In a recent interview, Joseph A. Hall, a former executive at the U.S. Securities and Exchange Commission (SEC), explained why “there’s a good chance” his former employer loses its lawsuit against Ripple Labs.

Hall has been partner in U.S. law firm Davis Polk since September 2005. Before that, between October 2003 and June 2005, he was working at the SEC, where he ultimately served as Managing Executive for Policy under Chairman William H. Donaldson, where he assisted the Chairman in “directing the Commission’s policy-making and enforcement activities.”

In an article for Law360 published on January 25, Hall attempted to explain why the SEC’s enforcement action against Ripple over XRP showed the need for much more regulatory clarity on cryptoassets.

As you may remember, on 22 December 2020, the SEC announced that it had “filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.” 

In this article, Hall explained how inadequate the SEC’s Howey test is for deciding whether a particular cryptoasset is a security:

Imagine trying to explain what an iPhone is in language your great-grandfather would have understood just after World War II. That’s how easy it is to predict which digital assets are securities under the postwar Howey test.

He then argued that this lack of regulatory clarity significantly hurts the development of blockchain technology in the U.S.:

It’s difficult to overstate the impact this uncertainty has on the development of blockchain technology in the U.S. Outside the venture capital community, corporations, major investors and banks are understandably skittish about risking serious sums of money on technologies their lawyers can’t assure them comply with law — even when a technology holds the potential to improve the efficiency of managing vast amounts of data across countless industries, or the potential for frictionless, inexpensive transfers of value over smartphones and other widespread consumer tools.

As for the SEC’s lawsuit against Ripple over the sale of XRP tokens, Hall said that after William Hinman’s speech at the Yahoo Finance All Markets Summit in June 2018, where he said that Ethereum (ETH) “might have been born a security but later morphed into a nonsecurity”, it was “a fair bet that XRP would get the same treatment”, i.e. “maybe there were some issues with early sales of XRP, but at this point surely XRP itself was in the clear”.

Hall argued that the SEC’s decision to bring an enforcement action against Ripple Labs for ongoing sales of XRP is “remarkable on several levels”:

  • … the timing — the day before Clayton stepped down — suggests the possibility of a rift among the commissioners as opposed to a case everyone agreed had to be brought immediately in order to avert looming investor harm.
  • … whatever one’s views on the merits, before news of the SEC’s intentions broke, XRP traded with a market cap in the $25 billion to $30 billion range, meaning that any precipitous action by the SEC would surely result in heavy investor losses…
  • Why on earth did the agency bring a case that was considerably less a slam dunk than its previous crypto enforcement actions?

On Tuesday (February 2), as first reported by The Daily HODL, during an interview on the “Thinking Crypto” YouTube channel, Hall shared his latest thoughts on the SEC’s “astonishing” lawsuit against Ripple.

Hall thinks that any judge looking at this case will be wondering why the SEC did not complain to Ripple about sales of XRP prior to December 2020:

The judge just might say, ‘If XRP was a problem, you’ve known about XRP since 2012. Why now? What is going on here?’ So, I think we start out with the XRP case with a factual posture that may not be the best for the SEC. So, I think that there’s a good chancethat the SEC loses this one.

Hall also said that it is quite possible for this lawsuit to result in a ruling that “makes it very difficult” for the SEC to “exercise any authority at all over the entire crypto space.”

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The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.