Unchained - The SEC's Lawsuit Against Ripple and 2 Execs: What You Need to Know - Ep.208

Episode Date: January 19, 2021

Stephen Palley, partner at Anderson Kill. and Gabriel Shapiro, partner at BSV Law, discuss the SEC's lawsuit against Ripple and two executives, Chris Larsen and Bard Garlinghouse. In this episode, they explain: what was so "egregious" that the SEC went after two executives, Chris Larsen and Brad Garlinghouse, were charged  why their sales showed an information asymmetry, and why that matters why the complaint comes close to being a fraud case, but why the SEC didn't charge them with fraud why the idea that XRP is a currency and therefore cannot be a security will likely not fly why it's unlikely the case will go to the Supreme Court the SEC's case for why XRP is a security, and Ripple's role in it how even on a technical level, the XRP network is centralized how strong the SEC's case is against Larsen and Garlinghouse Stephen's and Gabriel's predictions on how the lawsuit will play out how this will likely impact XRP investors whether or not Ripple could become an SEC-reporting company and XRP a security what happened with Ripple's lead investor in its most recent fundraising round whether or not the SEC might go after exchanges or other players who made money off XRP or collaborated with Ripple around XRP trading what this means for Coinbase, in particular, because it's going public later this year what Ripple's defense, in its summarized Wells submission, was  how this case compares to some of the other big SEC/crypto securities cases, Kik/Kin and Telegram whether there might ever be a digital token that is determined to be a security for specific transactions but not others what the wider implications of the case are for the rest of the crypto industry    Thank you to our sponsors!  Crypto.com: http://crypto.com 1inch: https://1inch.exchange   Episode links:  Stephen Palley: https://twitter.com/stephendpalley Gabriel Shapiro: https://twitter.com/lex_node   SEC lawsuit against Ripple: https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf   SEC lawsuit against Ripple being close to a fraud case: https://twitter.com/stephendpalley/status/1341523294344896515?s=20   Former SEC commissioner Joe Grundefest on the case: https://www.theblockcrypto.com/linked/89164/former-sec-commissioner-says-ripple-lawsuit-will-cause-multi-billion-dollar-losses-to-innocent-third-parties   Other lawsuit against Ripple: https://www.courtlistener.com/recap/gov.uscourts.cand.334410/gov.uscourts.cand.334410.115.0.pdf   Technical assessment of Ripple network: https://cryptobern.github.io/noconsensusripple/   Tetragon’s case against Ripple: https://twitter.com/stephendpalley/status/1346531087971999749?s=20   What the case means for exchanges: https://www.coindesk.com/coinbase-delist-xrp-exchanges-dilemma   Coinbase suspends trading in XRP: https://blog.coinbase.com/coinbase-will-suspend-trading-in-xrp-on-january-19-2e09652dbf57 https://www.coindesk.com/coinbase-suspends-xrp-trading   Lawsuit against Coinbase: https://www.bloomberg.com/news/articles/2020-12-30/coinbase-sued-over-xrp-commissions-after-sec-pursues-ripple?sref=m9L277rN https://twitter.com/stephendpalley/status/1344352455895691269?s=20   People in the industry thinking for a while that XRP is a security: https://www.theblockcrypto.com/genesis/57366/xrp-is-probably-a-security-dont-at-me   Mary Jo White: https://www.coindesk.com/former-sec-chair-represents-ripple-xrp-lawsuit Ripple’s Wells submission: https://ripple.com/wp-content/uploads/2020/12/Ripple-Wells-Submission-Summary.pdf Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C-U slash Unchained podcast and subscribe today. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto. in one place. Earn up to 8.5% per year on your BTC and more than 20 other coins. Download the crypto.com app now to find out how much you could be earning. One Inch Exchange is Defi's leading Dex aggregator that discovers the best trade practices across all Dexas. One Inch was launched in May 2019 by two White Hat hackers at ETH Global's ETH New York Hackathon. One Inch has reached almost $7 billion in overall volume in just over a year.

Today's topic is the SEC lawsuit against Ripple and two of its executives. Here to discuss are Stephen Pally, partner at Anderson Kill, and Gabriel Shapiro, partner at BSV Law. Welcome, Stephen and Gabriel. Hey, Laura. Nice to be here. Thank you. So let's set the baseline for listeners. On December 22nd, SEC announced a lawsuit against Ripple and Chris Larson, who is the former CEO and current chairman, and Brad Garlinghouse, the current and CEO. Stephen, why do we start with you? Do you want to give a brief summary of what the SEC is suing them for and why this lawsuit is a big deal? Sure. And actually, the SEC does a very nice

job summarizing it itself in the beginning of the lawsuit. It was filed in federal court in New York, in the Southern District of New York, which is in that courthouse is in Lower Manhattan. And the SEC alleges that from about 2013 to the present, the defendants, which, you correctly identified as Ripple Labs, Bradley Garlinghouse, and Christian. Larson sold over 14.6 billion units of a digital asset security, that's the SEC's words, called XRP, in return for cash or other consideration worth over $1.4 billion to fund Ripple's operations. And this is, I think, important. And according to the SEC to personally enrich Larson and Garlinghouse, who later in the lawsuit, the SEC alleges, took in about 600

million dollars from their sales. And this is problematic, according to the SEC's complaint, because allegedly, and as discussed in detail, XRP is actually security. And under U.S. securities laws, in order to sell a security, you either have to register it or it has to be subject to exemption. And the SEC says neither of those things were the case. So they sued Ripple for violating the registration requirements of the securities, of U.S. securities laws. And they also sued Garlinghouse and Larson personally as there are two counts to the complaint. The first is violation of the registration requirements into the Securities Act. The second is for aiding and abetting that violation under something called a control person

theory, which basically says that people in an organization who have sufficient control over the organization can be personally liable for securities laws, violations. That's it in a nutshell. And Gabriel, would you like to add to that? What do you think is the significance of the lawsuit and also of the fact that it named two executives? Yeah, well, I think the, you know, this is the first time in one of these suits, there have been a number of these token actions. This is the first time when the SEC has gone personally after the founders. It didn't do that in the kick case relating to the kin cryptocurrency.

It didn't do that in the telegram case. it didn't name the Derov brothers as defendants. So I think that speaks to what they feel is the level of egregiousness of the violations. Yeah. And I do think it's noteworthy in that regard. And it's not a fraud case either. So there have been token-related cases where individuals are named personally, but those are securities fraud cases.

