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The SEC released hundreds of documents, including emails and notes, after a judge ordered the documents to be unsealed as part of the ongoing legal battle between Ripple and the securities regulator.
The highly-anticipated documents related to a June 2018 speech from former SEC Division Director William Hinman were released on Tuesday, June 13.
The documents show how Hinman’s speech — which clarified that the SEC didn’t believe that ether was a security at the time — evolved prior to the SEC targeting XRP as a security.
In his speech, Hinman said, “And 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 released documents show conversations between SEC employees at the time — including the trading and markets department’s comments — and Hinman.
In an email, Hinman said the language around ether “would be used if we all are in agreement. We also have a call with [Vitalik] Buterin later this week to confirm our understanding of how the Ethereum Foundation operates.”
Brett Redfearn, the director of trading and markets at the time, told Hinman via email his original language on ETH and whether it was a security remained “vague.” Redfearn suggested that Hinman use “stronger” language.
Google Document comments show an unnamed editor saying, “As we discussed, as written, referring to the sentiment within this section of the speech. We think the relevant question as discussed throughout the rest of the speech is whether a digital asset meets the legal standards of a security, not whether it warrants regulation as a security.”
The comments also show the SEC saying that “we do not want to suggest that BTC is a security.”
An additional comment left on the document says:
“We thought you were going to say that you don’t believe ETH is a security. We think that is a helpful message. This statement, on the other hand, appears likely to create more confusion about the status of ETH. To the extent you don’t say ETH is not a security, please consider confirming the policy rationale to the disclosure regime of the federal securities laws, as you did with respect to Bitcoin earlier in the paragraph.”
Employees also noted that they had “reservations” about including a direct statement on ether in the speech because “it seems that it would be difficult for the agency to take a different position on ether in the future. Further, the rest of the paragraph strongly implies the thinking applies to ether.”
“Without the sentence about ether, those implications might generate a useful reaction about ether (from purchasers or those in the FinTech space). With the sentence, the reaction seems less likely to focus on the analysis, and more likely to focus on the potential fallout of making a direct statement about ether’s status as a security.”
Known conflicts of interest
A first batch of emails between Hinman and Shira Pavis Minton, the designated agency ethics official at the SEC, was released in April 2022 after Empower Oversight, a nonprofit whistleblower organization, successfully filed a Freedom of Information Act request.
Minton warned Hinman that he is not to engage in any SEC matters that could impact law firm Simpson Thacher, where he worked before the SEC, due to his financial interest in the firm. He was also advised not to meet with anyone from Simpson Thacher.
Hinman met with Josh Bonnie, a partner at Simpson Thacher, several times after being warned about the conflict of interest, Empower Oversight said in an April 2022 statement. The former SEC director also met with the co-founders of and investors in Ethereum ahead of the speech he gave in 2018 declaring ether a token, not a security.
The April 2022 email release suggested that Hinman and the SEC had an interest in promoting and protecting ether over other, similar tokens. If this were found to be true, it would be a significant win for Ripple.
Shortly after these documents revealed the agency may have acted inconsistently with their classification of crypto tokens, a judge ruled that the SEC would not be able to edit or clarify any of the content in the emails ahead of the XRP case, which had already been underway for over a year when the first round of emails dropped.
The SEC and Ripple are awaiting a summary judgment, which Ripple’s legal team previously said could come before the end of the year. There is a possibility that the judge could rule that there is not sufficient evidence for a summary judgment and the case could go to trial, or Ripple and the SEC could potentially agree on a settlement, although Ripple has said this is an unlikely outcome.
News analysis by David Canellis
Outside of an outright win against the SEC, the release of the Hinman emails is the Superbowl for XRP investors.
A word of caution, especially as markets push XRP nearly 10% higher: The Hinman speech never explicitly mentioned Ripple — or any other cryptocurrency apart from bitcoin and ether, for that matter.
In a bid to defend itself from an antagonistic regulator, Ripple Labs has attempted to draw parallels between Ethereum and its XRP technology, token sales and promotional efforts. To borrow Hinman’s phrasing, if Ethereum can become “sufficiently decentralized” over time — then maybe so too can XRP transform from a security into a commodity.
Such an evolution would certainly undermine the SEC’s case. Perhaps converting to a slap on the wrist akin to Block.one’s $22 million settlement, after it raised up to $4.4 billion with its own token sale.
But the XRP Ledger is a different beast than Ethereum — far lower in terms of validator counts and use cases, but with a more direct line to corporate support in the form of Ripple Labs.
It may be tempting to believe Hinman’s treatment of Ethereum is analogous to XRP, vindicating the latter by association.
But to do so would run the risk of underestimating key differences between major blockchain technologies, at a time when regulator pettiness is at an all-time high. How the courts will ultimately navigate that is still anyone’s guess, and these emails could simply bolster the case for ether’s commodity classification, with XRP’s relevance merely tangential.
The end of the Ripple v. SEC case may well be in sight, but consider the final outcome as hazy as the SEC’s definition of “crypto security.”