How Ripple's Win Reshapes Crypto with Paul Grewal & Mike Selig

A U. S court has ruled that XRP is not a security, and if XRP is a security then what implications does this have for other tokens? Joining us today is Paul Grewal and Mike Selig, both experts in their respective fields who are here to help walk us through the implications of this court decision and what it means for our industry as a whole. ------ 🚀 Join Ryan & David at Permissionless in September. Bankless Citizens get 30% off. 🚀 https://bankless.cc/GoToPermissionless ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE ⁠https://k.xyz/bankless-pod-q2 https://%E2%81%A0https//k.xyz/bankless-pod-q2⁠ 🦊METAMASK PORTFOLIO | TRACK & MANAGE YOUR WEB3 EVERYTHING https://bankless.cc/MetaMask http://bankless.cc/MetaMask 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/Toku https://%E2%81%A0https//bankless.cc/MetaMask%E2%81%A0 ⚖️ ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum⁠ https://%E2%81%A0https//bankless.cc/MetaMask%E2%81%A0 🦄UNISWAP | ON-CHAIN MARKETPLACE ⁠https://bankless.cc/uniswap⁠ https://%E2%81%A0https//bankless.cc/MetaMask%E2%81%A0 🛞MANTLE | MODULAR LAYER 2 NETWORK ⁠https://bankless.cc/Mantle⁠ https://%E2%81%A0https//bankless.cc/MetaMask%E2%81%A0 ----- TIMESTAMPS: 0:00 Intro 4:18 Great Day to Be a Lawyer 7:47 Was This a Surprise? 9:27 TLDR on the Ripple Case 16:08 What is a Security? 20:18 How Binding is This Decision? 27:05 Establishing a Precedent 31:47 SEC's Argument Falling Apart? 38:28 Opening The Door to More Tokens 42:37 What Does This Mean for Token Holders? 47:57 How Does This Impact US Regulation? 53:29 The Fight Ahead ----- RESOURCES: Mike Selig https://twitter.com/MikeSeligEsq Paul Grewal https://twitter.com/iampaulgrewal ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:16Ryan Sean Adams?

  We're going into the details with some crypto legal minds and experts. The news is this, the sales of XRP, the asset, do not constitute an offer of investment contracts. This is the words of a judge. Effectively, what this means is a US court has ruled that XRP is not a security. The question, of course, is, if XRP is not a security, how can all of the other tokens that the SEC alleges are securities be securities, including Matic, including Solana, including Cardano, including ETH? We're going to get into the details of that ruling today. On this news, of course, some of the crypto market has been up, XRP has been up, the Coinbase

• 1:01Ryan Sean Adams?

  token has been up as well. I shouldn't say token, I should say stock. That one's a stock. And I promised yesterday in the roll up that we would walk through the details with some legal minds, some folks where we can get into a deeper analysis than I can give you. So here we are, joined today with Paul Graywell and Mike Selig. They are both experts in this field and I think we'll provide some insight into the implications of this and the decision itself. So guys, we're going to get right to the episode, but before we do, I want to thank the sponsors that made this possible, including our number one recommended crypto exchange, Kraken. Go create an account.

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• 4:11Ryan Sean Adams?

  XRP is not a security. That seemed to be the ruling of a US court. Just yesterday, it happened. We want to get some legal minds in on this conversation. We've got two of the best in our industry. Mike Selig joins us. He is a counsel for Digital Asset Department at Wilkie Farr and Gallagher, which is a law firm based in New York City. Mike's been on Bankless before. Last time we talked, I think we were talking about the SEC. It's the year of the SEC, I think, Mike. So it's great to have you back.

• 4:40Speaker 02

  Good to be here.

• 4:41Ryan Sean Adams?

  We also have Paul Graywell, who's no stranger to Bankless. He's the chief legal officer at Coinbase. And I think Paul was last on the show to discuss the Wells notice that Coinbase received from the SEC. And now this time, we get to talk about maybe happier news, which is this recent ruling. Paul, it's great to have you back.

• 4:59Speaker 03

  It's great to be back. Thanks, Ryan.

• 5:02Ryan Sean Adams?

