Could newly released documents tip the balance?

The ongoing case of the Securities and Exchange Commission v Ripple Labs could have a significant impact on the future of cryptocurrency regulations. 

Ripple first popped up in 2012 with the promise of providing financial institutions and other entities with faster, more affordable clearance of cross-border fund transfers. To that end, Ripple created the XRP Ledger and a cryptocurrency called XRP (XRP) to function as its native coin and facilitate transactions.

On Dec. 22, 2020, the SEC sued Ripple, alleging that the firm selling XRP represented an unregistered securities offering.

Ripple co-founder and former CEO Chris Larsen and current CEO Brad Garlinghouse were also named in the SEC’s charges.

Most entities on the receiving end of SEC enforcement actions choose to settle. In this case, however, Ripple chose to fight the charges — at great expense — 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. It also said that if XRP was, in fact, a security, the SEC had failed to give it fair notice under U.S. securities laws.

Enter the Hinman documents

The “Hinman documents” refer to a 2018 speech given by former SEC Director William Hinman and documents associated with writing it.

In the speech, Hinman said that Ether (ETH) should not be considered a security given its decentralized nature, 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 decentralized structure, current offers and sales of Ether are not securities transactions.”

This was considered a landmark speech, as it signaled to the crypto industry that it could be possible for cryptocurrencies to transition from securities when they are first created to commodities once they are sufficiently decentralized.

This could have an impact on Ripple’s fair notice defense, which comes into play if Judge Analisa Torres finds that Ripple did indeed sell unregistered securities.

@attorneyjeremy1 is correct and this is why Ripple’s Fair Notice Defense should be viewed as an insurance policy. If the Judge finds Ripple violated Section 5 b/c these specific sales constituted investment contracts, Ripple argues the jury must decide if Ripple had fair notice.

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

Ripple requested the documents in discovery, and the request was granted on Oct. 21, 2022. While the documents could be used as a part of Ripple’s defense, the SEC has attempted to keep them sealed on multiple occasions, arguing that they are irrelevant to the court’s summary judgment decision.

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

Another win for transparency! Unredacted Hinman emails to be publicly available soon – stay tuned as the lawyers work through the mechanics to make that happen. https://t.co/o6puPypRHd https://t.co/qmaLVeQaP8

— Brad Garlinghouse (@bgarlinghouse) May 16, 2023

Notably, the court did not state whether the documents will be relied upon when it decides on the summary judgment motions of each party; but given the statements of those who have seen the documents, it appears likely they will negatively affect the public image of the SEC.

I’ve always felt good about our legal arguments, and I feel even better now.
I always felt bad about the SEC’s tactics, and I feel even worse about them now.

— Stuart Alderoty (@s_alderoty) October 20, 2022

Additionally, there are questions about whether Hinman had a conflict of interest when making the speech, as he worked at a law firm that is a member of an Ethereum advocacy organization before and after working for the SEC— and the documents may provide additional details around this.

Speaking during a Twitter Space shortly after the ruling, lawyer and CryptoLaw founder John Deaton predicted the documents will be:

“Disturbing, but not as shocking as maybe people think it’s going to be because there’s been, quite frankly, such a big buildup for it. […] I believe when these emails come out, that the conflicts of interest will be even more highlighted.”

What does the latest ruling mean for the case?

While it’s still too early to tell what the ultimate outcome of the case will be, the court also denied certain motions to seal from Ripple, which included references linking Ripple’s revenues with XRP sales and the amount of compensation offered to trading platforms, among others.

In the Twitter Space, Deaton highlighted these sections as evidence likely to hurt Ripple’s chances of a complete victory, adding:

“I think the chances of Ripple getting a complete victory are much slimmer after reading this than I felt before. I still don’t think the SEC is getting…