Thursday 15 July 2021 1:12 pm

Ripple case with SEC rests on a knife-edge phone call

The drawn-out courtroom battle between Ripple Labs and the Securities and Exchange Commission hinges on a phone call with the judge this afternoon.

Judge Sarah Netburn has agreed to discuss a request to have the deposition of former SEC chief William Hinman quashed.

The SEC legal team claim a speech made by Hinman in 2018 claiming Ethereum and sales of Ether were “not securities transactions” has no bearing on its case against Ripple.

XRP lawyers argue that it does, as their very defence is built around whether or not XRP should even be considered a securities asset, or if the SEC provided reasonable notice of its intention to regard XRP as a security.

Testify in court

If the Ripple request is granted, it could force Hinman to testify in court – something the SEC is keenly attempting to avoid.

The deposition surrounds a snippet from a speech made three years ago during a Yahoo Finance summit where Hinman, then the Director of the Division of Corporation Finance for the SEC, apparently stated that Ethereum didn’t warrant being considered as a securities asset.

During a lengthy address about cryptocurrencies and their stance as securities, he discussed the issue of both Bitcoin and Ethereum.

William Hinman

“The network on which Bitcoin functions is operational and appears to have been decentralised for some time, perhaps from inception,” he said at the 2018 conference.

“Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value.

“And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralised structure, current offers and sales of Ether are not securities transactions

“And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.

“Over time, there may be other sufficiently decentralised networks and systems where regulating the tokens or coins that function on them as securities may not be required. And, of course, there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.”

Scratched from proceedings

The SEC wants the address scratched from proceedings, saying Hinman was speaking in a personal capacity, but XRP lawyers want it to remain central to the case because they believe clear comparisons could be drawn between Ripple and Ethereum.

The SEC are having none of it, though. And in a strongly-worded letter to the court, say the speech carries insufficient weight to be a key part of the case.

“[The] Defendants have not demonstrated, as required by Lederman, that Director Hinman has ‘unique first-hand knowledge’ or that the information they seek is not available from other sources as to any facts about which they seek to elicit testimony,” the letter said.

“The only topic on which Defendants even claim that Director Hinman has ‘unique first-hand knowledge’ is ‘the circumstances under which he prepared and gave his speech and the agency’s treatment of the speech after the fact’.”

The call has been scheduled by Judge Netburn for 3pm EST (8pm UK time).

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