SEC Lawsuit's Ripple Effects May Strengthen Coinbase Litigation

Simar Marwaha
Simar Marwaha
Published on May 22, 2023 11:34 AM

Future legal claims made by Coinbase against the SEC may be supported by the Hinman documents. Compared to XRP, Coinbase may have a far better fair notice defence.

SEC Lawsuit's Ripple Effects May Strengthen Coinbase Litigation
Source: Getty

The Securities and Exchange Commission is continuing its investigation into cryptocurrencies, and its chair Gary Gensler has accused the sector of having "a lack of regulatory compliance, not a lack of regulatory clarity." However, the agency is up against strong pushback from the SEC of old in its attempt to control digital assets by designating them as securities.

Gensler has said that all digital assets, save Bitcoin, may qualify as securities and be governed by securities legislation. But old remarks and internal papers that are likely to offer a very different viewpoint are haunting the agency in its legal battle against cryptocurrency. In its action against Ripple Labs, the SEC has attempted to keep these records secret. 

SEC lawsuit's Ripple effects may intensify the Coinbase litigation

The Securities and Exchange Commission is still looking into cryptocurrencies, and Gary Gensler, the commission's head, has said that there is "a lack of regulatory compliance, not a lack of regulatory clarity" in the industry. The agency's attempt to regulate digital assets by classifying them as securities is met with stiff opposition from the old SEC.

According to Gensler, all digital assets—aside from Bitcoin—might be considered securities and subject to securities regulations. However, the agency's past comments and internal documents, which may provide a totally different perspective, are haunting it as it fights Bitcoin in court. The SEC has made an effort to conceal this information in its lawsuit against Ripple Labs.

However, a federal court ordered last week that they be made public. The verdict is a significant victory for Ripple as well as perhaps an even greater victory for the sector. This is why:

The internal discussion that took place within the agency surrounding the now-famous "Hinman speech" is a key turning point in the SEC v. Ripple case.

In a lecture he gave in 2018, William Hinman, the then-SEC Director, said that neither bitcoin nor ether constituted securities. This claim appears to conflict with the SEC's most recent remarks on the subject. Judge Analisa Torres rejected the SEC's attempt to have records pertaining to the Hinman speech sealed, further complicating the situation for the agency. 

Her choice will allow the public to see inside the SEC's rulemaking procedure for digital assets. It's a serious setback for the top financial regulator in the country. Why?

Because the Hinman records may shed new information on the SEC's perspective on cryptocurrencies.

SEC has so far preferred to keep its cryptocurrency holdings a secret, which has allowed it to adopt a strict position against any digital asset other than Bitcoin. Judge Torres is essentially forcing the SEC to reveal its position by ordering the publication of the Hinman documents. The records may reflect differing viewpoints on whether cryptocurrencies are securities and why among agency employees. And by doing so, they will probably strengthen Ripple's argument.

"We know that some senior SEC officials discussed that there was a reasonable basis to conclude XRP was not a security," said John Deaton, a former federal prosecutor and the creator of CryptoLaw. "And it's reasonable for Ripple to believe the same if SEC staff believed XRP was not a security," the statement said.

According to newly made public court filings, there are "reasonable grounds to conclude that XRP does not satisfy all elements of the Howey Analysis and is therefore not a "security" for purposes of the federal securities laws," according to an email from the SEC.

The SEC may run into legal and public relations issues if more proof of internal discussions from the Hinman documents is found to be in conflict with the agency's present position on the regulation of digital assets. Meanwhile, it could support Ripple's claim that the business lacked reasonable notice of what was illegal under the law because of the murky regulatory landscape around digital assets.

Effects of Ripple: Supporting Coinbase's Argument

Likewise, the Hinman papers may support Coinbase's legal claims against the SEC in the future. The fair notice defense for Coinbase may be much stronger than for XRP. This is so that Coinbase's IPO in 2021 would be allowed by the SEC, which did so knowing full well that the company's business plan involved listing digital assets like XRP without a broker-dealer license to trade securities.

This begs the issue of why the SEC would have granted approval for the initial public offering of a firm that sold digital assets to individual investors if the agency thought those assets were unregistered securities. Either the SEC mishandled its duty to safeguard investors, or at the time, internal opinion was that these digital assets were not unregistered securities. Regardless, the general public and the crypto business ought to be informed.

The SEC cannot avoid past remarks and actions that conflict with its current stance, whether it be the Hinman documents, the Coinbase IPO, or even Gensler's prior endorsement of a token that he now deems to be a security. And the court is beginning to see the significance of such discrepancies.

As an illustration, Judge Torres has ruled that the emails and papers pertaining to the Hinman speech are "judicial documents," meaning that she would probably use them as the basis for her ruling.

If Judge Torres finally finds in Ripple's favor, the ruling would set a crucial legal standard for the sector. It would shield digital assets like XRP from the SEC automatically classifying them as securities.

Additionally, it would all but force the government to abandon its regulation-by-enforcement strategy, which is pushing cryptocurrency investment outside.



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