Hinman Memo Unsealed: SEC Official Expresses Concern Over “Ethereum is Not a Security” Declaration

SEC Official Concerned About "Ethereum is Not a Security" Declaration in Unsealed Hinman Memo

On June 13, 2023, documents related to former Securities and Exchange Commission (SEC) corporate finance chief William Hinman’s 2018 speech have been unsealed, including numerous emails and annotated comments.

Hinman stated in the speech that the native asset of the Ethereum network did not need to be regulated as a security, a viewpoint that Ripple Labs often cited in its defense against SEC accusations. The newly released documents show that multiple senior SEC officials explicitly stated that Hinman’s speech may have caused confusion over how the United States categorizes digital assets.

Some industry insiders believe that the documents do not provide conclusive evidence but offer some new information that could help Ripple in its lawsuit against the SEC and overall, could be advantageous for Ripple.

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Several SEC officials express concerns over declaration that “Ethereum is not a security”

Hinman stated in his speech on June 14, 2018, “Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”

The released documents include email exchanges between Hinman and SEC staff aimed at preparing for the upcoming speech. The emails show SEC officials struggling with how to phrase the speech when conveying the viewpoint that Ethereum is not a security.

On June 12, 2018, Director of Trading and Markets Brett Redfearn wrote, “As written, the language around whether ETH is a security remains murky. If you want to make a more definitive statement that it is not a security, the language could be stronger (i.e., state it directly). If you do not want to take a definitive position, we suggest using language similar to that used in the Bitcoin disclosure regime to make it more consistent.”

Redfearn also commented on the proposed speech draft, stating that “some of the language seems like it could create more confusion around the status of ETH.”

SEC FinHub’s current head, Valerie SzczeBlockingnik, wrote in an email on May 25, 2018, that she believed “less detail is better,” and SzczeBlockingnik stated, “This is introducing a concept that may lead to a lot of discussion so I think leaving room for discussion is a good thing.”

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 of the Office of General Counsel responded in an email on June 12, “We are reserved about including statements about Ether directly 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 General Counsel believe that Hinman skipped over the threshold question of whether the SEC had jurisdiction, warning that Hinman’s creation of this “other” category and focus on information asymmetry would expose regulatory loopholes and potentially leave the SEC powerless to remedy them.

Other officials copied on the email include former SEC enforcement chiefs Stephanie Avakian and Steven Peikin, former Division of Investment Management head 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 have a conversation 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 filed a lawsuit against Ripple Labs, alleging that the company raised 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 are inconsistent with the SEC’s claim that XRP is a security.

William Hinman later became a key figure in this 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 lead defendant in the case Brad Garlinghouse said waiting was worth it before the documents were released. He responded to a post by crypto YouTuber Jungle Inc. on Twitter, saying, “I hope we can dive in now, but we’ve waited this long (over 18 months) and I don’t want to overstep…I’ll just say that Stuart Alderoty [Ripple’s chief legal officer] and I believe these documents were worth waiting for.”

Stuart Alderoty, Chief Legal Officer of Ripple, tweeted, “We can all now see that Hinman ignored multiple warnings, that his speech included a fictional analysis without legal basis, departed from Howey’s test factors, exposed regulatory gaps, which will not only cause confusion, but also cause ‘greater confusion’ in the market.”

Ripple Labs hopes to use Ethereum as a defense for its XRP technology and token sales. Borrowing Hinman’s words, if Ethereum can become “decentralized enough” over time, then XRP can also transition from securities to commodities.

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

Adam Cochran, founder of venture capital firm CEHV, commented that the documents “have little impact on the XRP case,” but “subtle differences are putting Gensler in a predicament.”

Delphi Labs General Counsel Gabriel Shapiro called these emails a “nothingburger” and did not reveal any new content that would help the Ripple case. Shapiro wrote on Twitter, “I would be happy if this helped Ripple’s case, but it doesn’t.”

Potential Impact on Cryptocurrency Classification

The public release of the Hinman document could trigger a major debate about classifying cryptocurrencies as securities, especially in a challenging period for the industry. Recently, the SEC sued cryptocurrency exchanges Coinbase and Binance for selling unregistered securities. In the legal lawsuit against Coinbase, the SEC stated that at least 13 cryptocurrencies offered by Coinbase to its customers are securities, including solana (SOL) and cardano (ADA).

Author: BlockingBitpushNews Mary Liu

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