balance?

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

Ripple first surfaced in 2012 promising to provide financial institutions and other entities with faster, more affordable handling of cross-border money transfers. To that end, Ripple created the XRP Ledger and a cryptocurrency called XRP (XRP) to function as its own currency and facilitate transactions.

On December 22, 2020, the SEC sued Ripple, alleging that the company 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 indictment.

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 case to court.

Ripple argued that XRP fails 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 would not have honestly announced it under US securities laws.

Enter the Hinman documents

The “Hinman documents” refer to a 2018 speech by former SEC director William Hinman and documents related to its writing.

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

“Apart from the fundraising involved in the creation of Ether, based on my understanding of the current state of Ether, the Ethereum network and its decentralized structure, current offerings and sales of Ether are not securities transactions.”

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

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

@lawyerjeremy1 is correct and therefore Ripple’s Fair Notice Defense should be seen as an insurance policy. If the judge finds that Ripple violated Section 5 b/c, this particular sale constituted investment contracts, Ripple states that the jury must decide whether Ripple was notified.

— John E Deaton (@JohnEDeaton1) May 18, 2023

Ripple requested the documents in discovery, and the request was granted on October 21, 2022. While the documents can be used as part of Ripple’s defense, the SEC has tried several times to keep them sealed, arguing that they are irrelevant for summary judgment of the court.

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

Another win for transparency! Unredacted emails from Hinman will soon be publicly available – stay tuned as the attorneys work through the mechanisms to make that happen.

— Brad Garlinghouse (@bgarlinghouse) May 16, 2023

In particular, the court has not indicated whether the documents will be relied upon when deciding on each party’s applications for summary judgment; but given the statements of those who have seen the documents, it seems likely that they will negatively affect the SEC’s public image.

I’ve always felt good about our legal arguments, and I feel even better now.
I’ve always felt bad about the SEC’s tactics, and I feel even worse about it now.

— Stuart Alderoty (@s_alderoty) October 20, 2022

In addition, there are questions about whether Hinman had a conflict of interest in giving the speech, as he worked at a law firm that is a member of an Ethereum advocacy organization before and after his work for the SEC – and the documents may include additional details about this.

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

“Disturbing, but not as shocking as people might think because, frankly, there’s been such a big build up to it. […] I believe that when these emails get out, the conflicts of interest will come to the fore even more.”

What does the latest ruling mean for the case?

While it is still too early to say what the final outcome of the case will be, the court also denied certain motions to seal Ripple, including references linking Ripple’s earnings to XRP sales and the amount of compensation to be paid under other is offered to trading platforms.

Speaking to the Twitter Space, Deaton highlighted these sections as evidence that would likely hurt Ripple’s chances of a full win, adding:

“I think the chances of Ripple getting a full win are much smaller after reading this than I felt before. I also still don’t think the SEC will get a full win.”

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

If the above scenario occurs AND the judge agrees with Ripple that the jury should then decide whether those early sales should be excused because Ripple was unaware that XRP sales were effectively illegal (unregistered), it can only are described as a TOTAL VICTORY for Ripple.

— John E Deaton (@JohnEDeaton1) May 18, 2023

Deaton’s thoughts on the subject gained credence when former SEC securities attorney 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 lawsuit was framed in a way that targeted the tokens issued by Ripple and not secondary market transactions.

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

…is good and bad news IMO. A full Ripple win would have given J. Torres a way out of ordering NO production. The same goes for SEC. Doesn’t automatically mean neither can win outright, but, as I predicted, still think both are low probabilities. Can force SEC to… 2/3

— Fred Rispoli (@freddyriz) May 16, 2023

Could the matter finally come to an end?

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

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

He also agreed that the decision could be made at any time, but added that it could take another month or more.

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