Court Documents Reveal SEC’s Changing Thoughts on Crypto Regulation
In a recent development that could have significant effects on the crypto industry, the United States Securities and Exchange Commission (SEC) has released a trove of documents, including emails and notes, as part of its ongoing legal dispute with cryptocurrency company Ripple. The SEC sued Ripple in 2020 for raising $1.3 billion through the sale of unregistered securities in the form of its native token, XRP.
Many in the Web3 space believe that these documents, which were unsealed by a judge’s order, shed much-needed light on the SEC’s approach to regulating the industry and could even impact how Ether and Bitcoin are legally categorized.
Shifting regulatory opinions
The documents pertain to a speech delivered in June 2018 by William Hinman, the former director of the SEC’s Division of Corporation Finance. In the address, Hinman clarified that the SEC did not consider Ether to be a security at the time. This clarification came before the SEC targeted Ripple’s native cryptocurrency, XRP, as a security.
In Hinman’s speech, he stated, “Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
The unsealed documents reveal the evolution of Hinman’s speech and the discussions that took place among SEC employees, including those from the trading and markets department. The documents show that Hinman’s original language around Ether was considered “vague” by Brett Redfearn, the director of trading and markets at the time. Redfearn suggested that Hinman use more definitive language.
One of the biggest takeaways from the #HinmanEmails is that they directly undermine Gary Ginsler’s main talking point: the securities laws are “clear” as applied to crypto.
If its so clear, why were lawyers at his own agency waffling about their position on ETH? https://t.co/8ZJMqNHxgP
— orlando.btc ⌐◨-◨ (@Orlando_btc) June 13, 2023
The documents also reveal that the SEC had a call with Vitalik Buterin, the co-founder of Ethereum, to confirm its understanding of how the Ethereum Foundation operates, an interaction that underscores the regulatory body’s efforts to understand the intricacies of the Ethereum network before making a public statement on Ether’s status.
Members of the SEC also expressed a desire to avoid suggesting that Ether is a security, showing concern that such a statement could limit the agency’s ability to change its position on Ether in the future. It was also said that making a direct statement about Ether’s status could shift the focus from the analysis of whether or not it met the legal definition of a security to the question of whether or not to regulate it as one.
Notably, the documents highlight a recognition within the SEC that tokens on a sufficiently decentralized network are not securities and are thus not required to register. Some even went so far as to point out what might be considered a “regulatory gap” in the cryptocurrency space.
The Web3 community chimes in
It’s this regulatory gap that industry advocates have been pointing to over the years as the SEC has ramped up its aggressive efforts to rein in the space through enforcement actions. While it remains to be seen just how legally useful the documents will be to Ripple’s case, the information they contain might be more helpful to the crypto industry’s broader goal of highlighting what many in the space view as the SEC’s lack of good faith in regulating the industry.
“The regulatory gap.” Proof from the Hinman emails of what we’ve been saying to the Third Circuit, to Congress and to the SEC itself: that the securities laws are incomplete when it comes digital assets, that securities law aren’t meant to rule over all digital assets, and that… pic.twitter.com/IgPJvEyqq2
— paulgrewal.eth (@iampaulgrewal) June 13, 2023
whatever you think of Hinman emails and Ripple’s chances of wining/losing, I think we can all agree SEC policy, tactics, everything on crypto has been an absolute mess–even before Gensler–inviting arbitrary application of law through nebulous ‘morphing’ non-guidance
— _gabrielShapir0 (@lex_node) June 13, 2023
Conflicts of interest
The documents are not the first to be unveiled in the SEC’s case against Ripple. In April 2022, emails between Shira Pavis Minton, the SEC’s ethics official, and Hinman were released at the request of the nonprofit Empower Oversight, which had filed a Freedom of Information Act request.
Those emails showed that Minton warned Hinman not to take part in any SEC-related matters that might impact the law firm Simpson Thacher (his former employer) and not to meet with anyone from the firm. Despite this, Hinman met with a partner from the firm several times. Hinman likewise met with Ethereum co-founders and investors prior to making his 2018 speech in which he labeled Ether a token and not a security.
The April emails hinted that Hinman’s interest in protecting Ether (compared to other tokens) was potentially unethically motivated. If the courts validate such conflicts of interest, it could work in Ripple’s favor and potentially bolster the industry’s efforts to show the SEC as out of touch and compromised in their strident regulatory approach.
The revelations the documents provide come at a time when the SEC is preparing to enter into a potentially drawn-out legal battle with Binance and Coinbase, the two crypto exchanges it recently filed lawsuits against for selling unregistered securities.
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