What's really interesting about this is to use Gabe's words, there's a certain level of egregiousness that's wound through. this, but it's not a fraud case. But in order to make a control person claim against people involved in a Securities Act registration violation, you have to show intent. And that, I mean, I think Gabe hits it exactly, hits the nail on the head. The SEC, I think, sees the egregiousness that they describe is that these guys, they made $600 million, and there was a sort of an information asymmetry, right? They knew things about this asset that, you know, people, regular people who are buying consumer buyers wouldn't know. And if this had been registered as a

security, you'd have reporting requirements, which were not followed here. Yeah. And actually, Stephen, you did tweet, the ripple case is the most fraud-like non-fraud filing I think I've seen. And you said it's full of evidence about market manipulation and control all to the benefit of the issue or inexact and to the potential detriment of the buying public. And then you said, so where I come down is not will it be delisted and will the thing die? You wrote, good chance of both. But are there other more serious charges waiting in the wings? So, like, why do you think the SEC didn't just pursue this as a fraud case? And, you know, what makes you think that potentially they could still?

So I'm not suggesting that there was fraud here. I think what I pointed to earlier, if you look at the complaint and you see it, it took me a minute, it took me a few minutes when I read it to understand why they did this. The reason why there are allegations of some trading on insight information or information asymmetry or suggestion of willfulness is because that's what you need to do in order to satisfy the proof requirements. for a control person claim. And I think the reason why they brought that claim is because, I mean, if you want to recover money, these guys, according to the SEC, they personally made $600 million.

So if you're going to try and claw back money to distribute to smaller investors, you have to go after them because they have the cash. They have nearly half of proceeds. And they're entitled to a presumption that the SEC, the government has to prove its case. But if all of these allegations are true, this was not about freedom. It was not about changing commerce or liberty. It was about personal profit for a couple of people who made a huge amount of money. And there's nothing wrong with making a lot of money.

I'm not suggesting that there is. but that's, I think, why the SEC went after these people personally. And, you know, I think it might have felt personal with them in part, too, because this was basically filed on Christmas Eve, right? Yeah, Brad Garlinghouse noted that in his, you know, in his Twitter, you know, response, right? He was as like a particularly egregious factor to show how heartless the SEC is. Yeah. Merry Christmas.

Yeah, right. Here's your gift. But so why do you think that the SEC didn't just pursue fraudulent? charges. I mean, we have, so, you know, as you also tweeted, you said that there was a very bad fact in that fact is that as early as 2012, Ripple got advice that XRP could very well be a security and even advice to consult with the SEC about it. And they didn't do that. And then instead went on to make $1.3,8 billion in sales. Fraud is very, very hard to prove. Because it requires what's called Sienter. The Sienter standard under securities law fraud is a little weaker than under

common law fraud, but there is still this element of an intention to deceive. And there is, in the, you know, there's also a class action securities lawsuit against Ripple going on concurrently with this. And in that suit, there is a fraud. There were a number of fraud causes of action. and a couple of them survived the initial motion for dismissal, or at least one did. So there was some possibility of bringing a fraud claim, but it's just much harder. And I think, you know, the SEC has close to a slam dunk on the registration claims. So why would it muddy the waters by bringing a weaker claim when it doesn't really have to? Yeah, and it can achieve the same thing by making a control person claim.

You still have to prove, I think it's clear and convincing evidence. So you still have to prove some intent. But, you know, one of the things, getting back to the most fraud-like non-fraud claim, courting, these are all allegations. I just want to remind people who are watching or listening. But the SEC alleges that Garlinghouse repeatedly said that he was, quote, very long XRP, meaning he had significant positions, he expected to rise in value without disclosing the fact that he was selling. And Gabe can speak more to how this works in the public securities context, but typically there are some restrictions on what you can do in terms of selling securities if you are management and you have inside information.

And I think that's where it's all about information asymmetry. Go ahead, Gabe. That's right. Yeah. And the, you know, if Ripple Labs was a public company, you know, that is if it was complying with the Exchange Act, and if XRP was a security, then whenever Brad Garlinghouse sold at his own XRP, there would have to be something called a Section 16B report, sorry, a Section 16 report filed with the SEC for the entire public to see that reports those.

transactions. And that's the case whenever, you know, if Tim Cook of Apple sells this Apple stock, he's filing those and so on. And that's a very important piece of disclosure because it puts the market on notice, you know, that the executives are selling, which could impact the market, or could indicate that they have some extra information that the market doesn't have. Now, in addition to that, they're also blackout periods where they're not allowed to sell, right? So they have a limited window to sell when they ought to have the same information as the public, basically because the company has just recently filed one of its periodic reports, and they have to do the disclosure on top of that, you know, and there are other limits as well. And so all of those protections

that a typical investor in a typical security would have, XRP holders were deprived of. And so if XRP is a security, you can see how they really lose out, relatively speaking, by not having this disclosure. Because if they did have the disclosure, they could time their own Bison cells in a more advantageous way. And let's give a very tangible example of how that might or might not be important. So SEC investigations are confidential. I don't believe that it was publicly disclosed that there was an ongoing investigation. towards the close of an investigation, you have the ability in something called a Wells Act response.

You have the ability to persuade the SEC in a letter that the SEC will come to you and say, we've finished our investigation, we think we're going to charge you. You can let us know why we shouldn't. So that all happened behind the scenes. Ripple and the executives knew that was going on. At around the time, they were drafting their Wells letter, their response to the SEC, XRP went up to, I think, 70 cents in price. So there was a huge spike in price.

And then when the information came about the SEC lawsuit, so basically Ripple said the day before the lawsuit was filed, they said, you know, they were going to be sued. The price tanked. So they knew for the last two years that they were under investigation. They also knew that they had been told by, I think, in two different memos by law firms, that XRP was probably security. And the general public did not know about that. Now, if I had bought XRP at 60 or 70 cents, it's trading now at 27 cents, which is peculiar to me. I'm not sure why.

I think I'd be kind of pissed off. As opposed to zero. Yeah, exactly. So, you know. Yes. Yeah. Well, I mean, speaking about a kind of like asymmetry of information, there, I mean, so, okay, first of all, people really should read the SEC's lawsuit because, yes, I understand it's 70 pages,

but you can like skim that, you know, you can kind of figure out which parts you can skip and which parts you can read so it's not actually 70 pages. But the point is, so there's just so much in here. It's literally like a 70 page list of all the ways in which ripple itself kind of like made itself guilty. And yeah, I mean, it's really a doozy, frankly. But one of the many, many anecdotes that they have in here is one in which Ripple was having conversations with a big market maker. And Ripple was like freely talking about how it wanted to sell XRP timed to some of Ripple's big announcements. And so Ripple's VP of Finance told the market maker, and so here I'm going to quote from the SEC lawsuit, Ripple would like to go to sale.

at 1% of trading volume and ask the market maker to, quote, be thoughtful slash opportunistic around the timing of implementing 1% because Rivel did not want to, quote, depress the rally, but rather capitalize on the additional volume. So it's like literally, they're literally saying like, we want to make money when the news hits. So be sure to sell when all the retail people are going to be buying on our news. And so it's pretty, there's so many eye-opening moments like that. Also examples of paying for listings on exchanges. So, yeah, it's hard to see. I mean, they have very, very fine lawyers who are defending them.

