Newly Disclosed Documents: A Game Changer in Shifting the Scales?

The ongoing legal case of the Securities and Exchange Commission (SEC) versus Ripple Labs could have far-reaching implications for the future of cryptocurrency regulation. Ripple was established in 2012 with the objective of offering faster, more affordable cross-border fund transfers to financial institutions and other organisations. Ripple created the XRP Ledger and its cryptocurrency XRP (XRP) to serve as its native coin and facilitate transactions. However, on 22 December 2020, the SEC sued Ripple, alleging that the sale of XRP was an unregistered securities offering. Ripple co-founders Chris Larsen and Brad Garlinghouse were also named in the charges. While most parties on the receiving end of SEC enforcement actions choose to settle, Ripple has decided to dispute the charges, incurring significant expense in the process, and take the matter to court. Ripple argued that XRP does not satisfy the Howey test, which is used to determine whether an investment contract exists, and therefore whether a transaction is a security transaction. Ripple also argued that if XRP was a security, the SEC had failed to offer sufficient warning under US securities laws.

The Hinman documents refer to a 2018 speech given by former SEC Director William Hinman and documents related to it. In the speech, Hinman stated that Ether (ETH) should not be considered a security, given its decentralised structure, stating: “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 decentralised structure, current offers and sales of Ether are not securities transactions”. This speech was viewed as a key moment for the crypto industry, as it represented a sign that cryptocurrencies could transition from securities on issuance to commodities once they become adequately decentralised. This development could impact Ripple’s ability to claim fair notice defence if Judge Analisa Torres deemed that Ripple did sell unregistered securities. Ripple requested the Hinman documents in discovery, and these were granted on 21 October 2022. The SEC has attempted to keep these documents sealed on several occasions, arguing that they are unrelated to the court’s summary judgment decision. However, on 16 May, Judge Torres ruled that the Hinman documents are “judicial documents” that are presumed to be publicly available. The documents could be detrimental to the SEC’s public image.

While the ultimate outcome of the case is unknown, the court denied several Ripple motions to seal, including references linking Ripple’s revenue to XRP sales and the compensation offered to trading platforms. This is likely to hurt Ripple’s ability to achieve a complete victory; pro-crypto lawyer John Deaton has stated that the court could fine Ripple for its early sales relating to the initial coin offering that promoted the network, but that the secondary sales of XRP and the coin itself are not securities. The case could finally be approaching its conclusion, with some believing that the summary judgment ruling could be issued in a matter of days.

J-S Tremblay
About the author - J-S Tremblay

I've been involved in the cryptocurrency world since 2016 and trading since 2019. I started Moon and Lambo in 2021. I'm passionate about crypto and love to share my knowledge. I hate bankers and I hope that cryptocurrency will change the financial world for the better. View full profile...

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