• Grayscale attorney Joseph Hall sees numerous problems with the SEC’s lawsuit against Ripple Labs and argues that this is “not a slam dunk” victory for the SEC.
• According to Hall, new SEC Chairman Gary Gensler could use the case to chart a new regulatory course.

After former SEC Commissioner Joseph Grundfest already questioned the ‘true motives’ of the SEC’s lawsuit against Ripple last week, Joseph Hall, a former SEC official and currently an attorney at white shoe firm Davis Polk & Wardwell who also represents Grayscale Investments, now also penned a critical editorial for Law360. In the piece, titled “Ripple Token Case Highlights Need for SEC Clarity on Crypto,” Hall discusses the need for the SEC to provide clarity on its regulation of digital assets.

Gensler should use case to chart new regulatory course

Although Hall’s criticism is somewhat gentler than Grundfest’s, the tenor of the post is clear: applying the Howey test to XRP and other cryptocurrency is not timely. As Hall discusses, a security must exist by definition to establish U.S. Securities and Exchange Commission (SEC) jurisdiction.

And “nothing in our Depression-era laws says that lines of computer code are securities,” which is why the SEC refers to the term “investment contract.” This term was first coined by the U.S. Supreme Court in the 1946 case SEC v. W.J. Howey Co. which involved investment opportunities in a Florida citrus grove. Accordingly, Hall’s application of the Howey test is absurd:

Imagine trying to explain what an iPhone is in language your great-grandfather would have understood just after World War II. That’s how easy it is to predict which digital assets are securities under the postwar Howey test.

Hall calls the lawsuit against Ripple indicative of what went wrong with the SEC’s treatment of cryptocurrencies under now-departed Chairman Jay Clayton. He calls on Gary Gensler, who was recently appointed by Joe Biden as the SEC’s new chairman, to use the lawsuit to “chart a different course” in the treatment of cryptocurrencies.

It’s difficult to overstate the impact this uncertainty has on the development of blockchain technology in the U.S. Outside the venture capital community, corporations, major investors and banks are understandably skittish about risking serious sums of money on technologies their lawyers can’t assure them comply with law […]

Joseph Hall on the SEC’s lawsuit against Ripple

As the former high-ranking SEC official notes, there are numerous “problems” with the lawsuit. For example, Hall believes that XRP should have been classified as a non-security along with Ethereum (ETH). When Bill Hinman, then director of the SEC’s Division of Corporation Finance, said in a 2018 speech that Ethereum is not a security, “it would have been a fair bet” that XRP would receive the same treatment.

That said, Hall, like Grundfest, criticized the timing of the lawsuit. This, he said, “suggests the possibility of a rift among the commissioners as opposed to a case everyone agreed had to be brought immediately in order to avert looming investor harm.”

Third, he said, the SEC’s decision to file suit caused massive harm among investors, whom it is supposed to protect:

Whatever one’s views on the merits, before news of the SEC’s intentions broke, XRP traded with a market cap in the $25 billion to $30 billion range, meaning that any precipitous action by the SEC would surely result in heavy investor losses — ending recently around $13 billion.

“Finally, and perhaps more interesting” is the question of why the SEC chose Ripple as a precedent.

Why on earth did the agency bring a case that was considerably less a slam dunk than its previous crypto enforcement actions? Barring a settlement, the Article III courts and not the SEC will ultimately say whether XRP is a security. There are plenty of digital assets with more tenuous use cases than XRP, any one of which might have better helped the SEC etch its views into federal caselaw before taking on a leviathan like Ripple Labs.

As Hall explains, the SEC by no means has a spotless record when it comes to defending its prerogatives in federal courts. A loss on the merits in the XRP litigation could epically damage the SEC’s regulatory project when it comes to digital assets. For him, therefore, the lawsuit offers a unique opportunity for new SEC chief Gary Gensler:

But speculating over the SEC’s motives shouldn’t distract from the more important policy question that Gensler and the rest of the agency’s incoming leadership will have to grapple with.

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