Ripple. Yeah, Ripple does. They're represented by really good lawyers who specialize in defending securities, lawsuits, and enforcement actions and class actions. But I just don't see how you, I don't see how you win. I mean, I guess what is there, Gabe? There's a limitations argument, perhaps. What are the arguments that can be made?

I know that one of the things that they said in the... I think the arguments will have to focus on are things relating to cryptocurrency. And, you know, the fact that the Howie precedents don't squarely address. So I think their arguments will be very policy-based person. Yeah, that's right. One of the things... They've argued that, for example, that XRP is currency and therefore it can't be a security. which is, I don't think is accurate.

That was an argument that was raised in either the kick or I think that was the same argument was made in the kick case and the judge found that that was not persuaded. So there's that. I know they argued that they were going to go to the Supreme Court and there would be the ripple case instead of the Howie case. I think that that's someone's huffing their own supply. It seems unlikely. I'm sorry, go ahead.

All right. Well, let's actually just because maybe not all listeners will know how a security is defined, especially if there are new people, because as we all know, crypto is coming up. So let's just talk about how is the security defined in the U.S. And then if you could walk through how you think or how the SEC makes its case that Ripple's actions with XRP do fit that definition. Gabe, why don't you take this? Sure. So, yeah, the term security is actually defined.

under a few different laws, but aside from very subtle variations, they're mostly the same. So under the Securities Act of 1933, which is the first major federal securities law, you know, it includes a long list of things such as stock, such as evidences of indebtedness, and so on. Among those things is the term investment contract. And investment contract is the one among that list that the SEC and others have most focused on as a theory for how tokens or token transactions or token offerings can constitute securities or securities transactions. And the principal test for whether an investment contract exists is called the Howie Test. It's the name of a Supreme Court case involving Orange Grove's.

And the test is quite simple. It basically says that an investment contract is a contract transaction or scheme in which there is an investment of money in a common enterprise with the reasonable expectation of profits from others. So there are essentially four elements. And that test has been further interpreted over time. So, for example, investment of money doesn't just mean giving money. it can also mean other forms of value or benefit that someone contributes to the issuer. So essentially what the SEC is saying is Ripple created this in effect or in any event they had a lot of it. They were selling it.

And when people were buying it, they were buying it because this company Ripple exists. The company was saying, hey, we have all these great products that we're going to put in place with banks through commercial deals. and those products are going to use XRP, the cryptocurrency, and that blockchain. And as a result of that, there's going to be a lot of demand for XRP, and therefore the price will go up because this will essentially become the new de facto universal interbank settlement method, which is a great thesis. But the problem with that thesis is that without ripple there to supply these other technologies and do the deals with the banks, that XRP wouldn't have that value proposition and probably a lot

less people would buy it and they would spend a lot less money on it. And so that's the basic thesis of the SEC's arguments. In addition to that, the SEC didn't really get into this heavily in the complaint, although it's hinted at, shortly before the lawsuit was filed, there was a report from several computer scientists at the University of Byrne where they, They basically analyzed that the blockchain itself, the technology is centralized because although Ripple Labs claims that its list of trusted nodes is just sort of optional, it turns out if you don't follow exactly that list, you know, the blockchain just wouldn't be secure or it wouldn't be live.

And so it's also centralized in that way. And that's another distinction from, you know, cryptocurrencies such as Bitcoin and Ether. Yeah, I mean, you know, the SEC really hammers home that Ripple was the one that was responsible for whether or not XRP was successful and that they themselves kind of made that case for the SEC. I mean, there's just so many choice quotes here. What are some of the good ones? You know, oh, and not only that, but like Ripple keeps talking about how they're, so they have this asset. but then after having the asset, then they try to develop a use for it, which, again, it's like that's, if it were... The tail wagging the dog. Yes.

Exactly. One of the, I mean, the problem with Twitter, I mean, I say this is a litigator. It's a benefit if you handle disputes is that it's like it's such easy evidence. Everything is there. So paragraph 47 of the complaint, the SEC says, is cryptography. number one, who I believe actually somebody, it's a Schwartz. I actually think he made his, David Schwartz. David Schwartz actually changed his Twitter handle to

Cryptographer number one. So as Cryptographer number one, a well, we're well respected and known ripple spokesperson stated in a recent tweet on Twitter, quote, the people who created XRP are pretty much the same as the people who created Ripple and they created Ripple originally to, among other things, distribute XRP. I mean, you have to back up from a second to think about how this is going to be resolved. Just imagine a federal judge who's got a big docket and it handles all kinds of cases. Criminal and civil, commercial disputes, whatever. This is not a person who's like deep in the weeds in crypto.

They're not like the universe closes. It becomes more narrow when you're in litigation. I think if you read that, if that proves to be true, it's very difficult to take statements like that. And that statement is probably, there's an evidentiary theory, basically, that statement is probably attributable to Ripple as what's not as a party opponent statement. In other words, it probably can be said that that statement made by, the SEC will argue that that statement made by somebody very high up in Ripple is attributable to them. So if that's a statement that Ripple made, statement after statement like that, from being read by a federal judge, it makes it very hard to see how this wasn't something other than a centralized money-making proposition.

Now, being a centralized money-making proposition doesn't make you a security necessarily. It doesn't make you an investment contract necessarily. but it becomes evidence of that. It's sort of indicia of that because you have to look through this and ask, what was the purpose of this thing other than to be a speculative asset? It doesn't really add up. Yeah, there's a number of these choice quotes. I'm not going to list them all, but there was another one. Again, it's cryptographer, one who explained in XRP chat in response to the question,

if Ripple failed, would XRP die? and he said that he didn't think he didn't quote think it's likely xRP would succeed without us though it's possible so yeah and there's just so many but so one thing then i also wanted to break down is so we did talk a little bit about the cases against chris larson and brad garlinghouse but in this case you know what what do you think of the cc's evidence and how likely is it that they'll you know be held responsible in some way as well. So this is a prediction. I guess I could be wrong. I have to hedge because I'm a lawyer. Ripple's going to lose. Carlinghouse and Larson are going to lose. This will, they'll monkey around,

they'll file motions to dismiss. They'll be denied. They probably get, they probably do some discovery. Maybe they take some depositions. Presumably in the enforcement action, they took depositions so that depositions for people not familiar with the way litigation works in the United States, or statements under oath, the examinations of witnesses, and they will probably file cross motions for summary judgment, and they're going to lose. Unless there is a limitations argument, or unless the judge, unless they get a sympathetic judge who reads through this

and is convinced that this was not an ongoing securities offering, they lose and they probably settle. Now, obviously, if I had insight information about the litigation, I wouldn't be talking to you. But it seems like a reasonable way for this to be resolved is you, I don't know, they got 600 million. So maybe they pay $5.50 to the government. They keep $50. And if something called a fair fund is set up and people can basically get reimbursed for the cost of their ex-RP.

