In a recent interview, Joseph A. Hall, a former executive at the U.S. Securities and Exchange Commission (SEC), talked about his former employer’s lawsuit against Ripple Labs.
Hall has been partner in U.S. law firm Davis Polk since September 2005. Before that, between October 2003 and June 2005, he was working at the SEC, where he ultimately served as Managing Executive for Policy under Chairman William H. Donaldson, where he assisted the Chairman in “directing the Commission’s policy-making and enforcement activities.”
In an article for Law360 published on 25 January 2021, Hall attempted to explain why the SEC’s enforcement action against Ripple over XRP showed the need for much more regulatory clarity on cryptoassets.
As you may remember, on 22 December 2020, the SEC announced that it had “filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”
In this article, Hall explained how inadequate the SEC’s Howey test is for deciding whether a particular cryptoasset is a security:
“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.“
He then argued that this lack of regulatory clarity significantly hurts the development of blockchain technology in the U.S.:
“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 — even when a technology holds the potential to improve the efficiency of managing vast amounts of data across countless industries, or the potential for frictionless, inexpensive transfers of value over smartphones and other widespread consumer tools.“
As for the SEC’s lawsuit against Ripple over the sale of XRP tokens, Hall said that after William Hinman’s speech at the Yahoo Finance All Markets Summit in June 2018, where he said that Ethereum (ETH) “might have been born a security but later morphed into a nonsecurity”, it was “a fair bet that XRP would get the same treatment”, i.e. “maybe there were some issues with early sales of XRP, but at this point surely XRP itself was in the clear”.
Hall argued that the SEC’s decision to bring an enforcement action against Ripple Labs for ongoing sales of XRP is “remarkable on several levels”:
- “… the timing — the day before Clayton stepped down — 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.“
- “… 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…“
- “Why on earth did the agency bring a case that was considerably less a slam dunk than its previous crypto enforcement actions?“
On February 22, as reported by The Daily Hodl, during an interview on the “Thinking Crypto” YouTube channel, Hall shared his latest thoughts on the SEC’s lawsuit against Ripple.
Here are a few highlights from his comments about the SEC, Ripple, and XRP:
- The current U.S. securities laws (which date back to 1934) do not do a good job of regulating cryptoassets since they were not designed with crypto in mind. If a token is declared to be not a security, then there is no investor protection whatsoever and if it is declared to be a security, then it is “regulated out of existence.” Therefore, U.S. Congress need to step in to create a “different regulatory structure for crypto.”
- As for the SEC’s lawsuit against Ripple, Hall said that he is “very sympathetic” to Ripple’s “fair notice” argument since “the Ripple network was operating for years before the last-minute filing of a lawsuit against them.”
- Hall believes that the SEC’s “entire regulatory project” could be “basically shut down if they lose on the merits here” and he still thinks “there’s a pretty good chance that they will lose on the merits.”
- Hall does not expect “a tidy resolution of this case over the course of this year” even though “settlement is always a possibility.”
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.
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