  All right. I want to go through this in two parts. First, let's talk about the decision. And your legal brains will be able to pick this apart far better than mine. So I want to spend some detail there. And then, once we do that, once we establish that, we can talk about the implications. But before we do, I want to just spend a moment to maybe celebrate what just happened. I, for one, am very excited. And I saw your tweet here, Paul. Most days, I love being a lawyer. Today is one of them. You were referring, of course, to yesterday, the day you got this news. I think all of crypto was really celebrating in a celebratory mindset. And I want to ask why. Why was yesterday an important day for you, Paul?

• 5:47Speaker 03

  Well, it was important because Judge Torres in her decision made several rulings that we think are transformational, not just for Coinbase and our particular issues with the SEC, but for the industry as a whole. But I actually think that the substance of the ruling was only part of the exuberance, Ryan. You know, for a long time, a lot of us in crypto had frankly been getting the crap kicked out of us seemingly on a regular basis. Part of that was from the SEC. And we're going to talk a lot more about that in a minute. But part of it was just the fact that our industry saw just one blow up after another and one scandal after another that really tarred a lot of innocent, hard

• 6:29Speaker 03

  working, creative, good people with negativity and words in ways that simply wasn't fair. So I think for For many of us, if I can speak on behalf of more than just myself for a minute, the ruling, I think, was a sense for the first time in a long time that we were being heard, that someone smart and hardworking and fair and frankly with no skin in the game, was looking at these issues so important to so many of us and saying, are you serious, SEC? Is this really the basis upon which you want to regulate such an important industry in the United States? I think that was as much of it as anything else.

• 7:10Ryan Sean Adams?

  I will definitely agree with you. I felt like it's been a theme of 2023. Regulatory overreach has felt like a theme, this regulation by enforcement. And it felt good to have some checks and balances at play. And that's, after all, is the the idea of the court system. That's where they come into play as a check and balance against the legislative and executive branch. I think we saw that today. Mike, what were your thoughts? First of all, were you surprised at this ruling in general? Like, it was not on my radar at all. I didn't even know that this ruling was imminent. Were you surprised at the timing of it and the result?

• 7:52Speaker 02

  So we were all waiting for this ruling to drop and we had no idea when, but we expected it any day. And, you know, it came when it came. But I think we've built up over all of these years this notion that the SEC is interpreting the howe test broader and broader with every case. And they've brought many enforcement actions over the years. Many of these have settled. And there have been a handful of cases where the SEC has been tasked with going to court. The Wahi case, the Coinbase case now, Ripple, Telegram, Kik, Library, a number of these cases. And the SEC has kind of gotten its way in some of these. We've not had the monumental ruling where we had a, you know, a court say that the,

• 8:37Speaker 02

  there is no security involved whatsoever. But we've kind of gotten these breadcrumbs in every case where the courts started to distinguish this idea that there's an investment contract. And this crypto asset that kind of sits apart from that, and it may be sold in ways that that implicate the securities laws, but it's not necessarily a security in every case. It's not the security itself. And so this was really a surprising win really for for the Ripple team and for the industry more broadly. I don't think any of us were necessarily expecting that the court would go so far as to say, look, we're separating the crypto asset from the investment contract very clearly here. And there are certain instances when you can sell the crypto asset and it's not going to implicate the securities laws.

• 9:19Ryan Sean Adams?

  So let's get to the what's happened. That was our celebratory round. And Mike, you started talking about this. I want to bring Paul in on this, too. This is a tweet from Bill Hughes that I think sums it up, but I'm wondering if you could paint in the shades of detail here. Crypto lawyer Bill Hughes says the SEC versus Ripple in brief. Ripple putting XRP on exchanges for trading and funding their operation with those sales. The court found that this is not an investment contract and therefore not a security. XRP on exchanges, not a security. Ripple paying people in XRP is not an investment contract and therefore not a security. So when you pay in XRP, it's not a security. XRP itself is not a security in and of itself, even when offered through a securities transaction.

• 10:04Ryan Sean Adams?

  All right, that I think is are the monumental pieces of this ruling. The last part, though, is Ripple selling XRP directly pursuant to contracts was an investment contract and thus a security. Ripple had fair notice that doing this without registration was illegal. So I think the idea here is that at some point when Ripple was selling XRP to investors, these maybe institutions, it was a security. And then XRP became not a security at some other point in the process. This piece of the of kind of the court ruling seems somewhat vague to me, but we've got sort of the start case where XRP starts as

• 10:46Ryan Sean Adams?

  a security and we've got the end piece where now it's not security, according to the court ruling. Paul, I'm wondering if you could kind of make sense of this for us. So what actually happened here?