The case should, it sounds like it was they were talking settlement. You can kind of see that. you have, there's that, I think they actually talked about that publicly on Twitter. I think the case ultimately has to be settled. I don't see it going up to the Supreme Court. If they take it up to the Ninth Circuit, they probably lose. I don't see the Supreme Court taking cert on this. Think about it too.

Like, does anybody really care about these guys who made $600 million selling this digital asset? It's not like, if I were going to take a case to change the law and to change how we'd look at at digital assets, this isn't the one that I would take because they're not sympathetic. Now, we haven't seen their answer, their motion to dismiss, but... What about the remedy?

Yeah, go ahead, Gabe. What about the remedy, though, Stephen? I mean, what about the interests of the XRP holders? I do wonder about this and sort of worry about it. Grunfest, you know, who's a former SEC commissioner.

That's right. Who's a former SEC commissioner himself and now teaches law at Stanford, has talked a lot about token stuff and is no pro token guy. You can find his videos on YouTube at one point arguing that Bitcoin is a security

which is the one thing that everyone now agrees is not a security. He wrote a letter to the SEC now he's an advisor and he's an unpaid advisor to ripple but he's a credible guy. He doesn't just do things and he expressed a concern like well this is really

really harming ex-rP holders who are supposedly the victims and all this. And So part of me does wonder, I mean, is a satisfactory remedy here to just destroy all of this and compensate people? How could you ever compensate people? So many people have bought and sold this, you know, and, you know, many more want to KYC themselves. So personally, you know, what I would think is a much more reasonable remedy, is that Ripple becomes an exchange act reporter, you know. Wait, I'm sorry, an exchange. What? An Exchange Act reporter, basically an SEC reporting company, like Apple or like any other public company. And then XRP holders would get the disclosure that investors are supposed to get. Right. So if that happened, there are not. I think that kills XRP, right?

It might, yeah. I mean, that might still, but it might be able to find ways to generate value for it. But yeah, it's stuff. It kills the utility of it. Also, where would you trade it? I know that Coinbase has a, they've got a broker dealer, but I don't. think they've been given the green light to use it. None of the exchanges are... These things are going to emerge. These things are going to emerge.

I mean, I think it's inevitable that many of these tokens will be securities, right? So this issue has to be... Happen, you know, it has to be faced at some point anyway, right? You're right, you know, there will be challenges to keeping it valuable or maybe finding some new utility for it as a potential security. But is it completely destroying it for sure really better than giving it some fighting chance. I mean, most of the XRP holders, you see them on Twitter, they're actually not mad. I mean, they have every right to be mad. But the only thing they're mad at is the SEC, right? And they see Ripple as the victim. So they clearly want this to go on. So maybe let it go on and just make Ripple labs an exchange act reporting company. Would that really be so bad? I don't know. Yeah. I mean, I think then, you know, Ripple, like, so the SEC really makes a strong case that Ripple didn't really have much by way of revenue except from selling XRP. And so they're big cash cow would be killed. And so I have a feeling,

Ripple wouldn't be super excited about making XRP security because then they, you know, it's like then they, they cut off their big flow of, of cash that has been coming their way, $1.38 billion worth. But one other thing, actually, before we go to a break that, I just want to ask quickly, Stephen, when you said you thought what was most likely is that they would have to disgorge $550 million and they keep $50 million. Why would they even

keep $50 million? Like, that's a huge. Well, I don't know if that's likely or not. What I'm thinking is if I were the defendants, in the end, if you are pushed to settle, so fine. Maybe once you have that much money, $50 million doesn't seem like very much. But if there's a way, I know of other cases where people disgorged a significant amount, but we're also able to keep a significant amount. Keep in mind as well, you know, Ripple's fighting a multi-front battle. Yeah, that's right.

Because it has the class action. It has this case against the SEC and now its equity investment. Yeah, that's right. Arguing that, you know, they're allowed to, that Ripple's required to redeem their stock now at the investment amount. And so some of the, and it probably has creditors, probably has commercial partners. Yeah. It has employees, right? There are its salaries.

So, yeah, I mean, there are a lot of, going to be a lot of people with their hands out here. And most likely this will be a total disaster. Yeah. Okay. I don't know. Maybe we should explain what that lawsuit is by their investors. Gabe, do you want to talk about that? Okay, well, let's do that right after this break. So first, we're going to take a quick word from the sponsors to make this show possible. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game?

Well, statistically speaking. Nah, no more statistically speaking. I want hot takes. I want knee-jerk reactions. That's not really what I do. Is that because you don't have any knees? The score bet. Trusted sports content, seamless sports betting. Download today. 19 plus, Ontario only.

If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. With Amex Platinum, you have access to over 1,400 airport lounges worldwide. So your experience before takeoff is a taste of what's to come.

That's the powerful backing of Amex. Conditions apply. One inch is a little. decentralized exchange aggregator that sources liquidity from the top dexes and liquidity sources to save users money and time on swaps. One inch is capable of finding the best possible trading paths and splitting them among multiple market depths. Recently, the one-inch team unveiled one-inch version two. The main highlights of V2 are Pathfinder, an API that contains a new discovery and routing algorithm, and a new intuitive, user-friendly UI. The V2 improvements ensure the best rates on swap,

while dramatically cutting response time. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cash back instantly. Reserve years now in the crypto.com app. Back to my conversation with Stephen Pally and Gabriel Shapiro. So we were just saying we were going to talk about the Tetragon case against Ripple.

They were the lead investor in Ripple's most recent fundraising round. So what is going on there? Yeah. So there's not a lot of detail because the complaint has been filed confidentially in the Delaware Court of Chancery, which is the biggest corporate law court in the world, the most prestigious, the best, all those things because Ripple Labs is a Delaware corporation. But what one can infer from the press reports is that Ripple has in its certificate of incorporation and other investment documents from its last preferred stock financing,

a provision that says that if XRP says something like, if XRP is found to be a security, then Ripple is required to redeem the preferred stock. that presumably its original investment amount or something very close to that. So basically, they got to pay the money back that their investors gave them essentially. And what Ripple said was, well, there hasn't actually been a finding that XRP is a security. And we don't have the investment docs. We don't know what they say. But that's what they're fighting about.

