US SEC discloses possible conflicts of interest in its cryptocurrency enforcement decisions

US SEC gives in to FOIA requests and litigation, detailing possible conflicts of interest in its cryptocurrency enforcement decisions.
Empower Oversight sued for all communications on cryptocurrencies between senior SEC officials and their past and future employers.
Empower Oversight has been at the forefront of the battle for SEC transparency.

Ethereum (ETH) and Hinman are two of the most popular names in crypto that have been mentioned as the US Securities and Exchange Commission (SEC) discloses possible conflicts of interest in its cryptocurrency enforcement decisions. On the financial regulator’s book, the matter revolves around securities offerings, a long-standing fight between the SEC and the Crypto industry.

Also Read: Ripple plan to re-engage with US market could trigger XRP price recovery

Ethereum and Hinman mentioned in SEC conflict of interest disclosures

Empower Oversight, a legal watchdog founded in 2021 by former Senate staffer Jason Foster, requested the SEC to release documents showing possible conflicts of interest in its cryptocurrency enforcement decisions.

The request goes back around three months and traces back to 2021 with the watchdog seeking information regarding the decision-making on cryptocurrency issues at the SEC. Specifically, Empower Oversight sought “all communications between senior SEC officials and their former and future employers and related entities regarding cryptocurrencies.”

The request has now been honored, with Ethereum and Hinman names featured in the 324 paged documents.

The fight for transparency never ends.

Empower Oversight Litigation Forces SEC to Release Additional Documents on Cryptocurrency Conflicts - Empower Oversight https://t.co/IqrZM8io8f
— John E Deaton (@JohnEDeaton1) August 3, 2023

Hinman is a common name in the Ripple ecosystem, relating to documents that contain internal messages and email communication between the SEC executives.

The request and litigation fall under the Freedom of Information Act (FOIA), with Empower Oversight hinging upon it to access important documents from the SEC that could have a long-standing bearing on the crypto industry.

Empower Oversight findings from the SEC’s latest document releases

Ethereum and Hinman are among the most pronounced crypto-related names featured in the document.

The documents reveal the role played by Joseph Lubin and his firm, Consensys, in influencing William Hinman, who served as SEC Director of Corporation Finance at the time (2018). Reportedly, Lubin and company had a sway on Hinman’s thinking and goals, alongside an involvement in orchestrating the meeting between Hinman and Ethereum creator, Vitalik Buterin.

Also, the documents indicate a meeting between Hinman and Chris Lin before Hinman’s division on its initial product offering (IPO). Noteworthy, Lin is a Simpson Thacher partner and representative for crypto mining client called Canaan, hence another conflict of interest.

Citing a paragraph in the documents:

Hinman was receiving millions of dollars in payments from Simpson Thatcher while working with the SEC.

The above citations compromise the conflict of interest protocols, which the Ethics Office of the US SEC had often cautioned Hinman against.

Is Ethereum a security?

There are still debates (especially among regulators) on whether or not Ethereum (ETH) is a security, with the recent Shanghai/Capella (Shapella) upgrade exacerbating the discussion. After its transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS), regulators started considering it to be one, despite there being no exact definition of what is “sufficient” or insufficient” decentralization. This status makes it all the more difficult to decide Ethereum’s stance as a security or non-security.

It remains to Congress and regulators, therefore, to explain beyond reasonable doubt, why PoS is less decentralized than its PoW counterpart, with the findings likely to help experts determine if ETH is a security.

Noteworthy, in a May 23 episode on Laura Shin’s Unchained podcast, former general counsel at the SEC, Dan Berkovitz, said that it is legally possible for Ether to fall under the jurisdiction of both regulatory agencies.

Berkovitz based his argument on the overlapping legal definitions of commodities and securities, which according to him, allows an asset to pass as both. In his words:

The law is clear. Something can actually be both a commodity and a security.

Further, he explained the source of the confusion, saying commodities are not purely physical items, adding that anything that falls under the purview of a “futures contract” can technically be defined as a commodity.

This explains why the term “futures” is a part of the name of the Commodities Futures Trading Commission (CFTC).

SEC vs Ripple lawsuit FAQs

Is XRP a security?

It depends on the transaction, according to a court ruling released on July 14:

For institutional investors or over-the-counter sales, XRP is a security.
For retail investors who bought the token via programmatic sales on exchanges, on-demand liquidity services and other platforms, XRP is not a security.

How does the ruling affect Ripple in its legal battle against the SEC?

The United States Securities & Exchange Commission (SEC) accused Ripple and its executives of raising more than $1.3 billion through an unregistered asset offering of the XRP token.

While the judge ruled that programmatic sales aren’t considered securities, sales of XRP tokens to institutional investors are indeed investment contracts. In this last case, Ripple did breach the US securities law and will need to keep litigating over the around $729 million it received under written contracts.

What are the implications of the ruling for the overall crypto industry?

The ruling offers a partial win for both Ripple and the SEC, depending on what one looks at.

Ripple gets a big win over the fact that programmatic sales aren’t considered securities, and this could bode well for the broader crypto sector as most of the assets eyed by the SEC’s crackdown are handled by decentralized entities that sold their tokens mostly to retail investors via exchange platforms, experts say.

Still, the ruling doesn’t help much to answer the key question of what makes a digital asset a security, so it isn’t clear yet if this lawsuit will set precedent for other open cases that affect dozens of digital assets. Topics such as which is the right degree of decentralization to avoid the “security” label or where to draw the line between institutional and programmatic sales are likely to persist.

Is the SEC stance toward crypto assets likely to change after the ruling?

The SEC has stepped up its enforcement actions toward the blockchain and digital assets industry, filing charges against platforms such as Coinbase or Binance for allegedly violating the US Securities law. The SEC claims that the majority of crypto assets are securities and thus subject to strict regulation.

While defendants can use parts of Ripple’s ruling in their favor, the SEC can also find reasons in it to keep its current strategy of regulation by enforcement.

Can the court ruling be overturned?

The court decision is a partial summary judgment. The ruling can be appealed once a final judgment is issued or if the judge allows it before then. The case is in a pretrial phase, in which both Ripple and the SEC still have the chance to settle.

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