• 10:58Speaker 03

  Yeah, Ryan. Well, just to be very clear, what actually happened here as a result of this ruling, XRP, the token, the asset, was never a security. It was never a security when it was a part of a broader investment contract and security transaction. That's what was going on with the institutional investors. It was never a security when it was part of trading on exchanges. And in fact, the trading on exchanges was deemed not to be a security transaction as well. It wasn't a security when it was distributed to employees and on and on the court went. So I think part of the FUD here, part of the uncertainty doubt and fear

• 11:38Speaker 03

  that the SEC has sown is that through its theory, it has suggested that assets themselves can be securities, independent of the context in which they are transacted. Judge Torres blows that entire thinking out of the water, and she does it in a very thoughtful, methodical way. That's why I think today so many people are celebrating that we finally have recognition that whatever else may be going on with assets from time to time, these assets themselves are not securities.

• 12:11Ryan Sean Adams?

  Okay, all right. So I think I got that that part wrong. And your your precision of language, that's why you guys are lawyers and I'm not. I'm just a, you know, lowly podcaster. Your precision of language really helped me there, Paul. So you're saying XRP was never a security, but there was this investment contract for XRP and that investment contract, a separate kind of thing, a separate asset, I suppose, or a separate agreement. The judge ruled that that investment contract was a security, but XRP was never a security throughout this entire process. Is that correct?

• 12:47Speaker 03

  100% correct. And the way we know that, the reason we know this is Judge Torres understood the law. The law has been clear for a very long time. You got to look at these things, transaction by transaction. That's one of the reasons why Judge Torres Distinguished the transactions involving institutions on the one hand, and the transactions that took place on the exchanges on the other. And that distinction is everything. And the SEC's refusal for years now to acknowledge that distinction is what created so much uncertainty for a lot of us. Judge Torres said enough. Judge Torres said, let me lay this all out so that everybody can understand.

• 13:30Speaker 03

  And she squarely ruled in favor of exchange trading in the XRP case not being a security.

• 13:38Ryan Sean Adams?

  Okay, now I see. So, thank you for that clarity. So, can we be clear on what XRP the asset actually is? So, if it's not a security, did Judge Torres designate what it actually is as an asset?

• 13:55Speaker 03

  She didn't. The burden was on the SEC as the plaintiff in the case to prove what it was alleging in its complaint, which is that the XRP asset itself was a security. And that's what the court considered, deliberated on, and ultimately rejected. She didn't go so far, and I think this is a reflection of the care with which she wrote her opinion, as to say what the asset might be in terms of other regulatory frameworks. For example, a commodity, a virtual currency, or something else altogether. The only thing that mattered in order to evaluate the SEC's claims was, is this a security or isn't it? And she plainly said, it's not.

• 14:36Ryan Sean Adams?

  And why? What were her reasons? What were her arguments for this, for XRP not being a security?

• 14:42Speaker 03

  Because the law has been very clear that what is at issue when the SEC charges violations of the securities laws is whether the transactions themselves constitute securities transactions that trigger the authority and jurisdiction of the SEC. And so, because you can have investment contracts or any other type of security transaction that involves all sorts of things that might be securities on the one hand, you know, Apple stock or debt instruments, those sorts of things. Or on the other, pure commodities, you can have securities transactions that involve transactions such as orange groves or pork bellies or other things that are planning on securities.

• 15:26Speaker 03

  In a certain way, Ryan, the underlying asset is kind of irrelevant to the analysis. What matters are the transactions, and that's why we found Judge Torres so laser-like focused on that particular element.

• 15:38Ryan Sean Adams?

  And this seems to, we'll talk about the implications, but this seems definitely to fly in the face of something that the SEC has been talking about, both in talking points and then in these individual court arguments, and the basic idea that tokens, all tokens are securities. It seems to be this very, I guess, strong position that everything that is not Bitcoin is a security or is very possibly a security. So this flies into the face of their argument. Mike, I'm wondering what you might add to this. And in your tweet thread, you said something similar. You made this distinction between the asset of XRP itself and an investment contract. You called this a massive win by the Ripple team against the SEC.