And to Gabe's point, there probably other people out there, too. I mean, it's interesting. I don't know how typical is a covenant like that in financing documents, game? I guess you'd only have that. Well, that's, well, redemption, I mean, redemption provisions are common, but not tied to some regulatory finding. And it shows that everyone knew for a long time that this is a real tangible risk. I know, even just knowing that that clause was in there, I was like, if I were an investor and I was about to sign a contract with this clause in it, I would be like, ding, ding, ding,

maybe I shouldn't sign this contract. Maybe this is not a good investment to make. That was just my opinion, but maybe I would be a very conservative. Well, I was going to say bad investor, but maybe I'd actually be a good investor. People wanted big returns and, you know, they were willing to take. It's actually the opposite. I mean, if you can get that deal. And you know it's Ripple. Ripple has a lot of money.

Ripple had a lot of money back then. You know, it's going to keep selling these things. It's almost like a risk-free investment. You know, so far from being a red flag, I bet the investors were more like going going, Katrina, you know, as we win, tails we, tells they lose. You know what I mean? So yeah. I see.

Yeah, that is true. But it is kind of funny. Everybody seemed to know. Well, so just while we're also talking about, you know, kind of like other entities that are affected by this, I was just curious because, you know, as you're reading through the lawsuit, the SEC just keeps mentioning all these other entities. And, you know, I mentioned earlier this market maker that, uh, you know, they were emailing about the timing of this, the selling to, you know, time it to announcements so they could make the most money from, from those announcements.

But I was just wondering, like, do you think would any of these other actors that are named in it be affected in any way? Like, would the SEC, you know, I don't know, go after them? Or I'm not sure how this works, but could it affect any of them or any of the exchanges that are now delisting XRP or anything like that? Well, I mean, one, you know, just to your last point, right, one interesting factor here is that Coinbase, you know, just filed for its IPO a week or two before this XRP lawsuit. And one wonders a little bit about the timing of that, of the lawsuit in light of that. And, you know, Coinbase has suspended XRP from trading. But the SEC has a lot of leverage over a company that is looking to. to IPO because in order for a company to IPO, the SEC has to approve its S-1, or also called its registration statement that registers the shares. The SEC is very broad discretion in the reasons why it can deny that approval. And so the SEC can use that process as leverage against

Coinbase, either to get Coinbase to atone for its pass-ins or to have tighter controls that that won't repeat them and so on. And, you know, obviously if XRP is found to be a security, you know, that'll make it even easier for the SEC to do that. On the other hand, in all these past cases, like the Telegram case, for example, was really all about underwriting concerns, you know, that the investors were acting as underwriters. And none of those investors were registered as underwriters. And yet, it doesn't seem like the SEC is going after any of the investors underwriting

theories. So what they do tend to do is they tend to rack up a win. And once they've won, they tend to move on to other things. One might call that unfair in some ways. And perhaps it's not even a smart enforcement strategy because if the money is sort of never suffering the consequences, it'll just keep flowing into the same types of schemes. But in the past, they haven't really gone after these ancillary players. Yeah. I mean, there is that lawsuit against Coinbase, although I did see, Stephen, you tweeted that you didn't think it was serious or well done. But it is true that there are a lot of companies that made money off of trading XRP, even as, like, I would say, you know, some huge percentage of people in the industry thought XRP was a security. We've

thought that for years. You know, like I remember when I first learned about the Howie test, it just, as I really learned about it, I kept thinking, how is, so if all these things are what makes a security, then how is XRP not a security? And, you know, there have been like a ton of articles, you know, people have written about this forever. So given that most people were of that opinion, how, like, do you think that the SEC is just going to be like, oh, well, it's just too much to go after all these people that were making money off of what they knew was probably, you know, just going to be a short, fun, free ride? I can't speak to who else the SEC might or might not go out.

after, but I think, you know, that as far as I know there's only one exchange in the United States where XRP can still be bought and sold, I guess I'd be surprised if they went after exchanges. So the issue is if something is a security, you need to either be a registered as a broker dealer, you need to be a national exchange, or you have to have appropriate registration. And none of these exchanges did. And presumably, I mean, I know that some companies looked at the lawsuit and just immediately said no, and delisted. but others may have been in touch with the SEC.

I'd be surprised if there was follow-on enforcement actions by the SEC against exchanges. I don't know, Gabe, what do you think? Other than maybe this Coinbase thing were very easy for them to do something because Coinbase is at their mercy for the IPO. Yeah, I agree. I agree. Yeah, I think what was interesting to me was that so Coinbase is suspending, trading an XRP, the day that this episode comes out, Tuesday, January 19th. And so I actually thought because their reputation is of, or it used to be, at least, of being kind of the conservative exchange and very regulatory compliant. And because of the fact that it's going public, I would have thought that they

would have delisted much sooner. So, yeah, I found that a little curious. It's complicated because when you have to get people time to get their assets off the exchange. I don't know if they're still doing buy-sell, but if they are, maybe you have to give people the opportunity. Did they shut off the money? So Tuesday is when that. So it seems like you have to balance between, you've got a balance between skill and churibitis basically. You're sort of damned if you do damned if you don't. But I think it's fair and reasonable to give retail consumers the ability to cash out or move their stuff. And, you know, maybe somebody hasn't logged in for a while. They don't check their email right away. There are plenty of people who don't check this on a daily basis.

Having a couple of weeks to give people the opportunity to move their assets off of the exchange, I think makes sense. I'm not sure. I mean, I don't know that the SEC would be too upset about that. So one thing that I want to go back to is so we talked at a few points about Ripple's Will's submission. So can one of you describe what Ripple's arguments were in the Wills submission? I think one argument was, to be candid, I haven't looked at, I actually haven't looked at the Welles Mission in a little while, but one was the argument that KIC made, which was that it's currency, and therefore it can't be a security. They also argued that they've been selling it for a long time, and the SEC had never complained, and there's almost like a stop, sort of a regulatory estoppel argument. But, you know, the parallel argument to that is, look, I've been going into, like, I've been robbing the bank every day. I've been ripping off this ATM every day for the last, you know, five years and the police car drives by, and they never say anything.

I'm not sure that that's a terribly, it's not a really persuasive argument. There is this, there is a theory in law called regulatory estoppel by which you can. I don't even know what that means. Estoppel. It's an equitable theory. It's basically the notion that you can prevent someone from taking a position because you relied on than doing something else or saying something else. It's nearly impossible to make that argument in the United States

that because a regulator did or didn't do something and you relied on them that they're stopped, basically stopped or prevented from taking action going forward. There was nothing in the letter that I was terribly persuaded by, but it's been a while since I've read it. And I don't know that the full letter was actually published. I think they published a summary. That's right.

They publish an outline. summary, that's correct. That's right. Yeah. And they, you know, there were a lot of, I'm just, you know, refreshing my memory now. A lot of it was about how useful XRP is, you know, without, without Ripple and stuff, which is just not true, right? Because, again, Ripple pays almost every node on its trusted list.

