Crypto’s ‘trial of the century’: Ripple case could be decided over just a few words from former SEC official

After 16 months of intense pre-trial litigation, countless hours in court and more than 600,000 documents reviewed by both parties, the case, which is being categorized as “the trial of the cryptocurrencies of the century”, could be reduced to a single speech. pronounced by a former Securities and Exchange Commission official four years ago.

That case, of course, is the lawsuit filed in late 2020 by the SEC against the payment settlement company, Ripple. The SEC says Ripple violated securities laws when it failed to register with the sales agency of its native cryptocurrency token, XRP, which helped fund its platform and facilitate payments on Ripple’s network.

At the heart of the commission’s case is the allegation that XRP was being sold by Ripple and its top executives as illegal, unregistered security. The commission is seeking millions of dollars in damages.


Ripple’s lawyers, including expensive and powerful legal minds, such as former SEC President and Southern District Attorney Mary Jo White, claim that XRP sales complied with the law and were not materially different from digital currency sales. Ether by Ripple operators. the Ethereum blockchain. SEC officials had previously authorized the sale of Ether as a legally unregistered digital currency.

On Tuesday afternoon, federal Judge Sarah Netburn will hold a face-to-face conference at Manhattan’s Daniel P. Moynihan Courthouse to discuss the release of documents Ripple says are needed to prove he did nothing wrong and that the SEC is choosing winners. and losers. in the trillion-dollar cryptocurrency business.

The documents Ripple wants to obtain, and the SEC seeks to maintain confidentiality, focus on a speech delivered in June 2018 by former SEC Corporate Finance Director Bill Hinman.

Ripple officials believe the documents will show a disagreement among several senior agency officials over XRP’s statement as security and undermining the SEC’s argument.

Hinman left the SEC after the election of President Biden and his appointment of Gary Gensler as president of the SEC, replacing Trump-appointed Jay Clayton. The Ripple case was signed by Clayton just hours before he resigned. Both he and Hinman are practicing lawyers who now work in the cryptographic space.

Hinman and Clayton declined to comment, as did an SEC spokesman. In the past, Hinman said the 2018 speech was designed to explain the agency’s thinking about regulating the nascent cryptocurrency market, and why many digital currencies are seen by the commission as securities to be registered while others, including both. bigger and more popular tokens, bitcoin and ether, are not.

While it’s clear from court records and oral arguments why Ripple wants to access documents related to the speech (a company spokeswoman had no immediate comment on this report), the SEC has been less transparent in trying to keep them secret.


The SEC argued in no further detail that the disclosure of the documents would violate the “lawyer-client” privilege because Hinman was technically a client of the commission as well as an official at the time he made his public statements.

“If the judge accepts the SEC’s argument that every draft, document, email and comment made on Hinman’s speech … the last year of litigation, including his sentences, is meaningless,” said John Deaton, a class action attorney representing more than 67,000 XRP holders. they filed their own lawsuit against the SEC seeking compensation for abrupt declines in digital currency after the case was filed against Ripple.

But if the communications are released, it could show how Ripple was unfairly pointed out and that the SEC could be forced to settle with Ripple on favorable terms for the company, Deaton says.


Otherwise, lawyers close to the case tell FOX Business that the protracted legal battle is likely to last until 2023 and could be extended further if the judge decides to take the case to trial.

Another reason Hinman’s speech papers are so important is that they could address the credibility of one of Ripple’s most explosive charges: that the SEC was influenced to give Ethereum’s digital ether currency a free pass as a non-security.

After the bitcoin token, ether is the second largest cryptocurrency worth $ 215 billion at the time of printing.

In court documents, Ripple’s lawyers point out that both Clayton and Hinman have maintained ongoing business dealings with companies that have supported the adoption of Ethereum since they left the SEC. Evidence of the statements shows that senior executives at a company that has links to Ethereum met with key SEC officials, including Hinman himself, as the commission was developing its regulatory approach to cryptography and weighing in on Ripple’s lawsuit.

