In its ongoing legal battle with the U.S. Securities and Exchange Commission, which sued the cryptocurrency company and several of its officials in 2020 for the unregistered sale of XRP for $1.3 billion, Ripple earned another procedural victory last week.
In a speech on September 29, William Hinman, the former director of the SEC Corporation Finance Division, claimed that ether (ETH) was not a security because it was "sufficiently decentralized," similar to bitcoin. On September 29, a U.S. District Court judge decided to release emails and other correspondence written by Hinman.
In a dispute that has been ongoing for almost two years, Ripple's legal strategy is based in large part on these communications. Ripple is attempting to show, rather than reach a settlement with the organization, that the SEC's approach to crypto regulation is ambiguous, contradictory, and arbitrary. The case may establish a significant precedent for the cryptocurrency industry if it is successful.
Liz Boison of Hogan Lovells wrote in an opinion piece last week that "the final version of Hinman's speech discussed a concept that is central to the Ripple founders' defense theory - whether assets that function only as a means of exchange in a decentralized network are not a security, even if they could be packaged and sold as a security."
The SEC has continually attempted to keep early drafts and other materials associated with Hinman's speech from Ripple, despite the fact that it was actually given at the Yahoo Finance All Markets Summit in June 2018 and is open to the public. The SEC's lack of transparency in this case is, at the very least, unsportsmanlike, and the general investing public would benefit from having access to them.
The SEC will now be required to provide Hinman's paperwork, but it's not obvious if this will have any real impact on the case. In fact, the judge made the documents public because they, and not the agency as a whole, reflect the individual thoughts of one employee.
In December 2020, the SEC filed a lawsuit against Ripple and its then-and-now CEOs, Brad Garlinghouse and Chris Larsen, alleging that the company's "rolling" sales of XRP constituted an investment contract and securities offering. These revenues have been utilized by Ripple to pay for operations and, most likely, its pricey legal defense.
The action was brought just before Chairman Gary Gensler assumed leadership of the SEC, indicating his more forceful approach to controlling the cryptocurrency business. The SEC, according to Ripple, "selected two winners" in the digital asset market: BTC and ETH, and is unfairly going after the payments-focused business. (XRP, which was removed from several cryptocurrency exchanges after the agency filed a lawsuit in 2020, gained 9% on the latest information.)
Hinman's correspondence, according to the SEC, was not deliberate in the matter and was therefore shielded by the attorney-client privilege. The messaging service Kik, which was sued by the SEC following its initial coin offering (ICO), and settled with them, also requested access to these records.
Critics claim that rather than articulating how cryptocurrencies and tokens should fit within the current securities laws, the SEC "regulates by enforcement." The SEC's legal actions, as well as the tokens it considers legal and why, add to the complexity of the matter.
It's unlikely that Hinman's correspondence contains a "smoking gun" that will put all of this to rest for the business or Ripple. Hinman did, however, leave the SEC following his infamous statement in order to join Andreessen Horowitz, a company with connections to the Ethereum Foundation. Notably, both the SEC and Ripple have requested that the judge render a decision based on the evidence at hand, rather than proceeding to trial.
A standard that might be used by other token projects is at stake in the Ripple case. If the business prevails, there may be a case for ongoing token sales to finance the development of decentralized projects, albeit the legal system will eventually decide what XRP buyers believed they were purchasing.