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Individual Defendants file letter and Peirce & Roisman statement as supporting Motions to Dismiss amid "significant regulatory uncertainty regarding when digital assets may be classified as securities by the SEC


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12 hours ago, Pablo said:

She's been a critic of the SEC approach to crypto prosecutions since her appointment in 2017.  The Commissioner first discussed the safe harbor proposal back in 2019 (or maybe even earlier). She published a full draft of the proposal for lawyers to comment in April. There is a mountain of material by her and from her about the gaping holes in the regulatory framework. She's been a strident critic of the SEC approach since her appointment (by Trump no less) in 2017.

Why didn't Ripple latch onto her earlier comments about regulatory uncertainty and the safe harbor draft back in April or from 2018, '19 or '20? Because it doesn't fit the defence narrative. Waving the letter around is pure theatrics. Maybe it works, maybe it doesn't.

Still, it's not without risk. Let's take a closer look, shall we?

I did chuckle at how Ripple's lawyers tip-toed around the safe harbour component of the Commissioner's letter. And they dodged the fact that the Commissioners very favourably name-checked the Crypto Rating Council (https://www.cryptoratingcouncil.com/asset-ratings) which gave XRP the worst rating of all the projects assessed by them. The CRC had effectively determined in August 2019 that XRP is almost certainly a security under US law. It's on their home page. The Commissioner would know this. So Ripple pushing that letter under the judge's nose is a very, very high stakes gamble.

What does it say about the Commissioner's real thoughts on Ripple if she name-checks the CRC? Did Ripple's lawyers even check the CRC website? I damn well hope so because that letter is a boomerang so let's see what they prepared if it comes up. I'm betting Tenreiro and Co will completely miss it. :sarcastic:

The idea the letter lends unique support to a fair notice defence is pretty close to fantasy. On top of everything I've already said, Ripple is claiming the fair notice defence for stuff that happened back in 2013-2020. The letter on the other hand is focused on the situation as it stands today.

Here's the other angle that has gone unremarked: Ripple is leaning on the fair notice defence pretty heavily. They only need that type of defence if they feel they may lose the investment contract argument. The defence assumes Ripple, Brad and Chris did breach the Securities Act. It's not their only defence obviously but I've been surprised at how little has been said about a supposed new rule that will re-write securities laws. That would have been fun and certainly mixed things up a bit.

The judges will also have a problem untangling the fair notice defence because it undermines Statute of Limitation rules that apply to everyone else. It's effectively saying: Ripple did a bad thing for so long and we said nothing about it and even watched them do it so hey, they're free to go. Yes, that would be novel legal territory I guess, but not one many people will get behind for obvious reasons. Just think about that defence in the context of other corporate malfeasance and you get a sense of the magnitude of the problem and why public policy weighs heavily against courts allowing the use of that type of defence.

Finally, if Ripple succeeds on fair notice, the industry is still stuffed because that defence adds nothing to anyone's understanding of the rules and still exposes Ripple to claims for future conduct, not to mention potentially check-mate them on the class action still rolling along on the West Coast. Ripple could even conceivably win on fair notice for past misconduct but be prohibited from future sales. That doesn't help anyone either.

Keep in mind that I'm only talking about Ripple, Brad and Chris here. XRP will be fine and maybe better than fine if Ripple has to close down. The community is so strong, I easily see a DAO popping up on Flare that allows holders and MMs to stake their XRP, leveraging the deep liquidity already in the market, pushing XRP into completely different sets of use cases that generate returns for holders of XRP rather than Ripple itself.

Imagine that. B)

 

The Crypto Ratings Council

This is an interesting point of view I have not come across.  In four years of following XRP I have never heard of the Crypto Rating Council which I understand is mentioned by H pierce in her recent unofficial unendorsed plans to create a sandbox for ICOs?  I can see why you think it paints a new adverse slant on Ripples case.  However as mentioned by as @solid102  these ratings do not come from an accredited agency and there is no way of knowing why XRP is given an unfavourable "4" and ETH a favourable "2"?  (my guess is that the compilers have a biased BTC maxi point of view that PoW is highly decentralised). 

Given these observations I do not see how H Pierces unofficial, unendorsed ideas can be relevant to the case made by SEC

SECs weakness

Ripple's defence is built on two points:

  • Fair Notice (we all know this case inside out)
  • The Howey Test should not apply to the secondary market because in the Howey Test it was the investment contracts that were the securities not the sale of the oranges.  SEC are telling the judge that even sale on XRP on the secondary market are securities. 

SEC have not yet clarified to the judge why (Hinman's) ETH oranges are not security contracts but the sale of XRP oranges are securities/investment contracts?

