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My running analysis of the SEC v. Ripple, Larsen et al


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This brings us to the latest development from the hearing yesterday regarding the SEC's request to access Brad/Chris's bank accounts as part of discovery. The question arises as to how the hearing aff

I've already commented in separate threads how I think the SEC case is playing out and what it means for XRP, Ripple and the broader crypto ecosystem.  Some people have asked me to consolidate th

You are correct that I wasn't confident of a good outcome. However it goes further than just the outcome of the case. It extends to the fact that a redemption clause was there in the first place for T

Thank you for this!

If possible for you to answer, I have three questions. 

1.) If I interpret this correctly, you think that there is a possibility that XRP is not a security when it applies to retail, but could potentially be a "security" as it relates to BG, CL and Ripple, but only if the SEC can prove the 5 percent of sales that occurred in the US are securities offerings in the courts?

2.) If Ripple loses, this would affect XLM and other tokens? 

I do smell something odd. Like Jed was truly behind providing privileged and early communications to save his own tail. 

That move may eventually come back like a boomerang. 

3.) If XRP is deemed not a security for retail holders, then we're in the clear? 

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5 minutes ago, Cambridge said:

1.) If I interpret this correctly, you think that there is a possibility that XRP is not a security when it applies to retail, but could potentially be a "security" as it relates to BG, CL and Ripple, but only if the SEC can prove the 5 percent of sales that occurred in the US are securities offerings in the courts?

Yes to first part - there is a jurisdictional question about the sales in the US versus sales in other countries but I doubt the court will make too much of it given it's undisputed that XRP was sold in the US. Each sale is considered a separate potential breach under the Securities Act.

5 minutes ago, Cambridge said:

2.) If Ripple loses, this would affect XLM and other tokens? 

You have to seriously wonder how they've avoided sanction all this time, particularly when Jed and Stripe are collecting the bulk of the XLM minted as part of the inflation algorithm and are the main promoters of XLM. As I posted above, I suspect that Jed has assisted the SEC in their prosecution.

5 minutes ago, Cambridge said:

3.) If XRP is deemed not a security for retail holders, then we're in the clear? 

I don't know about "in the clear" but I refer back to my conclusions posted in the opening post:

Quote

If that's how this plays out - it still leads to the conclusion that the asset (XRP) could remain free to be sold on the secondary market and used by clients but that Ripple, Brad and Chris (and potentially other founders) have to end their unregistered sales.

There are some positives to come out of this. The use of XRP and the XRPL by banks and FIs would now be fully opened up, especially in light of the OCC endorsement regarding the use of DLT and stablecoins. It would also eliminate the toxicity and ongoing negative press. Ripple would simply be a very good DLT software and services house specialising in the XRPL. The IPO is still on the cards and valuation becomes clearer.

 

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9 minutes ago, Pablo said:

Yes to first part - there is a jurisdictional question about the sales in the US versus sales in other countries but I doubt the court will make too much of it given it's undisputed that XRP was sold in the US. Each sale is considered a separate potential breach under the Securities Act.

You have to seriously wonder how they've avoided sanction all this time, particularly when Jed and Stripe are collecting the bulk of the XLM minted as part of the inflation algorithm and are the main promoters of XLM. As I posted above, I suspect that Jed has assisted the SEC in their prosecution.

I don't know about "in the clear" but I refer back to my conclusions posted in the opening post:

 

I can't thank you enough Pablo! Thank you! 

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Is it really bad that the XRP in Ripple's escrows are a security, and can only be sold in the US to accredited investors on accredited platforms?

They'll pay a hefty fine to the but they're sitting on a big pile of gold (Brad invested in Bitcoin) so they can afford it.

From what I understood, the SEC lawyer has basically given clarity to the XRP in the hands of Joe Public, as not securities.

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4 hours ago, Pablo said:

This brings us to the latest development from the hearing yesterday regarding the SEC's request to access Brad/Chris's bank accounts as part of discovery. The question arises as to how the hearing affects each party's case?

In my view, it's too early to say - the hearing only related to discovery in front of a magistrate who is not hearing the main case. The magistrate (Judge Sarah Netburn) appeared to have little understanding of crypto and seemed unsure of the case law relating to discovery in securities cases. At one point, she referred to Ripple Labs as if it was a crypto exchange used by Brad/Chris to sell XRP and didn't know who Coinbase is (referring to them several times as "Coinbank").