Although both Clayton and Hinman declined requests for comment, in past statements and comments they vehemently denied any wrongdoing. Both said their decision to sue Ripple was based on the law, the Supreme Court’s 1946 Howey test used to determine what turns something into an investment contract, also known as a security.

Continuing with the litigation, SEC attorneys working for Genlser made the same argument: that XRP sales were clearly linked to the construction of the Ripple platform, classifying them as an investment contract with Ripple itself.

One thing is certain, say legal experts: the outcome of the case will set the stage for cryptographic regulation to move forward. For starters, it could resolve territorial warfare between regulatory agencies such as the Commodity Futures Trading Commission, the Office of Consumer Financial Protection and the SEC, all of which compete for jurisdiction in space.

A SEC victory could mean the agency will delve even deeper into cryptocurrency regulation, a move Gensler hinted at in speeches he referred to the business as the “wild west” of investment. The commission could argue that Bitcoin and Ethereum will face SEC regulation given the blurred lines between what is considered a security and what is legally defined as a commodity.

Gensler was careful not to express absolute views on the status of any individual cryptocurrency token, leaving open the possibility of broader repression if the SEC prevails over Ripple. Last month, during his testimony at a hearing before a House Allocation Committee subcommittee, Gensler said Bitcoin could be a legally unregistered cryptocurrency, but gave no further details. Gensler, during his tenure as president, has so far refused to reveal whether he believes ether should be registered as a symbol of values ​​or not.

But the case turned out to be a challenge for the commission given Ripple’s insistence on fighting, rather than resolving. A loss to the SEC would also frustrate Gensler’s expansionary application agenda in the cryptographic space.


It could also mean that the XRP would probably be declared a commodity or a currency, that it would re-trade on U.S. stock exchanges, and that the price, which fell after the SEC filed its lawsuit, could rise. Ripple will avoid a major regulatory hurdle that could pave the way for it to fully resume operations in the United States that have been hampered by demand.

With so much play in the case, both parties struggled primarily through pre-trial motions and requests for records to gain any possible advantage. Most of these legal battles relate to the details surrounding Hinman’s speech, including confidential internal emails and meeting notes that reveal how the speech unfolded along with the thinking of the agency’s top officials at the time.

The SEC has repeatedly argued that the speech, classifying Bitcoin and Ether as legally unregistered securities, was Hinman’s view, a move by legal experts to challenge the agency’s decision on XRP’s crypto competitors, Bitcoin. and Ether.

However, as the lawsuit progressed, the documents show that SEC attorneys had a much greater hand in writing the speech than was previously known.

According to court-reviewed documents and FOX Business, no less than 68 drafts of Hinman’s speech were written before he was delivered. New documents recently obtained by the Washington, DC-based whistleblower group, Empower Oversight, revealed that the recipients of those drafts were about 30 people, including employees of the General Council Office, the Enforcement Department, Hinman’s own Corporate Finance Division. and President Jay Clayton’s staff, among others.


The other four members of the five-member committee, Hester Peirce, Elad Roisman, Kara Stein and Robert Jackson, were not included in the draft speeches. When Ripple’s lawyers asked why the other four commissioners were not included, Hinman said he did not think his contribution was worth the additional delay. Ripple’s lawyers were quick to ask questions about why the full committee was not invited to comment on such a significant issue.

As the case progressed, Judge Netburn relied heavily on Ripple’s requests for commission documents. In January, he ordered the SEC to publish drafts of the speech and related internal emails because Hinman’s “opinion” is not covered by the client-lawyer privilege.

That’s when the SEC reversed course on what should be considered Hinman’s speech. He stated in a reconsideration motion that the speech should be protected by the “lawyer-client” privilege because he consulted with SEC staff for legal advice before delivering the speech. Therefore, he was a “client” of SEC attorneys.

So why the change? The SEC declined to comment. But legal experts say the change underscores some of the difficulties the SEC faces in winning the case.

“Hinman’s speech was not an official opinion at Commission level, but it was not a personal opinion,” says JW Verret, an associate professor of securities law at George Mason University. “Securities professionals know that the line between inaction letters and the director’s speeches is not as sharp as the SEC suggests through its inconsistent positions in the Ripple litigation.”

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