What everyone can understand is that Hinman said that ETH "oranges" are not securities, and this letter was paraded on the SEC website and by Jay Clayton in his communications with Congress. Even today, if you go on to the SEC website, you will Hinman's "clarity speech" with the famous "we".  

At public meetings over many years Clayton was specifically asked to clarify whether "XRP oranges" are securities. He refused to give any clarity. (by any straight reading of Howey they are not)  But Hinman gave common sense clarity for ETH oranges.  

No one is arguing against SEC's notion that ICOs are a shifty way for dubious companies to raise venture capital without complying with security laws.  This space need regulating and it is SEC's job to define the rules.  The only clarity we have got so far is that ETH's clarity was gained by the ETH foundation indirectly putting 1.5 million per year (5 x his salary) into Hinman's (a senior SECs executive's) pocket.

Why SEC cannot win this case 

I am not a lawyer and cannot predict what the judge will rule, but I can tell you one thing with certainty;   Everyone has the  impression that Clayton and Hinman were the corrupt placemen of ETH and BTC community who were paid indirectly to aid ETH,BTC and the Chinese against a bona fide American company trying to build innovation into financial system.  As a result of this corruption the US is out of phase with almost every other financial regulatory body in the world (particularly the UK, EU, Singapore and Japan)

The law is not almighty.  When the law conflicts with what everyday people see as fair or practical they are ignored and are run over by events.  If SEC were to win it would be as if in 1900 the highway authorities passed a law that motor cars had to be pulled by horses.  

I think Gensler understands that SEC/Congress have to provide clarity like has been done in every other advanced country, and that this case has to be put into a side track and forgotten.

Edited by Julian_Williams
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8 hours ago, Alluvial said:

Pablo, thank you for your posts.  I know that everyone looks forward to reading them, including me.

That's very kind of you to say that. I'm definitely an outlier in my views so it feels strange to think that anyone else would read my posts. Some have commented that my views have changed recently. Actually, that's not quite right - I started life on this forum unpicking Hodor's blog posts so I'm pretty consistent - skeptical and prepared to dig into sources while others skim over the top. I mean, check that post I linked from 2017 - not too shabby, even if I say so myself.

One thing has changed this year - I'm no longer simply an observer and investor. I'm working in the space.

OK, onto the questions - and apologies because this might be the last time I post for a few days. I'm pretty busy!

5 hours ago, Cambridge said:

Wouldn't it support the fair notice defence because if the SEC can't provide clarity *today* on digital assets, how could they have provided it between 2013-2020? 

 

4 hours ago, Alluvial said:

I agree with this to some extent.  The reason that this case (and others digital asset cases relating to fair notice) is distinguishable from your analogy about corporate malfeasance, however, is because there was no clear guidance about what does and does not violate securities laws as it relates to sales of digital assets. 

I've seen these types of comments appear frequently and not just in the context of this case. The fact is that the SEC did offer detailed assessment of ICOs, crypto sales and DAOs in their DAO report published in 2017. The report wasn't perfect but it was a start. Reading it now, it's hard to say people were not put on notice or weren't warned:

Quote

The Commission deems it appropriate and in the public interest to issue this report of investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to advise those who would use a Decentralized Autonomous Organization (“DAO Entity”), or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws. All securities offered and sold in the United States must be registered with the Commission or must qualify for an exemption from the registration requirements.

In addition, any entity or person engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.

Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Released July 25, 2017)

Ripple got its own advice in 2013 and the advice was that there was a risk that sales of XRP could be viewed as an unregistered securities offering. The investors in Ripple also got advice and were aware of the risks. That's why they took steps to protect their investments via redemption clauses. Coinbase took advice and viewed XRP as a risk for a good long while until they cracked under investor demand. So everyone knew and mitigated their risk accordingly. Except us.

The main question for me is not why is Ripple being prosecuted, but rather why are other projects such as Algorand, Ethereum and the big DeFi projects not being prosecuted.

8 hours ago, Alluvial said:

As attorneys, we plead in the alternative.

Agreed - that's exactly what Ripple have done. My post was using short-hand to cut to the chase but I'm glad you bring this up. The fair notice defence is a pleading in the alternative because the consequences of successfully pleading that defence leaves Ripple in a bind after the case is over.

What Ripple really needs here is a positive declaration that their sales of XRP are not unregistered securities offerings. The fair notice defence doesn't give them that. Fair notice is only a short-term tactical victory because it doesn't resolve the uncertainty around future sales of XRP in the US nor resolve the secondary market questions.

