Ripple vs. SEC: Might recently disclosed documents influence the outcome?

The ongoing litigation of the Securities and Exchange Commission v Ripple Labs may significantly influence the future landscape of cryptocurrency regulations.

Ripple emerged in 2012 with the intention of offering financial institutions and other organizations a quicker, more cost-effective method for clearing cross-border fund transfers. To achieve this, Ripple developed the XRP Ledger and introduced a cryptocurrency named XRP (XRP) to serve as its native currency and facilitate transactions.

On December 22, 2020, the SEC initiated a lawsuit against Ripple, claiming that the company’s sale of XRP constituted an unregistered securities offering.

Ripple’s co-founder and former CEO Chris Larsen, along with current CEO Brad Garlinghouse, were also included in the SEC’s allegations.

Typically, entities facing SEC enforcement actions opt to settle. However, Ripple decided to contest the allegations—incurring substantial costs—and bring the issue to court.

Ripple contended that XRP does not meet the criteria of the Howey test, which is utilized to ascertain whether an investment contract exists—and consequently, whether a transaction qualifies as a security transaction. The company also asserted that if XRP were indeed classified as a security, the SEC had not provided adequate notice under U.S. securities laws.

Introducing the Hinman documents

The “Hinman documents” pertain to a 2018 address delivered by former SEC Director William Hinman and the related documents associated with its preparation.

In his address, Hinman stated that Ether (ETH) should not be classified as a security due to its decentralized characteristics, asserting:

“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, current offers and sales of Ether are not securities transactions.”

This speech was regarded as a pivotal moment, as it indicated to the cryptocurrency sector that it might be feasible for cryptocurrencies to evolve from securities at their inception to commodities once they achieve sufficient decentralization.

This development could influence Ripple’s fair notice defense, which becomes relevant if Judge Analisa Torres determines that Ripple did indeed sell unregistered securities.

@attorneyjeremy1 is correct, and this is why Ripple’s Fair Notice Defense should be perceived as a safeguard. If the Judge concludes Ripple violated Section 5 because these specific sales constituted investment contracts, Ripple argues that the jury must ascertain whether Ripple had fair notice.

— John E Deaton (@JohnEDeaton1) May 18, 2023

Ripple sought the documents during discovery, and the request was approved on October 21, 2022. While these documents could be utilized as part of Ripple’s defense, the SEC has made multiple attempts to keep them sealed, claiming they are irrelevant to the court’s summary judgment decision.

However, on May 16, Judge Torres ruled that the Hinman documents are “judicial documents” that carry a strong presumption of public access and denied the SEC’s motion to seal.

Another victory for transparency! Unredacted Hinman emails will soon be publicly accessible—stay tuned as the lawyers work through the logistics to make that happen. https://t.co/o6puPypRHd https://t.co/qmaLVeQaP8

— Brad Garlinghouse (@bgarlinghouse) May 16, 2023

Importantly, the court did not specify whether the documents will be considered when deciding on the summary judgment motions of each party; however, based on the comments from those who have reviewed the documents, it seems likely they will adversely affect the SEC’s public image.

I’ve always felt confident about our legal arguments, and I feel even more assured now.
I have always been concerned about the SEC’s tactics, and I feel even more troubled by them now.

— Stuart Alderoty (@s_alderoty) October 20, 2022

Moreover, there are inquiries regarding whether Hinman had a conflict of interest during his speech, as he was affiliated with a law firm that is part of an Ethereum advocacy group both before and after his tenure at the SEC—and the documents may shed additional light on this matter.

During a Twitter Space shortly after the ruling, attorney and CryptoLaw founder John Deaton anticipated that the documents will be:

“Disturbing, but perhaps not as surprising as some might expect due to the considerable buildup surrounding it. […] I believe when these emails are released, the conflicts of interest will be even more pronounced.”

What does the recent ruling imply for the case?

While it remains premature to ascertain the final outcome of the case, the court also rejected certain motions to seal from Ripple, which included references connecting Ripple’s revenues with XRP sales and the compensation offered to trading platforms, among other details.

In the Twitter Space, Deaton emphasized these sections as evidence likely to diminish Ripple’s chances of a total victory, adding:

“I believe the likelihood of Ripple achieving a complete victory is significantly reduced after reviewing this than I felt previously. I still don’t believe the SEC will secure a total victory either.”

Deaton speculated that the courts might impose a fine on Ripple for its initial XRP sales—related to the initial coin offering and other transactions aimed at enhancing the network—while asserting that secondary sales of XRP and the coin itself do not qualify as securities.

If the aforementioned scenario occurs AND the Judge concurs with Ripple that the jury must then determine whether those early sales should be excused due to Ripple lacking fair notice that XRP sales were effectively illegal (unregistered), it can only be characterized as a TOTAL VICTORY for Ripple.

— John E Deaton (@JohnEDeaton1) May 18, 2023

Deaton’s insights on the matter gained further validation when former SEC securities attorney Marc Fagel contributed to the Twitter Space, expressing general agreement with the points made but noting that the SEC’s lawsuit was framed in a manner that concentrated on the tokens issued by Ripple rather than secondary market transactions.

Fagel remarked that he believed Torres “would be overstepping to make a ruling on secondary sales,” but he considered them beneficial to the SEC’s case, as they demonstrate how a secondary market would not have emerged without Ripple issuing securities while promoting the network.

…is both good and bad news in my opinion. A complete Ripple win would have provided J. Torres an opportunity to NOT order production. The same applies to the SEC. It doesn’t automatically imply that neither can win outright, but, as I have predicted, I still believe these are both low probabilities. Could compel SEC to…2/3

— Fred Rispoli (@freddyriz) May 16, 2023

Is the case nearing its conclusion?

In a May 17 Twitter thread, notable pro-crypto attorney Fred Rispoli suggested that the summary judgment ruling may already be drafted and could be released “any day now,” while also agreeing that a split decision is the most probable outcome.

Deaton mentioned during the Twitter Space that he believes Judge Torres is aware of her ruling but added that speculating on how much is finalized “in its final form” would be mere conjecture.

He also concurred that the decision could be announced at any moment, but he noted that it might take another month or longer.

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