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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

1 hour ago, Julian_Williams said:

If I read this correctly - SEC are trapped in a trap of their own making.

He is certainly sounding positive but I'm keeping my hopes down. As he says it is all down to the discretion of the judge, meaning that all it takes is someone with a large enough bag of money (or a sufficiently frightening threat) to move things one way or the other. Wherever there is a human making a decision with power and money involved, there will be corruption. 

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4 minutes ago, Julian_Williams said:

As settlement with a fine would suit Ripple, taking this to discovery and then dragging this through the courts would be very dangerous for SEC.  A settlement sooner rather than later?  But still moths away :unsure:

Yes maybe months away but it seems some kind of official declaration from the SEC that XRP is right now not a security might not be that far away. It would be a huge win and result in a big price spike. 

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40 minutes ago, Seoulite said:

Yes maybe months away but it seems some kind of official declaration from the SEC that XRP is right now not a security might not be that far away. It would be a huge win and result in a big price spike. 

I get that sense as well, but keep in mind that SEC has also been completely negligent with its treatment of crypto to date so don’t put anything past them. 

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On 3/27/2021 at 11:15 AM, Julian_Williams said:

As always I will be interested to find out how positive @Pablo's opinion is on these developments 

Isn't this call simply to decide on Ripple's request for the SEC to provide documents relating to ETH and BTC? They're still angling for the estoppel/fairness argument and need more evidence to support that. Of course, this material goes to John's case against the SEC and also affects everyone else involved in the litigation extravaganza that has followed the SEC prosecution.

I'm guessing they're going to have to fight for it. :) 

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  • 2 weeks later...

As I was working my way through what was said during the motion to compel hearing, here were my thoughts.

Mr. Bliss, on behalf of the SEC, said Ethereum (and Bitcoin) were different from Ripple in the following two ways:

  • XRP was promoted by Ripple, while Ethereum wasn’t. Clearly, that’s incomplete at best because Ethereum raised a very public IPO.
  • XRP was premined by Ripple whereas Ether is randomly created through the way Proof of Work operates. If the case goes to a stage where they call expert witnesses, things should be interesting.

The point of contention would be that Ripple is the sole custodian of the proceeds from the escrow whereas with Ether each reward is randomised and hence this being considered a single long offering. I personally don’t agree with SEC’s view on this but I think this could be the primary argument for Ripple to win.

I think the reality is that by the time Ripple could distribute it in a better way, there was already a market and there was no way for them to “dump” or “airdrop” it. David Schwartz mentioned this multiple times. When the coins were “gifted” to Ripple, there was no crypto market. It was just a libertarian dream. Things changed really quickly. Perhaps I’m biased but I personally truly believe that Ripple tried to do the best it can. 

One other thing. Completely unrelated to the above. This is pure conspiracy theory on my part, so take this with a grain, nay a lot, of salt. David Schwartz went over the FBA consensus algorithm in detail with someone for a review, for almost a whole day. Some where in California. Way back in the really early days. He said that was the most stressful experience he had, but ultimately the reviewer concluded that the consensus algorithm was ironclad (within its parameters). David said he didn’t want to reveal who the reviewer was. I have often wondered if this was reviewed by the person or one of the people behind the moniker - Satoshi. I couldn’t find anyone else of that caliber from that time. Perhaps there were. David himself is/was quite accomplished. He was also one of the first developers on Bitcoin. Of course I’m probably very very wrong here, but it’s something I wonder about from time to time.

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Posted (edited)
On 4/8/2021 at 12:50 AM, Ripley said:

XRP was premined by Ripple whereas Ether is randomly created through the way Proof of Work operates.

Gary Gensler is on the record saying that in his view, Consensys, the Ethereum Foundation and founders were pre-allocated ETH prior to mainnet launch and because those parties were, and are fundamental to ETH's success, there is a serious question to be asked regarding sales of ETH by those parties. It doesn't mean that ETH itself is a security but does mean that specific sales may have amounted to securities offerings that were subject to the Securities Act.

That line of reasoning doesn't help Ripple at all of course but it does have major ramifications for the market. Because if Ripple is found to have breached the Securities Act then Gensler is almost duty-bound to pursue Joe Lubin, Vitalik and Consensys. And the pressure to do so increases if Ripple of John find a "smoking gun" in the SEC files that demonstrate the SEC staff were giving preferential treatment due to their conflicts of interest.

There is so much at stake here it's actually mind-bending:

  • I don't see how the SEC can afford to lose this case. If they do lose because they interpreted the act incorrectly, they are facing a tsunami of lawsuits as wronged investors and ICOs pursue the SEC for abusing their authority.
  • If that happens, the SEC may have to respond by categorising a whole range of tokens as securities. The Tetragon decision handed down in Delaware actually establishes some guidance as to how the SEC could formalise this in a manner that would be recognised by the courts as final:
Quote

It is undisputed that the SEC can make “determinations on an official basis” in three other ways: (1) an administrative proceeding, (2) a report pursuant to the Securities Exchange Act of 1934 (the “’34 Act”), and (3) rulemaking.

