Implications for XRP, SEC credibility and more

Hinman’s papers were finally unsealed and made available to the public on June 12 after a long time back and forth between Ripple and the United States Securities and Exchange Commission (SEC), but what exactly are they revealing?

The documents are extensive, and while they can be found in public sources such as Public Access to Court Electronic Records (PACER) or CourtListener, attorney James Filan tweeted on June 13 that he compiled them into two URLs.

In an interview with Cointelegraph soon after the unsealing, pro-XRP attorney and founder of CryptoLaw John Deaton shared his beliefs that “the documents themselves do not affect the judge’s basic analysis of whether XRP (XRP) has been offered/sold by Ripple as an investment contract or XRP status on secondary markets in the United States.”

This is seen as Ripple’s key defense during its legal battle with the SEC. But those who follow the case closely will know that the documents were not expected, despite then-SEC Chairman Jay Clayton. referencing speech as “the approach we use to assess whether a digital asset is a security”, 2018 speech carried a statement that these were the personal views of then-Director of Corporate Finance William Hinman and “do not necessarily reflect those of the Commission”.

With the Hinman documents being such a hot topic, many other crypto lawyers have also wondered what the documents could mean for XRP and Ether (ETH).

“Nicburger?”

After the documents were unsealed, many onlookers, such as Gabriel Shapiro, general counsel of crypto firm Delphi Labs, called them “nichamburger” on Twitter, which had no bearing on the case between Ripple and the SEC.

Pro-XRP attorney and Hodl Law founder Fred Rispoli had a different take when he appeared on the web Cryptocurrency Thinking podcast June 15th. He suggests they are “explosive” because while “we all knew there was a revolving door between regulators and private firms” — and “behind-the-scenes dealings” — the public rarely gets a chance to see it as clearly as it does in the emails .

In other words, while the documents may not help Ripple in establishing the security of XRP, they do have an impact on the SEC’s credibility. This sheds further light on why Hinman gave speech despite protests from other SEC divisions.

The documents also highlight what appears to be confirmation by Laura Jarsulic — a lawyer from the SEC’s Office of General Counsel — that tokens in a sufficiently decentralized network can exist in a “regulatory gap” where tokens “are not a security because there is no ‘controlling’ group,” but “regulation may be needed to protect buyers,” as with credit cards and drugs.

Comments from Jarsulic. Source: Hinman Papers

This may be significant because current SEC Chairman Gary Gensler he said repeatedly that they trust all cryptocurrencies except Bitcoin (BTC) are securities and that rules for cryptocurrencies already exist.

Strengthening Ripple’s fair defense

Ripple’s fair notice defense refers to the argument that the SEC did not provide it with sufficient notice before suing it for securities fraud in December 2020.

However, the defense is not generally seen as strong because long-standing judicial precedent—ie, the Howey test that determines whether a transaction qualifies as an investment contract or a security—is considered fair notice.

But in an interview with Cointelegraph, Deaton suggested that the documents support Ripple’s argument that the speech created market confusion and prevented market participants from accurately determining what constitutes a security under the Howey test, saying:

“The documents help Ripple (and others) argue that the speech caused more confusion in the markets, causing market participants to lack sufficient information about what was prohibited by existing laws.”

Credibility SEC

The Hinman documents show conversations between various members of the SEC as they tried to prepare the speech for public release.

As Ripple Chief Legal Officer Stuart Alderoty pointed out in a June 13 Twitter thread, the emails also highlight that Hinman received feedback from other divisions of the SEC and noted that some of the factors he used in determining that Ether was not a security had no legal basis.

Deaton’s CryptoLaw hosted a panel on June 14, joined by fellow cryptolaw firm Jeremy Hogan and former SEC securities attorney Marc Fagel, who has worked at the agency for 16 years.

During the panel, Fagel agreed that the email contained no real bombshells relevant to the case, but raised some potential conflicts of interest. He said on several occasions that he did not want to attribute motivation to Hinman, but added:

“I try to see it from both sides. So I don’t like to jump to the conclusion that there’s something unethical here, even though we can all agree that there are some conflicting issues and some really unsatisfactory behavior.”

Before and after working with the SEC, Hinman worked at the law firm Simpson Thacher & Bartlett, which was a member of the Enterprise Ethereum Alliance, an advocacy organization that seeks to govern the use of Ethereum’s blockchain technology.

According to the watchdog group Empower Oversight Whistleblowers and Research, the group that originally filed the Freedom of Information request that led to the Hinman documents, Hinman “continued to receive millions of dollars from Simpson Thacher while working at the SEC.”

The implication, as Hogan stated during the panel, is that Hinman was essentially being paid to give Ether a free pass, saying in his speech that Ether was not the security that some people previously referred to as “ETHGate.”

Related: Ripple’s Alderoty calls for an investigation into Bill Hinman and his infamous speech

Hogan took a similar view, suggesting that the emails did not contain much that Ripple could actively use in the case, but suggested that Hinman should be more concerned with the content of the emails than the SEC, especially as his earlier drafts of the speech indicated it as “speech of the ether”.

Ether’s strengthened position

Deaton also said he believes “speech documents are good for Ethereum” and “can also help ERC-20 tokens like Dragonchain” that are controlled by the Ethereum blockchain:

“If the SEC argued that the network was decentralized enough, then these tokens have an even better case of fair notice than Ripple.”

This was also mentioned in the Office of General Counsel’s comments, with the division sharing that it had “reservations about including statements directly about Ether in the speech” because “it would be difficult for the agency to take a different position on Ether in the future.”

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