Her difficulty understanding the tech and crypto in general will present problems for both sides. In this regard, Brad's lawyers (Matt Solomon) did a better job of keeping things simple. I'm not convinced about the tone and theatrical gasps of frustration but it obviously struck a chord.

As for Jorge Tenreiro of the SEC, it was a bumbling, rambling, confusing, spaghetti bolognese of a presentation. His explanation of how crypto trading works and the critical importance of the bank records as a central source of truth was a masterclass on how NOT to argue a case to a crypto novice like Judge Netburn. Despite interjecting a few times, I think Netburn cut Tenreiro a lot of slack. That's something worth noting as this case proceeds - in the Kik and Telegram cases, we witnessed a similar leniency towards the SEC lawyers when they stumbled which makes sense once people remember that the SEC is starting on solid, well established, public policy grounds for pursuing these cases and the judges are there to uphold these laws and the public policy behind it.

I found the twitter reaction to some of Judge Netburn's comments regarding XRP as a currency and its utility value pretty amusing and overblown. Firstly, the magistrate was only repeating what Brad's lawyers said to make sure she understood his point. But more importantly, she doesn't have a great understanding of crypto, is not involved in the hearing and will not be deciding the tricky matters of law under the Securities Act. If we get commentary like that from Judge Torres, that would be a significant development.

Given Netburn's role is limited to deciding procedural matters and handling mediation (which does not decide matters of law as it is focused on finding common ground for potential settlement), I couldn't get excited about her comments. There was, in fact, something much more important said during this hearing which I'll get to below.

At the end of the day, this was a small tactical skirmish.

Here are my big takeaways as an XRP investor:

  • Brad/Chris can say goodbye to "quick" resolution. Motions to dismiss won't be heard until June. They will likely be dismissed and then we go to trial another few months after that. You guys and gals know my thoughts regarding what I intend to do in the middle of a bull market while this thing drags on and on. 
  • The SEC is caught in a bind regarding ETH. Their attempt to distinguish between XRP and ETH will be something I will be watching to see if that gap closes - meaning I foresee trouble ahead for Ethereum, particularly as (i) Gary Gensler already sees the Foundation as a key central force in the development of ETH, (ii) the Foundation actively promotes ETH and (iii) the Foundation and key figures such as Joe Lubin pre-mined themselves a nice little stash of ETH which they are selling to fund the promotion of ETH. If Ripple wins however, the Foundation owes them a few beers because the SEC will think twice before pursuing Joe and the Foundation.
  • The SEC has missed a trick by not looking at the Tetragon litigation - there is stuff filed there that has a major bearing on the SEC case. Let's see if they work it out.
  • The biggest news: we are almost certainly on track with my assessment I linked in the above post - that the SEC is going to find a way to allow secondary market trading of XRP in the US and will distinguish between promoters of ICOs and retail investors (and probably even money makers/banks). If I'm right, watch me claim credit for calling it first on January 5th. :D

First of all, many thanks for your sober analyses. They help me not to bet house and home right away again 😩
I also think that the Ethereum Alliance is still in trouble. And actually regardless of the outcome of the Ripple case, I think someone will take another run at the Hinman thing. That didn't go over very cleanly in a very matter-of-fact way.

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4 hours ago, Pablo said:

T

  • The biggest news: we are almost certainly on track with my assessment I linked in the above post - that the SEC is going to find a way to allow secondary market trading of XRP in the US and will distinguish between promoters of ICOs and retail investors (and probably even money makers/banks). If I'm right, watch me claim credit for calling it first on January 5th. :D

Thanks for starting this thread.  Given that crypto law is your profession your opinions clearly very interesting to us.

Jeremy Hogan told us the SEC lawyer, in response to a question from the judge said "Under section 4 only Ripple or Employees of Ripple can illegally sell XRP"

In the words of SEC's lawyer seems to confirm the case is restricted to Ripple, Brad and Chris's sales

and it seems to clear the way for

  • Jed to go on selling
  • exchanges to reopen
  • Bank to use ODL

It seems a big deal that a SEC lawyer has clarified the meaning of section 4 (whatever that says?).  I cannot see how they can go back on what they said in court. 

