The crypto industry in the U.S. is facing its greatest challenge in the history of its nascent existence. After steadily ramping up anti-crypto rhetoric and the enforcement of securities laws in recent years, the United States Securities and Exchange Commission (SEC), led by Chair Gary Gensler, filed civil lawsuits against the largest crypto exchanges in existence — Binance and Coinbase —during the week of June 5, 2023.
The legal action removed any doubt regarding the regulatory body’s commitment to what many — even dissenting SEC Commissioners — have labeled a “regulation by enforcement” approach to the industry. However, the SEC’s hard-line position came under intense scrutiny on June 13 when, after a court-ordered release, a trove of digital documents shed light on the organization’s vacillating thought process on industry regulation, revealing potential conflicts of interest regarding former SEC director William Hinman and a marked inconsistency in the body’s thoughts on applying existing securities laws to digital tokens.
The Hinman emails led to a firestorm of discussion in online spaces amongst the Web3 community and included calls from Ripple, one of the cryptocurrency entities the SEC is engaged in a legal tussle with, to investigate the agency. Some have further speculated that Ripple, along with Coinbase and Binance, might be able to leverage the documents in their favor in court.
Hinman emails: Much ado about nothing?
Ripple’s executive team has, unsurprisingly, been highly vocal about their displeasure with the content of the released documents, claiming that the former SEC director’s comments should no longer be seen as legitimate when considering the status of cryptocurrencies as securities.
Brad Garlinghouse, Ripple’s current CEO, likewise took to Twitter recently, writing, “Seeing the depth to which the SEC has essentially weaponized the lack of regulatory clarity through enforcement actions since this speech was given – it’s no surprise that we can call bluff on their claims to ‘just come in and register’ as nothing but in bad faith.”
It’s absolutely unconscionable that a regulator – when presented with so much pushback on what he was about to say / how he compiled this fake “test” in the first place – decided to move forward anyway, and throw an entire industry into chaos. https://t.co/9qzKOiPWsA— Brad Garlinghouse (@bgarlinghouse) June 13, 2023
But do legal experts see any credence to the idea that these documents might be useful in court?
“I do think so,” said Andres Munoz, an intellectual property and commercial litigator at Romano Law, while speaking to nft now. “[Ripple] could use this to their advantage. If the SEC’s determination that XRP was a security was based on, for example, the rationale that Hinman laid out in his statements, Ripple could use that internal commentary to show that the SEC’s analysis is flawed.”
Munoz, who litigates trademark and intellectual property matters regarding NFTs, and whose firm advises Web3 projects on the regulatory landscape, also notes that Hinman’s comments might not be enough for crypto companies to gain a legal foothold against the SEC’s claims, depending on how the regulatory body presents its decision-making process in classifying XRP (Ripple’s native cryptocurrency) and others as a security.
“If the SEC determined that XRP was a security under the more traditional Howey Test analysis and existing case law, or if the court ultimately agrees with whatever the SEC’s analysis was, then it doesn’t really matter.” Munoz elaborated. “And I think the same goes for Coinbase and Binance.”
A ripple in the legal pond
However, if there is significant doubt regarding how the SEC determined the status of the crypto tokens relevant to these lawsuits, Ripple (and other crypto companies) may be able to legally explore how the body came to its decision by requesting certain kinds of evidence from the prosecution pertaining to that process.
“At the very least, these documents give Ripple, Coinbase, and Binance some ammunition to take extensive discovery as to why and how the SEC determined that the tokens at issue are securities,” Munoz explained.
Some Web3 commentators are less convinced of the legal utility of the Hinman emails, however, with Gabriel Shapiro, Delphi Labs’ general counsel, claiming the documents are a “nothingburger.”
Hinman emails are a nothingburger though great for ETH. No idea why Ripple thinks these emails help Ripple's case….— _gabrielShapir0 (@lex_node) June 13, 2023
Ripple obtained access to the Hinman emails last October, but the documents were only recently released when United States District Judge Analisa Torres denied the SEC’s motion to seal the emails and keep them from public access.