They're almost all paid by Ripple. There are a bunch of universities, Ripple commercial partners, companies that Ripple have invested in. There's only one that claims to be independent, right? And so I think if ripple goes away, I just don't know how this, even the technology itself would safely function. Going back to the Well submission, the one part of the summary that I saw some people tweeting about, and that really struck me as a really bad argument, frankly, was that if the SEC finds XRP to be a security, then, quote, innovation in the cryptocurrency industry will be fully seated to China. I mean, yes, I remember that. That's just, that's a crazy, crazy argument. But let me finish. The Bitcoin and Ethereum blockchains are highly susceptible to Chinese control because both are subject to simple majority rule. I was a little bit like, okay, if this is your argument, hmm, I'm not sure. This is going to succeed.

Yeah, that's kind of a shock, especially considering the caliber of lawyers they have, it's shocking. that that would be their argument. Yeah, and especially because the SEC has already deemed that Bitcoin and ether are not securities. So to rely on that, it just was like, okay, if you're going to try, like, and make a good attempt here, like, why did you go down this path? Because, you know, okay. When the, you just like, there's a saying that the lawyers have, which you've probably heard, when you have bad, when you, the facts aren't on your side, you pound of the law. when the law is not on your side, you pound on the facts. When neither the law or the facts are on your side, you pound on the table.

So that's basically what they're doing here. The law and the facts are bad. And the best lawyers in the world, people have a mistaken understanding of what lawyers can do. Gabe and I are both very good. I would say I'm on the best. But, you know, like, if you caught on video robbing a liquor store, you know, I can argue that you had a troubled childhood. But I actually had a case that reminds me when I was in law school, I clerked for the public defender. This was a PD case.

And we actually had a client who was in fact caught on video robbing the liquor store. And he wanted to go to trial. And we were like, but the video shows you. That's you. He's like, it's not me. It's like, it's you. So it's kind of like, so we actually, we tried that case and he lost. But he got to be out of jail for a couple days.

So it's kind of like sometimes people... There's an epidemic of this type of behavior in our society right now, I feel like. Well, I actually, I think that they may believe this, right? I think they may have like... Oh, wait, Ripple. Yeah, no, I don't, I think that Ripple and Mr. Garlinghouse and Mr. Larson. They believe that China will control that... I think they believe that they have created some sort of revolutionary technology.

I think they probably believe at this point that it's not a security. and that they're being unfairly targeted, that the law should change. So, like, I think that they, I think that they actually probably believe this. It's preposterous. But if you tell yourself a story for long enough, you know, sometimes you believe it.

That's, I'm just a simple country lawyer. That's my view. No, there definitely was a lot of cognitive dissonance in the SEC's lawsuit. Like, just, I mean, like I said, it's literally just quote after quote, you know, I mean, it's, it's a pretty, damning document, but it's very interesting because even while Brad was saying things like,

oh, I'm extremely long, XRP. I mean, he was selling it, but not disclosing it and making tons of money off of retail investors. So, you know, I don't know him personally. I've never met him, but for him to keep saying that he's extremely long XRP, meanwhile, he's doing all these sales behind, you know, people's back. I mean, it's a little bit like, okay, either you, you know, just sort of lived with that cognitive dissonance and didn't recognize it as such, or, Or you, you know, I mean, I'm not going to speculate what was going on in his head. But I think you would also say, so just to be devil's advocating here, somebody else pointed this out, I can't remember I was talking to it. But one of the allegations is that, okay,

one of the things that the SEC puts out there is being problematic is that Ripple was paying people to use XRP. And it is true that that is a, that is not an unusual Silicon Valley play to get adoption. PayPal did that. I think Stripe did that. So paying people to use your product or use your service is something that other companies have done. So maybe that's something that will hear them come back with. So for example, in paragraph 123, the complaint, yeah, but that, yeah, I mean, like, well, just, but to use PayPal or to, you know, use Stripe or whatever, like that, doing that isn't engaging in some kind of unregistered securities offering. No, it's not.

Yeah. Yeah. So. Right. When you use, I can't remember what it was, but I think when PayPal first came in to use, I think people were paid, was it $5? I think it was $10 if they got a friend to sign up. Yeah.

So we did also reference a little bit some of the other big SEC enforcement actions in the cryptocurrency industry. I think the ones probably that are most relevant for this case are KIC slash KIN, as we mentioned. maybe EOS, simply because that was one that a lot of people were, you know, thought it was pretty egregious because it was a year-long ICU. They, I think they claim to block U.S. investors, but then they had that big advertisement in a square. And then, of course, Telegram. So when you look at those, like, if you were to read the tea leaves, how do you think?

I mean, I know, Stephen, you want to give your opinion, but just in that context. Oh, this is more like kick or telegram. Oh, it is? Yeah, yeah. So like with EOS, whatever you think about the technology or the company that folks involved, they settled. And also according to the, I think it's the consent agreement, the consent order, they really actually did try and block U.S. persons.

I know they had that sign in Times Square. It was stupid. But they did do some form of geo-blocking. They did actually try and block U.S. They paid $24 million and they, you know, they settled. And, you know, they took the offer. And I think the other difference is that KIC and Telegram were companies that existed before they tried to do this token. And Ripple in a way, so Ripple was actually, we, as how does it go?

It was a little bit different where the company was incorporated after. But it's similar in that the company was just so closely, associated with the cryptocurrency. And obviously they have, you know, what is it, 55% of, yeah. I mean, kick out of a social media app, right? And I, you know, Telegram is used by 500 million people to communicate.

I mean, they're real, they are real enterprises that have real users that do real things. And, you know, here, it's, I'm sure Ripple would say, look, we have enterprise software that's used by, you know, Oswits of Banks. I'm not sure that I'm not sure how much traction they're going to get. It does seem like, at least if you read this complaint, the principal purpose of the company was to get people to buy and sell XRP and to create market value and create liquidity. And that was not the principal purpose of telegram or of Kik.

They didn't come into existence to sell a cryptocurrency. Right. So, Stephen, you did talk about. about how you think this case will go. Gabriel, do you have any, you know, thoughts on what you think will happen? Yeah, I basically agree with Stephen. I mean, I think Ripple will lose. I'm a little bit. I would say I'm less certain that Garlinghouse, you know, that the founders will end up having personal liability.

We'll have to see about that. Yeah. But certainly Ripple will lose in my mind. And I'm more just curious about what the remedy will end up being because, You know, in the case of kick and kin, right, they lost, but really, you know, now, like, kin is still out there and actually, like, kin holders were very happy with the outcome, right? No one was forced to become an SEC reporting company. They did, you know, they had to pay a fine, right?

