Hinman Document Unsealed: SEC Officials Concerned About “Ethereum is Not a Security” Declaration

Author: BlockingBitpushNews Mary Liu

On June 13, 2023, files related to a 2018 speech by former Securities and Exchange Commission (SEC) corporate finance chief William Hinman (2017-2020) have been unsealed, including a large number of emails and annotated comments.

In the speech, Hinman argued that the native assets of the Ethereum network do not need to be regulated as securities, a point that Ripple Labs often cites in its defense against SEC accusations. The newly released files show that several senior SEC officials clearly stated that Hinman’s speech could create confusion about how the United States classifies digital assets.

Some industry insiders believe that these files do not provide conclusive evidence, but provide some new information that could help Ripple in its legal battle against the SEC, and overall may be favorable to Ripple.

Several SEC officials express concerns about Hinman’s statement that “Ethereum is not a security”

In his speech on June 14, 2018, Hinman said: “Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. “

The released files include emails exchanged between Hinman and SEC staff to prepare for the upcoming speech, which show that SEC officials were struggling with how to articulate the point that Ethereum is not a security.

On June 12, 2018, Director of Trading and Markets Brett Redfearn wrote: “As written, the language regarding whether ETH is a security remains fuzzy. If you want to make a more affirmative statement that it is not a security, the language could be stronger (i.e., say it directly). If you do not want to take an affirmative position, we recommend using language similar to what was used in the Bitcoin Disclosure Regime to make it more consistent.”

Redfearn also commented in proposed speech drafts that some of the content “seems likely to create more confusion about the status of ETH.”

Valerie SzczeBlockingnik, the current head of the SEC FinHub group, wrote in an email on May 25, 2018, that she believed “less detail is better,” and added, “This is introducing a concept that is likely to generate a lot of discussion, so I think it’s a good thing to leave room for discussion.”

This early version of the speech did not mention Ethereum, although it did mention Bitcoin. SEC officials said, “We don’t want to imply that BTC is a security.”

SEC lawyer Laura Jarsulic from the Office of the General Counsel responded in a June 12 email, “We are hesitant to make direct statements about Ether in the speech… because it would make it difficult for the agency to take a different position on ETH in the future.”

Both Redfearn and the Office of the General Counsel believe that Hinman skipped over the threshold question of whether the SEC has jurisdiction, warning that by creating this “other” category and focusing on information asymmetry, Hinman exposed a regulatory loophole that the SEC may not have the authority to fill.

Other officials copied on the email include former SEC Enforcement Directors Stephanie Avakian and Steven Peikin, former Director of Investment Management Dalia Blass, former Chief Counsel and Acting Director of the Division of Trading and Markets Heather Seidel, and others.

The emails also show that William Hinman planned to speak with Ethereum co-founder Vitalik Buterin in 2018 to discuss “confirming our understanding of how the Ethereum Foundation operates.”

How will this affect the case?

As previously reported, in December 2020, the SEC sued Ripple Labs, accusing the company of raising over $1.3 billion through the unregistered sale of digital asset securities and its cryptocurrency XRP. Ripple denies that XRP is a security and argues that it does not meet the Howey test. It also argues that Hinman’s comments about ETH contradict the SEC’s position that XRP is a security.

William Hinman later became a key figure in the lawsuit, and Ripple has been seeking disclosure of these documents since late 2021. The new documents were released pursuant to an order from the U.S. District Court for the Southern District of New York.

Ripple CEO and principal defendant in the case Brad Garlinghouse said waiting was worth it ahead of the release of the documents. In response to a post from crypto YouTuber Jungle Inc. on Twitter, he said, “I hope we can go deep now, but we’ve waited this long (over 18 months), and I don’t want to overstep… I just want to say, Stuart Alderoty [Ripple’s Chief Legal Officer] and I believe these documents were worth the wait.”

Ripple Chief Legal Officer Stuart Alderoty tweeted, “We can now all see that Hinman ignored multiple warnings, that his speech included a fictional analysis without legal basis, divorced from the Howey test factors, exposed regulatory loopholes and that it would create not only confusion but ‘greater confusion’ in the market.”

Ripple Labs hopes to borrow Ethereum’s defense of its XRP technology and token sale. Borrowing language from Hinman, if Ethereum can become “decentralized enough” over time, then XRP can also transform from a security to a commodity.

SEC and Ripple are waiting for a summary judgment, with Ripple’s legal team previously stating that a judgment could be made by the end of this year. The judge could rule that there is not enough evidence for a summary judgment, the case can go to trial, or Ripple and the SEC could potentially reach a settlement, although Ripple has said this is an unlikely outcome.

Venture capital firm CEHV founder Adam Cochran commented that the documents “don’t have a huge impact on the XRP case,” but “subtle differences put Gensler in a bind.”

Delphi Labs’ general counsel Gabriel Shapiro called the emails a “nothingburger,” revealing no new information helpful to the Ripple case, Shapiro wrote on Twitter: “If it helped Ripple’s case, I’d be happy, but it doesn’t.”

The Potential Impact on Cryptocurrency Classification

The release of the Hinman files could spark a major debate over the classification of cryptocurrencies as securities, particularly during a challenging time for the industry. Recently, the SEC sued cryptocurrency exchanges Coinbase and Binance, accusing them of selling unregistered securities. In the legal suit against Coinbase, the SEC said that at least 13 of the cryptocurrencies offered to customers by Coinbase are securities, including solana (SOL) and cardano (ADA).

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