The Breakdown - The Ripple-SEC Case is Finally Over

Episode Date: August 9, 2024

...and in the eyes of Ripple Labs and the crypto industry, it was a big win. NLW explains how it ended. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, August 8th, and today we are talking about the final decision in the long-running ripple case. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, after almost four years in court, the SEC's lawsuit against Ripple is finally resolved. The judge has ordered Ripple Labs to pay a $125 million civil penalty and prohibited them from further breaches of securities law. The ruling is being hailed as a victory for Ripple as the SEC had argued for a company-ending fine of $2 billion.

From the beginning, this case has had major implications for the industry. It helped define the borders of how securities law would apply to crypto assets in the absence of SEC rulemaking. This ruling only dealt with penalties, with substantive legal issues decided in a July 2023 decision. That order found that direct token sales to institutional investors were covered by existing securities law. Ripple had failed to obtain the relevant SEC exemptions before conducting these sales. However, the judge also found that secondary market token sales on the open market were not subject to securities law. This led to the conclusion that the tokens themselves are not securities. There were also further issues related to Ripple executives

aiding and abetting this illegal conduct. Those claims were set to go to a full trial, but have since been dropped by the SEC. In deciding on the appropriate penalty, the court found that there were 1,278 transactions that violated securities law. The judge justified a much smaller penalty than the SEC had asked for because the case, quote, does not involve allegations of fraud, misappropriation, or other more culpable conduct. In addition, the court rejected any claim for disgorgement of profits. The judge found that the SEC had not provided enough evidence that failure to register resulted in substantial losses for institutional investors. Regarding the injunction against further breaches of securities law, the order referred to on.

ongoing sales to institutional investors. Since last year's ruling, Ripple has sold tokens via their on-demand liquidity program. They maintain that these transactions are largely with offshore entities so are not governed by U.S. securities law. The judge found that a general injunction was justified due to, quote, Ripple's willingness to push the boundaries of the order evinces a likelihood that it will eventually, if it is not already, cross the line. However, she stopped short of making any determination in this order, adding, to be clear, the court does not today hold that Ripple's post-complaint sales have violated securities law. In essence, it seems the judge felt that the judge felt that the SEC should file a new motion if they take issue with Ripple's ongoing sales rather than bundling

the conduct up into a request for an injunction. Crypto lawyers seem a bit undecided whether or not Ripple's ongoing sales or violations of securities law, which is probably a good indication that the SEC should just start over if they want to pursue that issue. The order is still subject to appeal, but failing that, Ripple is done with its fight against the SEC once they mail them the check. Ripple executives position the result as a big win. CEO Brad Garlinghouse wrote, the SEC asked for $2 billion, and the court reduced their demand by 94%, recognizing that they had overplayed their hand. We respect the court's decision and have clarity to continue growing our company. This is a victory for Ripple, the industry, and the rule of law. The SEC's headwinds

against the whole of the XRP community are gone. Chief legal officer Stuart Alderati tweeted, A final judgment. The court rejects the SEC's suggestion that Ripple acted recklessly, and she reminds the SEC that this case did not involve any allegations of fraud or intentional wrongdoing, and no one suffered any financial harm. She rejects the SEC, absurd demand for $2 billion in fines and penalties. We respect the $125 million fine the court has imposed for certain historic sales to sophisticated third parties. Crypto lawyer Gabriel Shapiro thinks this lawsuit will have some major repercussions for the industry and the SEC's strategy of regulation by enforcement.

He tweeted, Ripple team definitely popping bottles right now. Probably the first time the SEC has litigated to a final judgment without achieving near total destruction of the Devco. Feels like a game changer and major loss of pre-litigation settlement leverage for the SEC. This loss of settlement leverage could be a really big deal, with the SEC no longer able to credibly threaten billions of dollars of fines for mere registration issues. Shapiro continued, Really can't think of a worse case for the SEC to lose from the SEC's point of view than

Ripple. They did everything wrong, tying their business to token price, hiring market makers to massage the price, et cetera, et cetera. You can literally look on old charts and see how Ripple Corp announcements pumped XRP. The tech itself is also highly centralized, with no crypto-economic mechanism to incentivize validators and dependence on a Ripple-maintained list to get consistency. Point being, if the SEC lost this one, imagine how it will fit. in all cases where the project team was much more careful. Now, for the past year, Shapiro has taken the view that passing crypto legislation isn't strictly necessary for the industry to move forward.