But they were left with some money like Stephen was talking about. And, you know, it's gone up. It's actually gone up since the lawsuit, you know, it's gone up in price since the lawsuit. because it no longer has this cloud hanging over it, that the, you know, worried that that kin itself is a security. For Telegram, on the other hand, it was completely disastrous, right? I mean, Telegram has, as Stephen was saying, it has a real app, and so it'll be fine, you know, and it has money,

but it had to give all the investment back. Now it's raising a debt financing round. And all of the value and time and opportunity costs that it put into this technology was a complete loss. They were just enjoined from doing it. doing it flat out. And so that's a huge loss. That's like a total wipeout, you know, of that part of their business history.

And then with Block 1, you know, it's kind of interesting, right? There are a little bit of a combination, right? You know, they had much better lawyers, I will say much better deal lawyers. Yeah. You know, because they, the way they documented their thing just gave them much stronger arguments that they were producing software, that they walked away from it, once it was done. And EOS is kind of a self-sustaining thing.

You could say it's a bad blockchain because it has collusion and all that stuff, but it's not block one doing the collusion. If anything, you could fall, you know, morally fault block one because it's just not doing anything to, like, increase the value of that ecosystem or not doing that much. So they're all very different, you know, and I think the real thing that they all have in common is that a lot of ordinary people bought the token hoping to get rich.

in circumstances where they don't have all the information and where they're highly dependent and vulnerable upon other people who also are trying to get rich off of it, but in a different asymmetrical way. And that's what all these things have in common, despite the apparent differences. And that's why the Howie test is kind of a genius test because it's very functionalistic

and it's designed to capture this dynamic where people are vulnerable with their money and investment expectations in a particular way, and they all have that in common. And that again, going back to what we said at the beginning, that information asymmetry is one of the principal reasons for our securities laws to make sure that investors are, if not on parity or equal terms with insiders, they at least get, they have a guarantee of some quality information

so that they're not taken advantage of. And you can tell that that's one of the principal purpose. or one of the principal themes in this lawsuit by the SEC. Yeah, I mean, and they really make that case that, you know, the insiders knew certain things and were making money off of the fact that the people they were selling to didn't know those things. So Gabriel, something that interested me about what you just said is that you thought that there was a chance that like XRP survives and then that would be good for XRP holders. And I did see like, you know, for instance, Japan's financial authority, I think, said

that XRP is not a security. So I did wonder, like, so what happens in that case if the U.S. does, so either one, either that, you know, like you said, somehow something happens to ripple, but XRP survives, or if the U.S. just determines that XRP is a security, but other countries make a judgment, like different judgment, how would that affect XRP? Well, in the second set of facts you mentioned, I mean, I'm just speculating here, right? But, you know, people are pretty creative, right? especially if they have a fair amount of money, right, or the ability to get more money. And certainly, Ripple has a lot of fans. The, you know, one thing they could do is just try to, it's already, you know, in my opinion, a centralized chain.

They could just add KYC to it, right? You know, and they could just really try hard to exclude U.S. persons, get cozy with some other regulator that says it's not a security and keep trying to do their thing with the U.S. just almost totally blacked out. That's a possibility, I suppose, if they have enough money left over and so on. You know, another thing that maybe they could do, although, you know, I agree that this is probably, might be even more challenging, you know, is to embrace that XRP is a security or embrace that certain transactions in XRP are securities. And to kind of keep doing their thing, maybe find some alternative uses for XRP that don't involve

banks because banks sure aren't going to want to settle all their ordinary transfers in a security. But maybe they could come up with some stuff. I mean, tokens, people are good at coming up with ideas of stuff to do with tokens that sound good to people. And maybe they could become an Exchange Act reporter. And they could just openly put forth efforts to drive value to this token, right? One of the ongoing metaphysical issues, right, and I've had debates with another lawyer named Lewis Cohen about this is what is that?

the security, right? Is it this token? Is it always a security or is it only certain transactions in it, which are a security and so on? And, you know, the SEC's complaint fludges that a little bit. You know, it does call XRP a security, but on the other hand, you know, it's really talking about these times when Ripple or Garlinghouse sold it, right? And so it's possible that a judge could craft a remedy that, you know, says, well, this is a security or transactions in it are securities in certain circumstances and not others. And, you know, Ripple, you become an Exchange Act reporter, so everyone has the information. But, you know, and when you sell it, it's a securities transaction, but when it's in the secondary market, it's not, something like that is possible.

So we have to see, you know, I'd be interested to see what the remedy ends up being. Because the judge ought to care about the XRP holders, you know, in my opinion, right? And he ought to try to do the least harm to them possible. So the question there is who is who's going to make, I guess the people who will make that argument will be Ripple's lawyers. Yeah, at the remedy stage. At the remedy stage. But I mean, obviously out of self-interest in minimizing harm to their own. So the SEC will, well, response will be, yeah, right.

You don't care about them. You're just, you're arguing out of self-interest. But yeah, no, I think that's a fair point. interesting. Yeah, I don't know. It strikes me as like incredibly complicated to say, oh, it's a security in certain transactions, but not in others. It's incredibly complicated, but, does that exist? Is there another digital or any other asset that is a security for certain transactions, but what? There are other tokens. I mean, this flavor of thing is something that's been embraced by some securities lawyers. And to a certain extent by the, by the SEC itself,

this more functionalistic interpretation, you know, where a given thing can be a security and not of the, I talked about Grunfest earlier. I would take him to be sort of the leading proponent of this in the way that he talks about tokens, that certain transactions in Bitcoin, for example, might be security. Isn't the argument is that it's not, so we have to parse security and so we're talking on an investment contract. Well, that's Lewis's thing. But there is an example, right, because one token, the staff,

TACS token from Blockstack, they did an actual Reg A Plus offering for their token. And that means that they qualified it as a securities offering. And the SEC asked them a lot of questions as part of that. One of the questions they asked, for example, is, well, does the fact that you're holding a bunch of Stax tokens that you're later going to sell, right? Does that mean you're an investment company or something like that? or does the fact that some of the tokens are being burned, right, at the same time as you're selling them, right? Does that mean you're buying and selling your own securities at the same time, which can be a violation of regulations?

And they made a lot of nuanced arguments that are very functionalistic about, well, when it's here, when we hold it in this circumstance, it's not a security. When it's being burned, that's not a securities transaction for this other reason, even though the issuance is being treated as securities transaction. And personally, although yes, it's complex and nuanced, I actually think that type of thing makes a heck of a lot of sense. So the, you know, because sometimes the securities laws just aren't implicated in a particular transaction. And you don't need to be so essentialist and literal about it. But we'll see.