Now we're back to the question of leverage and negotiation with the SEC which I've always said is the main game. Without a comprehensive statement from the courts endorsing Ripple's sales of XRP, Ripple needs to go to the negotiating table with the SEC to provide clarity to all market participants.

I'm guessing the parties already tried to settle and failed. That has to be because the SEC will not accept Ripple's continued sales of XRP in the US market and intends to take this to the wire.

9 hours ago, Alluvial said:

IMO, I think it would actually help a lot (especially those in the xrp community) because it would mean that all xrps trading in the secondary market are not securities. 

I'm not concerned about secondary markets. I just wish the secondary markets agreed with me.

In response to questions from Justice Netburn at the March 19 hearing, Jorge Tenreiro confirmed that the SEC does not view secondary market participants as within the scope of the Securities Act violations being alleged:

Quote

THE COURT: Presumably under this theory then, every individual in the world who is selling XRP would be committing a Section 5 violation based on what you just said.

MR. TENREIRO: That's not quite correct, your Honor. So the statute, the Securities Act of 1933 has sort of a
registration provision under Section 5, and then an exemption provision under Section 4. And broadly speaking, the Section 4 exemptions, I'm speaking very generally here, if these are transactions by people in the market, they are exempted by statute.

Section 5, though, focuses on and is relevant to this case, the issuer and the affiliates of the issuer. So it is only Mr. Larsen and Mr. Garlinghouse, the CEOs, or someone on the board. The affiliates of the issue are captured by the statute. Section 4 specifically exempts these transactions that the court put in the hypothetical of all these other people buying and selling XRP in the market.

That was a huge bit of news for me and I'm disappointed it didn't give exchanges the clarity they needed to rethink their delistings. It says a lot about how unsophisticated the exchanges are.

8 hours ago, VanGogh said:

Respectfully, bullshit!

Love it. The Aussie in me loves that type of reply - direct and to the point. More please! :D

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20 minutes ago, Pablo said:

 

That was a huge bit of news for me and I'm disappointed it didn't give exchanges the clarity they needed to rethink their delistings. It says a lot about how unsophisticated the exchanges are.

 

The sting would have been taken out of the tail If SEC clarified that the sales on exchanges are not securities, (which is what Hinman did for ETH).   SEC, and Clayton were asked for this clarity again and again and again over many years, and they never gave a straight answer, he was always deliberately mysterious and evasive.

Why have SEC not issued a statement about sales on the secondary market and put it on their website?  It is for the SEC to clarify, not the exchanges to look through the court docs and make inferences.  I think on other days in Court SEC have contradicted this point of view and given a strong impression that sales in the secondary market "can be" securities too (and then not clarified how to distinguish).

Of course the exchanges are neurotic on this issue.  None knows who SEC will pounce on next, or what the pretext for their action will be.

 

 

Edited by Julian_Williams
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6 minutes ago, brianwalden said:

Can I ask the question another way? Instead of debating what's a security, what would make a cryptocurrency unambiguously qualify as a currency or a commodity or anything other classification that's not a security? What boxes would it have to check?

Ah the old square peg, square hole trick. Would be an interesting thought experiment between the various agencies all looking to fund themselves as much as possible via enforcement actions. 

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23 hours ago, Pablo said:

 

That was a huge bit of news for me and I'm disappointed it didn't give exchanges the clarity they needed to rethink their delistings. It says a lot about how unsophisticated the exchanges are.

 

 

23 hours ago, Julian_Williams said:

 

Why have SEC not issued a statement about sales on the secondary market and put it on their website?  It is for the SEC to clarify, not the exchanges to look through the court docs and make inferences.  I think on other days in Court SEC have contradicted this point of view and given a strong impression that sales in the secondary market "can be" securities too (and then not clarified how to distinguish).

Of course the exchanges are neurotic on this issue.  None knows who SEC will pounce on next, or what the pretext for their action will be.

 

 

Judging by what's happened in this case, if exchanges had acted on the transcript of that exchange in court, and re-listed XRP on all major exchanges, then the SEC would have turned around and said

"Woah, hold your horses ffs. That was just the personal opinion of a lawyer in court, not the SEC's official view. Stay tuned for that...! Oh, and he was speaking in 'general terms' anyway, so not specific to this case. Confused? Learn to speak lawyer muthafuka!''

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.... regarding John Deaton above.... he is a bad, bad, mothafucka!.... 

any rate.... I remember attorneys (Poopin Palley) going out of thier way to leave arrogant, obnoxious, and attention seeking comments "LOL"... in response to his (Defeat'n Deaton) initial tweet regarding the Writ of Mandamus... 

"first they laugh....."

damm.......... get ready.... it's getting warm.....

Take it to the house!

 

 

 

Edited by FOOD
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