Crypto DeFined: SEC vs. Ripple
Lawyer involved in the case weighs in on why it's such a big deal
By Kathy Chu, TruthDAO
A high-profile lawsuit filed by the Securities and Exchange Commission against payment network Ripple Labs may finally answer a thorny question that has dogged the crypto world since its inception: In the eyes of the SEC, what is the difference between a cryptocurrency and a security?
The government's case, filed in 2020, accuses Ripple of raising $1.3 billion by selling unregistered securities of XRP, a cryptocurrency used on Ripple’s blockchain for international payments and currency exchange. Ripple claims it has done nothing wrong.
The crypto world is watching the case closely, as it could portend whether, and under what circumstances, federal regulators regard digital assets - cryptocurrencies, NFTs, etc. -- as an investment contract. That, in turn, could have a profound impact on the way fundraising is handled in the $1 trillion crypto world.
Lawyer John Deaton, who represents 74,000 XRP holders, joined Crypto DeFined on Oct. 6, 2022. Among other things, he talked about why this case, which could be decided as early as next year, is shaping up to be a watershed event for the crypto industry.
Five key takeaways (edited for clarity). In Deaton's view:
— The case will determine the future of crypto, literally: "Every government around the world is in discussions about creating a central bank digital currency," Deaton says. "So there's no bigger topic in global trade and finance in the world today." When Ripple got sued in 2020, he points out, XRP was the third-largest crypto currency in the world: "This case is the most significant non-fraud SEC enforcement action since 1946, when (SEC vs. W.J. Howey Co.) was decided, because it's going to dictate what happens in crypto. The decision handed down in this Ripple case is really going to define the regulatory reach of the SEC in this asset class."
— The SEC is overreaching by insisting all XRP sales are securities. "Any commodity can be packaged and marketed as a security," he said. "Bitcoin is not a security, but in 2015, there was a case where someone packaged it in a certain way and it was considered a security. Chinchillas have been used as a security; beavers have been marketed as a security. (The SEC) went with this insane... type of argument that we're going to go back in time and say, all XRP — no matter who traded it, no matter who sold it — are unregistered securities.”
—XRP shouldn’t be held to a different standard than Ether. Deaton believes the Ethereum community’s initial coin offering (ICO) in 2014 — when it raised around 31,000 bitcoin, or $18.3 million in 2014 dollars — was a securities offering, although the SEC didn’t classify Ethereum as such at the time. The bottom line, in his view: "If Ethereum is not subject to securities regulation, then XRP is not either."
—Drafts of a speech by a former SEC official may prove pivotal. The speech, delivered in June 2018 by William Hinman, the then-director of the SEC’s Division of Corporation Finance, said that, aside from the fundraising that occurred with Ether, “the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”
Deaton believes it’s possible — likely, in fact— that XRP was discussed in correspondence about previous drafts of Hinman’s 2018 speech. Why? At the time, he notes, XRP was battling Ethereum to be the second-largest cryptocurrency, behind Bitcoin. “Someone (at the SEC) might have said, ‘Hey, why are you giving ETH a free pass and not XRP?’” Deaton theorized. “‘Don't you think XRP is just as decentralized?’" If there was that kind of give and take going on at the SEC, he says, "it could guarantee Ripple the win.”
—XRP has more in common with a commodity than a security. Holders "take their XRP and they go to Celsius, to Nexo, to BlockFi and they collect interest off their token,” Deaton points out. “That is another example of how XRP, Ether, bitcoin and all these others that have been traded for almost a decade are more akin to commodities."
Watch the replay here.