Ripple’s win forces SEC to reveal internal documents on Bitcoin and Ethereum

Ripple Labs won in a discovery hearing that would force the Securities & Exchange Commission (SEC) to hand over its internal documents on Bitcoin and Ethereum. The XRP price has since risen 23.4% in the past 24 hours, trading above $1 at the time of writing. 

SEC to hand over documents on Bitcoin and Ethereum

The SEC accused Ripple Labs and its executives of offering an unregistered security — XRP — in December 2020. The securities regulator alleged in the $1.3 billion lawsuit that Ripple illegally earned over $600 million by selling the digital currency.

In a previous discovery hearing, US District Court Judge Sarah Netburn dropped a bombshell statement, saying that her understanding of XRP is not only that it has value but also utility. 

Former SEC Chairman Jay Clayton and former Director of Enforcement Willian Hinman both claimed that the regulator does not consider the two largest cryptocurrencies to be securities. The SEC has not detailed how it has come to this conclusion.

Ripple Labs and its co-defendants, CEO Brad Garlinghouse and Executive Chairman Chris Larsen, filed a motion on March 15 to request the SEC to bring forward documents regarding the regulator’s internal communication on Bitcoin and Ethereum.

The securities regulator stated that Bitcoin and Ethereum were not securities offerings, US District Court Judge Sarah Netburn reiterated. She added:

For almost a decade, the SEC watched as XRP grew and developed, all the while issuing no formal guidance that its sales may be illegal.

Ripple is seeking to find documents where XRP is mentioned by the SEC as a “virtual currency,” similar to Bitcoin and Ethereum. The internal communication documents may also show the SEC’s criteria for determining which digital assets are and are not deemed securities, which could help the blockchain firm make its case.

Judge Netburn said it was a “high-stakes” discovery win for Ripple, as she ruled in favor of the defendant. She added that documents such as meeting minutes and internal memos “expressing the agency’s interpretation or views” on cryptos would be included in the order, however, leaving out internal staff emails. 

Why are Bitcoin and Ether relevant?

Attorney John Deaton, who led the motion to intervene in the SEC v. Ripple case, highlighted the importance of the decision a prosecutor makes at the beginning of who to charge and what to charge. Clayton favored going after the individual executives of Ripple, not just the company. 

Deaton, who is familiar with the case, figured that if the SEC only sued Ripple, it would only be a strict liability case — where the securities regulator would only need to prove that XRP was a security when Ripple sold it. 

However, since the SEC went after the two executives, the regulator needs to prove that Garlinghouse and Larsen “knew or recklessly disregarded that Ripple’s sales of XRP required registration.” 

Bitcoin and Ethereum are further relevant to the case as the former Commodity Futures Trading Commission (CFTC) Chairman Chris Giancarlo authored an article stating that XRP is not a security and that it is a commodity. Current CFTC chairman Heath Tarbert said in January 2020 that:

We’ve been very clear on Bitcoin: Bitcoin is a commodity. We haven’t said anything about Ether — until now. It is my view as chairman of the CFTC that Ether is a commodity.

Deaton said, “If the former CFTC Chairman stated affirmatively that XRP is a commodity and the then-current CFTC Chairman said officially ETH is a commodity, it’s certainly reasonable to assume that XRP is not a security.”

He further claimed that Clayton — who filed the lawsuit against Ripple Labs on his last day — and his crew were “arrogant bureaucratic bullies” who wanted to either “send a message” or did so for other personal reasons.

Ripple issued a subpoena to Clayton at his new place of employment for any communications related to cryptocurrencies, not limited to Bitcoin, Ethereum  and Ripple.