He felt this final ruling that XRP is not a security justified that position, concluding, we don't need Fit 21 and it does more harm than good. Courts solved most of the problem. While it may be a little bit premature to fire up the ICO machine back on U.S. soil, if this ruling survives an appeal, it would undermine the SEC's position that all token sales are illegal securities. There's also impact litigation in the pipeline that deals with air traffic. drops in crypto exchange registration. We're not there yet, but there could be a pathway to legal

clarity through the courts rather than through Congress. The other big issue is how the result plays politically for the SEC. Earlier this year, Congress turned down the agency's request for a budget increase to pursue more crypto enforcement. After four long and expensive years of litigation, it's hard to see this as anything but a failure for the agency. Bloomberg analyst James Safart thinks they will try to spin it anyway, tweeting, I'm sure the SEC will refer to this as a win for getting a $125 million penalty. But that's really a win for ripple as far as I'm concerned. and an L for the SEC's regulation via enforcement stance. Tony Edwards, the host of Thinking Crypto,

believes that we're at the point of narrative collapse for the SEC, commenting, I see some people are saying Gary Gensler will appeal the SEC versus Ripple ruling. You're missing the bigger picture here. Gary Gensler has lost the narrative. His lies in political agenda given to him by Elizabeth Warren are getting exposed. He is losing major court cases. He wanted $2 billion from Ripple but only got $125 million,

and XRP got the clarity as not intrinsically being a security. Plus, he is feeling political pressure. He was called out by Donald Trump, Democrats are turning on him and Elizabeth Warren, and much more. Anders pointed out that the 60-day timeline to lodge an appeal is more than a little inconvenient for the Democrats, tweeting, if the SEC would decide to appeal the Ripple case, they would have to appeal right before the U.S. presidential election, which would be the worst possible timing for the SEC and Gensler. Now, when it comes to these court issues, there is never really truly a full end, but this is about as close as we get. I think, as everyone says this is likely to cast a very long shadow over the future of U.S. crypto policy,

and certainly for Ripple itself, this week has been a good one. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political parties platform, which will lead ultimately to the creation of new financial products, new applications,

and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders, and perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.co. There will be links to register for the conference, and again, you can use code breakdown 10 to get 10% off. Let's stay in this regulatory sphere a little bit. A new report from the New York Fed found that the tornado cash sanctions have largely been effective. Fed staff examined the change in behavior from infrastructure providers and found a high level of cooperation. The paper primarily

looked at how block proposers and block builders dealt with tornado cash transactions. It found the proposers largely included the transactions, but most block builders are now filtering them out. Compliance diminished once multiple transactions were carried out, suggesting that most nodes were only choosing to censor transactions that were within a few hops of tornado cash. The paper focused on a period of time shortly after an August 2023 court ruling, which validated the application of sanctions to tornado cash. The paper stated, we find direct evidence of large buildings switching to a cooperative posture following the ruling, giving credence to the idea that clarity around regulation is a pivotal factor to determining whether to cooperate. It found that over half of the

non-cooperative blocks were coming from just two builders. The paper found that total value and transaction volume had dropped precipitously since the court ruling. It noted that a reduction in wallets interacting with tornado cash has reduced the anonymity set, making the protocol much less useful. According to data from TRM Labs, volume is down around 90% since the sanctions were upheld. The report's framing was that, quote, although Tornado Cash's transactions continue to be settled, censorship resistance appears more tenuous than what the transaction volume suggests. Over in the UK, that country's financial conduct authority has been busy since crypto-promotion rules came into effect in October. The regulator has issued over 1,000 warnings which have led to

