The Meaning Of “We”At The SEC
News broke Thursday that President Biden will issue a sweeping executive order tasking his Administration to develop a regulatory framework for digital assets as a matter of “national security.” This should have been welcome; cryptocurrency innovators have begged for a clear regulatory framework for the better part of a decade.
But the news sent a chill through the crypto space. After years of abuse of crypto investors and innovators, the credibility of the Securities and Exchange Commission (SEC) is in tatters.
Determined to destroy crypto
The Biden news didn’t happen in a vacuum. Fellow Democrats in Congress have called for a wholesale crackdown against crypto, even portraying anodyne digital stablecoins as Frankenstein’s monster that must be hunted down and destroyed. A Federal Reserve paper on a central bank digital currency (CBDC) identified the economic benefits of digital assets to remove friction from the financial system. Fed Chairman Jerome Powell already set the stage for concern at a House meeting on fintech last summer when he said a CBDC could eliminate the need for cryptocurrencies. It seems Democrats took this as a green light on the path to prohibition.
The SEC, however, has led the way in destroying confidence in the crypto space, and it predates the Biden Administration. During the Trump Administration, SEC Commissioner Robert Jackson repeatedly said in public forums that the SEC purposefully avoided clarity on what makes a digital asset a security, and therefore subject to the agency’s regulation and in lieu of “talking to the market”. That “talking” became a baffling set of confusing and contradictory guidance doled out by previous SEC Chair Jay Clayton and his Director of Corporation Finance William Hinman, buttressed by dozens of arbitrary enforcements which in themselves demonstrate a case of immense unchecked power.
The infamous “talking” event was Hinman’s speech in June 2018 where he declared that ether, the Ethereum network token, is not a security. Hinman said that since Ethereum had become “sufficiently decentralized,” ether sales would “no longer” be considered securities transactions. Hinman’s criteria included “setting aside” Ethereum’s public initial coin offering (ICO) in 2014.
These were principles taken with other SEC guidance that led many to believe that other token sales were not securities transactions, including the holders and users of billions of XRP tokens that had been trading on the open market since 2013. XRP never had an ICO; the XRP ledger was built and decentralized before sales began. Ripple, the cross-border payments software company and biggest XRP user along with crypto exchange Coinbase sought explicit clarification from the SEC on XRP. After “talking” with the SEC, Ripple continued programmed sales of XRP and Coinbase listed the token in 2019.
SEC Pronoun Play: “I, I mean, we”
Hinman prefaced his speech with the usual disclaimer that it was his personal view, “not necessarily” that of the Commission. Yet everyone on the planet understood this as official guidance, and markets reacted. Minutes after delivering the speech, Hinman himself explained that he gave it because “the chairman and the SEC” felt they had to “be clearer” and “transparent” and give “guidance” about ether. At a later appearance at Georgetown Law School, Hinman said his speech was where “we expressed to the world that we didn’t view ether as a security as it was then currently being offered. . . we also, last summer, spoke a little bit more about how we were looking at” ether and bitcoin, and “we made it very clear that we don’t see a reason to regulate those as securities.”
For a speech proffered as “not necessarily” the views of the Commission, Hinman repeated said “we” when referring to the SEC’s approach. He wasn’t alone; Jackson also repeatedly called Hinman’s speech “guidance” on “what we think”. Two months after the speech, Clayton himself told a conference in Nashville that Hinman “outlined the approach we [emphasis added] take to evaluate whether a digital asset is a security. I encourage you to take a look at Bill’s speech, which is available on our website.”
On his last day as chairman, Clayton’s SEC filed its blockbuster enforcement action against Ripple saying that XRP has been a security since inception and all sales, including among retail holders on exchanges, have been securities transactions and that everyone should have known for seven years. Its logic was so head-spinning that Hinman’s speech became a logical centerpiece of Ripple’s defense, that the SEC has been capricious in applying securities laws to them and other crypto actors.
Ripple emerges as the defender of markets and investors join
The SEC responded with a contention as ridiculous as its complaint against Ripple – that Hinman’s speech was personal opinion, not market guidance. Presently the agency is fighting maniacally to stop Ripple from obtaining dozens of emails, speech drafts, and meeting notes that would expose how Hinman’s speech was developed. Such documents will likely be exculpatory for Ripple and reveal that Ethereum investors and their lawyers played a role in writing Hinman’s speech. Some 65,000 holders of XRP who lost $15 billion in value before having their holdings locked by trading suspensions have entered as friends of the court against the SEC. San Francisco-based Ripple with a world-class legal team remains defiant in the case.
In court the SEC’s lawyers stand behind their logic-neutral pronouns, the arrogant condescension that everyone should have known that XRP was always a security, that Hinman’s speech wasn’t guidance, and that all those “we”s—meaning the SEC—is mass delusion. It’s a stunning display of federal hypocrisy determined to protect its own power over and above any mandate to protect markets or investors. The White House should reconsider an executive order which blesses this madness.