Yeah, no, I mean, and I think the argument that I think you were going to say that Lewis makes is that, and this is Lewis Colin, who is a very fine securities lawyer in New York, practices a firm called DLX law. Your argument is, in order for these tokens to fall within the definition of security, we have to consider whether or not they are part of an investment contract. And I think he would distinguish between the transaction, which involves a contract, and the asset itself. So he would say, sure, like when Ripple buys and sells it, it is part of an investment

that transaction is an investment contract that covers this asset, but the asset itself is not an investment contract. So therefore, it's not a security. Whether or not a judge buys that argument, there's maybe something to that that it's in the standpoint of kind of getting a good result for retail investors, you can see that argument having some suasion. Well, I mean, I think where I disagree with Lewis, though, right, is that when the retail investors are buying it, that's the time it's most like a security, right? You know, he thinks that's when it's least like a figure.

But for example, if banks were trading it amongst themselves, right, as a form of settlement, I mean, the reason why they're doing it is actually not, why the banks would be trading. There's no security's purpose. Yeah. To invest in it. And so maybe you could treat the retail ones as a securities transaction, make ripple labs a securities reporter. But when the banks are trading it, that's not a securities transaction because they're just using it as like a monetary equipment. I probably won't go there. But I'm just saying that if someone were inclined to be creative and fashion, they're doctrinally coherent possibilities.

Yeah. Even just listening to that right now, I'm a little bit like influencing that is going to be such a headache. I can't imagine somebody actually. You're probably right. This is what should happen. It's like way too complicated. Right. You know.

So, all right. Well, so we've covered a lot of things. things here. But I guess just, so to sum up, both of you think what's most likely to happen is there's going to be some kind of settlement and Ripple and the executives will disgorge, but maybe not everything because there are other shark circling the waters and they need to be paid to. Is that kind of what you think is most likely to happen? I think they monkeyed on with this litigation for a year maybe. They have some motion practice. I think Ripple. And I actually agree with Gabe. It's so.

So the Securities Act violation is strict liability. There's no Sienta requirement. If it's a security you have to register, it has to be exempt. There is an intent requirement for Garlinghouse and Larson for the Control Act claims. So those are harder to prove. I think it's more likely than not they lose on motion practice there too, just based on this very detailed complaint. And then maybe it goes up to the Ninth Circuit. Wait, they lose, meaning Chris and Brad lose to as you see? I think so. It may go up to the Ninth Circuit, but it settles at some point. I doubt that I doubt that the Supreme Court takes an uncertain.

So it's just a matter of time and expense. And these things, like the litigation cost to get through a year of litigation, complex discovery and motion practice, $5 to $10 million, probably. It's a good estimate. Okay. So then last question before we say goodbye on this super fascinating case, is, you know, XRB has been around like the third or fourth largest cryptocurrency for quite a long time. And, you know, it's quite well known, especially when there's a bubble.

You know, I think a lot of us in the industry hear from like people outside the crypto world. Like, what about XRP? So obviously this case is going to have huge implications. Like, you know, as big as EOS or KIC or Telegram were, like they're just not anywhere near the level of something like XRP. because of where XRP has been in the crypto rankings for such a long time. So once this case is decided, however it's decided, what do you think the implications are for the wider crypto world? You know, do you what ripple effects do you think it will have?

Fair enough. It's a tough question. That's I think that's why any of us. I think it's very hard to say. I mean, in many ways, the way it has worked so far, this is what I'll say, is that, Every time one of these cases gets decided, everyone in the ecosystem seems to very quickly become confident that the distinctions between their circumstances and the decided circumstance are just very, very different. And the case means nothing for them. I struggle with this a lot as a transactional lawyer because part of my job in negotiating some of these deals is.

is convincing people to do certain things in order to have a better regulatory treatment of a token. And I will do something like point to the telegram case. And what I found is that in many cases, some of the people around the table are just very, very convinced that it is completely different and that it has no implications to the current circumstance. And I just think the power of the industry to engage in self-denial and also to engage in proactive things, you know, what some call decentralization theater or these maneuverings to try to make each new circumstance look as different as possible from the last. It's just part of the culture at this point.

And so I don't think it will immediately have some big dramatic effect that changes a lot of people's behavior. I think there would have to be a lot more blood in the water before something like that happens. I kind of tend to agree. I mean, I find the same thing. somebody will propose something and, you know, we'll point out telegram and kick, and they'll tell us all the reasons why it's different. And unfortunately, there are lawyers out there who will give people the advice,

give people the opinions that they want to hear that perpetuates this sometimes. One of the really interesting things, actually, about this complaint. One of the most interesting things to me is that it cites the opinions that the lawyers gave back in the day. I'm really curious how they got that. that. Yeah, I tend to agree with game. I don't think it will be, it's just another case. You know, we've seen over and over again, you know, the law is pretty clear. And this is another case where I think the conclusion is somewhat inevitable. And I think people will continue to believe what they want

to believe, at their own peril. Yeah, actually, just to ask one last question about what you were saying about how did they get that information about the opinions given by the lawyers back in Eindhol? the way in 2012. You know, you were saying that they've been under investigation for two years. So I'm assuming is that where most of the information came from in the lawsuit? I think so, but, you know, legal opinions that lawyers provide are confidential and privileged. And they would not typically be something that you have to disclose. And it could be that they relied on an advice of counsel defense, which seems silly, given the fact that this advice was contrary to what they ended up doing.

But unless there was a waiver of some kind or unless like a third party turned it over, typically, no, you wouldn't get those. You would not get a privileged legal memorandum. I don't think. You could hold that back. Interesting. Well, I have my own theories. But anyway, they're just theories.

Okay. Well, where can people learn more about each of you and your work? You can follow me on Twitter, Stephen D. Pally. And I am s.pally at Andersonkill.com. And I've got a very fancy and impressive bio of the law firm website. that I don't know who wrote. April. I'm Lex Knoad, L-E-N-O-D-E on Twitter, and I have a website.

I think it's called deal ninja. Dot law. Anyway, it's linked on my Twitter bio. I have all my writings and stuff up there and I have a substack. So, yeah, yeah, I never stop talking, so you can definitely find it. You have a substack, man. You're super cool. I'm a little tardy on it, to be honest with you.

I think I'm too late. I think substack is kind of like TikTok for me. I just don't think I'm cool enough. Stephen, I think we're in the same club. All right. Well, this has been so fun. Thank you both so much for coming on Unchained. Our pleasure.

Yeah, thanks so much. Thanks so much for joining us today. To learn more about Stephen, Gabriel, and the SEC lawsuit against Ripple, check out the show notes for this episode. Don't forget, you can now watch video recordings of the shows on the Unchained YouTube channel. Go to YouTube.com slash C-unchained podcast. and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yun, Daniel Ness, Bossie Baker, Shashog, Josh Durham, and the team at CLK transcription.

Thanks for listening.