First, in an administrative proceeding, the SEC initiates an enforcement action before an administrative law judge. After the administrative law judgemakes her decision, the SEC Commission makes its own final determination through a review of that decision.

Second, the ’34 Act authorizes the Commission to undertake investigations “necessary to determine whether any person has violated, is violating or is about to violate any provision of this chapter,” or other SEC regulation. The Commission may thereafter publish a report, called a 21(a) report, describing the investigation. That determination is final and comes from the SEC Commission itself. In one recent example, the Commission released a 21(a) report in the cryptocurrency space, in which the SEC determined that certain tokens were securities, consistent with the SEC’s statutory authority.

Third, under its rulemaking authority, the SEC votes to issue rules and regulations pursuant to the Administrative Procedure Act. Through this mechanism, the SEC may give its views the full force of the law.

Boy, did Clayton hand Gensler a turd sandwich trying to sort this out... <_<

Edited by Pablo
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2 hours ago, Pablo said:

Boy, did Clayton hand Gensler a turd sandwich trying to sort this out... <_<

I think you logicked your way to the answer: a quick settlement shortly after Gensler takes office cuts the Gordian knot. 

I still sense this strange overall tone of pessimism from Pablo. It's interesting, but seems a bit at odds with Ripple's sweep of (small but meaningful) court victories lately. 

Also, I think the market is starting to price a settlement in. Sometimes it "knows" more than we do. 

 

Edited by HenrySeldom
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8 hours ago, Pablo said:
  • If that happens, the SEC may have to respond by categorising a whole range of tokens as securities. The Tetragon decision handed down in Delaware actually establishes some guidance as to how the SEC could formalise this in a manner that would be recognised by the courts as final:
Quote

It is undisputed that the SEC can make “determinations on an official basis” in three other ways: (1) an administrative proceeding, (2) a report pursuant to the Securities Exchange Act of 1934 (the “’34 Act”), and (3) rulemaking.

First, in an administrative proceeding, the SEC initiates an enforcement action before an administrative law judge. After the administrative law judgemakes her decision, the SEC Commission makes its own final determination through a review of that decision.

Second, the ’34 Act authorizes the Commission to undertake investigations “necessary to determine whether any person has violated, is violating or is about to violate any provision of this chapter,” or other SEC regulation. The Commission may thereafter publish a report, called a 21(a) report, describing the investigation. That determination is final and comes from the SEC Commission itself. In one recent example, the Commission released a 21(a) report in the cryptocurrency space, in which the SEC determined that certain tokens were securities, consistent with the SEC’s statutory authority.

Third, under its rulemaking authority, the SEC votes to issue rules and regulations pursuant to the Administrative Procedure Act. Through this mechanism, the SEC may give its views the full force of the law.

Expand  

Hmmm, so if I’m understanding this correctly, if the SEC loses this case because they were wrong, they just write down new rules that suit them and have them put in effect as law so that they can win later.
 

Ok, sounds perfectly fair, nothing wrong with that at all.

6 hours ago, HenrySeldom said:

I still sense this strange overall tone of pessimism from Pablo.

 I do as well, he’s sounded pretty pessimistic since the beginning. Not that that’s necessarily a bad thing, it’s always good to have a precautionary view presented to us as well as the optimistic ones. 

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5 minutes ago, PlanK said:

^

I would think Double Jeopardy would still apply.

 

Can't be charged for the same crime twice, therefore Ripple off the hook.  Time for the other coins to live in fear.

 

Yeah, I just think it’s pretty effed up how he system is setup. It’s rigged in a sense. 

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Posted (edited)
14 hours ago, HenrySeldom said:

I still sense this strange overall tone of pessimism from Pablo. It's interesting, but seems a bit at odds with Ripple's sweep of (small but meaningful) court victories lately.

@HenrySeldom - you need to explain what a neutral assessment looks like if you think mine is pessimistic. I'm hoping to advance the debate.

I think the onus is on you now to supply the following:

  • Propose your alternative hypothesis.
  • Explain what you think is really at stake for SEC if they lose.
  • You may be aware the SEC just filed a new lawsuit against Library Coin. What does that lawsuit tell us about the SEC's intent towards crypto given that Jay Clayton,  Hinman and their entire crew are no longer involved?
  • Does it strike you strange that their departures failed to slow down prosecutions against crypto projects? What do you think that tells us about the views of the remaining SEC commissioners?
  • Please tell us what you think the SEC will do if Gensler is confirmed?
  • How long will it be before the SEC provides market guidance regarding fundraising from sales of crypto? Are we talking weeks, months or years?
  • Give us your timeframes for the Ripple matter being resolved. Just pick a quarter this year.

On another thread you said this:

On 12/27/2020 at 5:49 PM, HenrySeldom said:

However, I think Kin's positive price action enables the market to "see" what an SEC settlement looks like for XRP, thus pricing in that possibility and preventing it from falling as far.

This is an interesting claim to make. Kik can't sell Kin tokens without jumping through hoops. What would it mean if Ripple were similarly restricted and what do you think this means for Ripple's business plan, investor redemptions etc?

 

Edited by Pablo
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