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 memos, 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 original token, XRP.
Many in the Web3 community believe that these documents, which were made public under a court order, shed much-needed light on the SEC’s approach to regulating the industry and may even affect how Ether and Bitcoin are legally categorized.
Changing regulatory opinions
The documents relate to a speech given 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 that time. This clarification came before the SEC targeted Ripple’s native cryptocurrency, XRP, as a security.
In Hinman’s speech, he stated: “Setting aside the fundraising that accompanied the creation of Ether, based on my understanding of the current state of Ether, the Ethereum network and its decentralized structure, the current supply and sale of Ether are not securities transactions.”
The unsealed documents reveal the development of Hinman’s speech and the discussions that took place among SEC staff, including those from the Commerce and Markets Division. 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 #Hinman Emails is that they directly undermine Gary Ginsler’s main talking point: the securities laws are “clear” when it comes to crypto.
If it’s so clear, why were lawyers at his own agency giddy about their stance on ETH? https://t.co/8ZJMqNHxgP
— orlando.btc ⌐◨-◨ (@Orlando_btc) 13 June 2023
The documents also reveal that the SEC had a conversation with Vitalik Buterin, the co-founder of Ethereum, to confirm its understanding of how the Ethereum Foundation operates, an interaction that underscores the regulator’s efforts to understand the intricacies of the Ethereum network before making a public statement about Ether’s status.
Members of the SEC also expressed a desire to avoid implying that Ether is a security, showing concern that such a statement could limit the agency’s ability to change its stance 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 it met the legal definition of a security to the question of whether or not to regulate it as one.
In particular, the documents highlight an acknowledgment within the SEC that tokens on a sufficiently decentralized network are not securities and therefore are not required to register. Some even went so far as to point out what could be considered a “regulatory gap” in the cryptocurrency space.
The Web3 community chimes in
It is this regulatory gap that industry advocates have pointed to over the years as the SEC has increased its aggressive efforts to rein in the space through enforcement actions. While it remains to be seen how legally useful the documents will be to Ripple’s case, the information they contain may be more helpful to the crypto industry’s broader goal of highlighting what many in the space see as the SEC’s lack of good faith in regulating the industry.
“The regulatory gap.” Evidence from the Hinman emails of what we have been saying to the Third Circuit, to Congress, and to the SEC itself: that the securities laws are incomplete when it comes to digital assets, that the securities laws are not intended to govern all digital assets, and that… pic.twitter.com/IgPJvEyqq2
— paulgrewal.eth (@iampaulgrewal) 13 June 2023
Whatever you think about the Hinman emails and Ripple’s chances of winning/losing, I think we can all agree that SEC policies, tactics, everything in crypto has been an absolute mess – even before Gensler – that invites arbitrary law application through nebulous ‘morphing’ non-guidance
— _gabrielShapir0 (@lex_node) 13 June 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 participate in any SEC-related matters that might affect the law firm Simpson Thacher (his former employer) and not to meet with anyone from the firm. Despite this, Hinman met a partner from the firm several times. Hinman likewise met with Ethereum’s co-founders and investors before giving his speech in 2018 where he labeled Ether as a token and not a security.
The April emails suggested 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 strengthen the industry’s efforts to portray the SEC as out of touch and compromised in their strict regulatory approach.
The revelations in the documents come as the SEC prepares to enter a potentially lengthy legal battle with Binance and Coinbase, the two crypto exchanges it recently sued for selling unregistered securities.