48 financial apps being withdrawn from the UK market. The new rules required crypto firms to take reasonable steps to establish a customer's level of net worth and sophistication before offering services. The intention was to ensure the appropriateness of investment options. Initial backlash suggested the rules were onerous and somewhat unclear. This week, the FCA has published new guidance with examples of good and poor practice. As one example, the report noted that some firms, quote, are guiding consumers through the process by telling consumers what they need to enter to proceed. Some other examples seem to reference generally available marketing material from large multinational firms. It seems the FCA is paying particularly close attention to how consumer

protection, such as cooling off periods, are being implemented on the back end. Following up from a lot of our recent discussions, a group of 50 crypto firms have spelled out their policy requests in a letter to Joe Biden and Kamala Harris, including Coinbase, Circle, and the Digital Chamber, the Crypto Market Integrity Coalition wrote to the incumbent Democrats on Wednesday. Also in support of the letter were Robin Hood, Bitgo, OKX, Gemini, Chainalysis, Elliptic, TRM, Kyco, and Matrixport. their core request was for the administration to, quote, take meaningful steps to out-clear clear rules of the road rather than relying solely on enforcement. The letter claimed that without enforcement of clear rules,

compliant firms are losing market share to entities that are willing to play fast and loose. Coalition claimed that clear rules would help promote a compliance mindset among the industry, particularly for offshore firms. The letter stated, quote, many of the losses of the last few years could have been avoided with basic consumer protections. This is of particular concern to CMIC members given our public pledge to market integrity and efforts to set strong industry standards for monitoring for and eliminating market misconduct. The coalition further emphasized the need for the U.S. to remain a leader in the industry,

stating, digital assets utilizing open public blockchains, present an important opportunity to further cement American values and norms into the global financial system, more concrete policy goals focused on passing bipartisan legislation that has already been put forward, and for the coalition, the goal was not to promote specific legislation, but to press the need to, quote, establish broad safeguards and market conduct rules that can showcase the norms and foundational security and regulatory compliance protocols expected by the industry. The letter comes as the Democratic National Committee puts together their policy platform ahead of next week's convention.

However, waiting until after the election is not good enough for the coalition, who signed off by stating, we hope to see your administration work with Congress to enact such foundational legislation this year. Missing the opportunity to make law would be a mistake that will be noticed at home and abroad. A little report from El Salvador. The International Monetary Fund has released an update of their work with the government of El Salvador over recent months. The IMF mission to El Salvador said in a statement,

progress has been made in the negotiations toward a fund-supported program, focused on policies to strengthen public finances, boost bank, reserve buffers, improve governance and transparency, and mitigate the risks from Bitcoin. The IMF claims their proposal is focused on supporting medium-term growth and resilience. The policy discussion is currently about rationalizing the public wage bill while leaving fiscal space for social and infrastructure spending. Addressing the Bitcoin issue, the IMF said, while many of the risks have not yet materialized,

there is joint recognition that further efforts are needed to enhance transparency and mitigate potential fiscal and financial stability risks from the Bitcoin project. Additional discussions in this and other key areas remain necessary. Now, this statement represents a huge shift in tone from the IMF. Until now, the organization has been overtly critical of El Salvador's Bitcoin plan. In November 2021, shortly after Bitcoin was first adopted as legal tender, the IMF listed dozens of potential risks and concluded, quote, Bitcoin should not be used as legal tender. The Bitcoin policy has been a major barrier to the IMF moving forward with issuing development

loans to El Salvador in the years since. Bitcoin advisors embedded in the Salvadoran government welcome this shift. Stacey Herbert, the head of the National Bitcoin Office said, we welcome this acknowledgement and we believe that these risks will in fact never materialize in El Salvador. Max Kaiser, who is also a government advisor, seem to imply the IMF is softening on Bitcoin tweeting, you don't change Bitcoin, Bitcoin changes you. That's it for today's episode. It's a little bit of a short one. We are finally having some of that late summer quiet period that we have not had very much of. Although then again, all it would take is one political statement. for that to get blown out of the water.

So like I said, for now, we will wrap there. Appreciate you guys listening or watching as always. And until next time, be safe and take care of each other. Peace.