Edited by Julian_Williams
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15 minutes ago, Ripple_A_S_Well said:

First of all, many thanks for your sober analyses. They help me not to bet house and home right away again 😩
I also think that the Ethereum Alliance is still in trouble. And actually regardless of the outcome of the Ripple case, I think someone will take another run at the Hinman thing. That didn't go over very cleanly in a very matter-of-fact way.

Hinman's behaviour seems to be be about unethical behaviour by a civil servant.  From an outsiders point of view it seems to stink of corruption.  There should be procedures that deal with this sort of issue.   In Britain we would be calling for a public enquiry in front of an ethics committee of some sort.   

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4 hours ago, Pablo said:

Tetragon litigation

Another win for Ripple here btw:

https://www.law360.com/articles/1366937/chancery-grants-ripple-win-in-tetragon-cash-out-suit

I recall @Pablobeing bearish on Ripple's chances here, interpreting the "official basis" clause as the SEC merely bringing the lawsuit. That struck me as a cautious interpretation of the facts.

Well, now that we see how this is playing out in court with tangible results, I wonder if you might recalibrate and dial down the caution a bit on some of your bullet points above.

Edited by HenrySeldom
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15 minutes ago, Julian_Williams said:

Hinman's behaviour seems to be be about unethical behaviour by a civil servant.  From an outsiders point of view it seems to stink of corruption.  There should be procedures that deal with this sort of issue.   In Britain we would be calling for a public enquiry in front of an ethics committee of some sort.   

On the face of it, this whole narrative does seem to be a decent indicator that Gensler will move to settle the case. 

It's funny how many people don't even realize that he hasn't actually been confirmed yet.

I think this forum in general continues to underestimate the post-Trump political calculus of the whole case.

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@Pablo

my last question, how much of an impact would you say that John Deaton's motion to intervene will have on the final decision in this case, especially since over 10,000 XRP holders and counting feel damaged by the SEC actions?

The SEC alleged XRP is a security on December 22, 2020, and the next day the acting chairman resigns. A week later or so, the SEC leadership walks out the door, leaving exchanges in regulatory disarray resulting in 15 billion losses in the market - not to mention the unfortunate human losses in consequence.

How could this influence Judge Torres? 

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1 hour ago, HenrySeldom said:

Another win for Ripple here btw:

https://www.law360.com/articles/1366937/chancery-grants-ripple-win-in-tetragon-cash-out-suit

I recall @Pablobeing bearish on Ripple's chances here, interpreting the "official basis" clause as the SEC merely bringing the lawsuit. That struck me as a cautious interpretation of the facts.

Well, now that we see how this is playing out in court with tangible results, I wonder if you might recalibrate and dial down the caution a bit on some of your bullet points above.

I think sometimes "common sense" is a good guide. Legal tricks play an essential role in court, of course, but if something sounds absurd to the layman, a judge can hardly understand it otherwise. What always struck me as suspicious was the fact that the SEC kept Ripple and many others in the dark, even though they were constantly asked to regulate. The free pass for BTC and ETH seems in the light of the impressions around Hinman and his unethical behavior now very shameful for the SEC and makes me as a longtime XRP investor also really angry.
Gensler has a difficult task ahead of him. He must repair the damaged image of the SEC and ensure new trust. Personally, I think the "case" against Ripple is dead since yesterday.

 

Edited by Ripple_A_S_Well
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2 hours ago, Julian_Williams said:

the SEC lawyer, in response to a question from the judge said "Under section 4 only Ripple or Employees of Ripple can illegally sell XRP"

In the words of SEC's lawyer seems to confirm the case is restricted to Ripple, Brad and Chris's sales

and it seems to clear the way for

  • Jed to go on selling
  • exchanges to reopen
  • Bank to use ODL

It seems a big deal that a SEC lawyer has clarified the meaning of section 4 (whatever that says?).  I cannot see how they can go back on what they said in court. 

To the last point, in bold (mine) - given how many times they have done that very thing (how many amended complaints are we on, now?) - I want it in "letter format."

No offense to Mr. Tenreiro - I'm sure he's just doing his best - but...

Nobody is going to hang their hat (or that of their business) on the word of what one of the SEC's current trial attorneys said while pursuing one frivolous motion.

In attempting to regulate this space via enforcement, all that SEC has accomplished is to call its own credibility into ultimate question.  (I await a no-action letter.)

(Blanket.)

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