• 16:18Ryan Sean Adams?

  Judge Torres clearly affirms the view that the same crypto asset may be sold as an investment contract and therefore a security and as a standalone good. So both, the investment contract is the security, not the crypto asset. What else would you add to Paul's explanation of what just happened here, Mike?

• 16:41Speaker 02

  You know, it's important to have this distinction because you have these all sorts of commodity assets, gold, silver, sugar, that are sold every day in various types of transactions. The court's decision here really firmly places XRP with these other types of commodities and goods. And of course, they may be sold under circumstances where certain promises and commitments are made by the seller. You know, in the original 1946 Howey opinion, you had a land management contract coupled with the Orange Groves. And if the Orange Groves are later resold, why should that be subject to the securities laws? And so I think we've seen, you know, Matt Levine kind of saying, well, this isn't how stock is sold. And, you know, if you buy stock in a secondary market, you know, it's still stock, but that's

• 17:26Speaker 02

  a different type of security. And so really, the investment contract analysis will require the SEC in every instance to do their homework and prove that the commodity was sold in a manner of sale that implicates the securities laws. And of course, certain crypto assets might be stock. They might be notes. They might fit within other prongs of the security definition. But the Howey test is really this prophylactic catch-all that says if it's none of those other things. Then we're going to make you prove your work to show that the facts and circumstances dictate protection of the securities laws. And that's no joke. I mean, it's a serious thing for these assets to be within the scope of the securities laws. There's disclosure requirements and all other sorts of compliance obligations around

• 18:11Speaker 02

  registration and trading in secondary markets. And so it shouldn't be taken lightly that that the assets are just grouped within the securities laws because they have some investment characteristics.

• 18:22Ryan Sean Adams?

  So does this mean effectively that like the SEC would have to prove for every single asset that it passed, like that it is subject to the Howey test? And right that that the court, the ruling just established that that is a fairly high bar to pass.

• 18:40Speaker 02

  Yeah, I mean, there was just a Supreme Court opinion regarding Slack where they're dealing with traceability of securities and some were sold as unregistered and some were subject to a registration statement. And the Supreme Court said you can't mix the two and say they're equivalent if there's fraud in the registration statement. It pertains to the, you have to prove that those securities you acquired were subject to that registration statement. It's the same kind of analysis the SEC is going to have to do here. They're going to have to prove that in every instance, the way that was sold was in an investment contract. And that's a really heavy burden for the SEC. And it's on, you know, exchanges where there's blind trading. It's very difficult to prove that people are kind of undertaking to invest in some

• 19:20Speaker 02

  enterprise and they understand all of these undertakings and promises when they're just buying something that they think is more of a commodity. They might be using it to pay gas. They might be using it for all sorts of reasons within the ecosystem. Who knows why they're buying it? But the SEC has to prove in every case that that reasonable purchase is based on an expectation of profits from the issuer or from some identifiable other. And that that's a difficult burden. So I think this case, you know, this, this order is very helpful for secondary sale cases as well as, as some of these other cases.

• 19:56Ryan Sean Adams?

  We'll get more into the implications, I think, in a minute because I think the implications are absolutely huge, are absolutely massive for crypto in various ways. I want to ask, though, Paul, for those not familiar, listening, who are not familiar with how the court system works, how binding is this sort of thing? Is there the opportunity for the SEC to appeal this? Does this cement this type of a decision in precedent? For those that aren't familiar with how the court system case law works, can you give us some details on that? Is this the end of story? XRP as a security, or is not a security, can never

• 20:37Ryan Sean Adams?

  be called into question again? Or are there some ways for the SEC to strike back here?

• 20:43Speaker 03

  Well, the empire can strike back, and it's important that we be very clear-eyed about this. But this is nevertheless a critical, critical decision. Ryan, in an earlier life, I served as a judge in a United States District Court. So the finality and certainty of a trial judge's decision is something that is near and dear to my heart. Look, Judge Torres, in this case, issued a ruling on what's called a motion for summary judgment that each party brought. And that's basically a claim by each side that, hey, we don't even need to have a trial on these various issues. As a matter of law, you can just decide this because we agree on all the facts that matter. Facts are why you usually have a trial. And if you don't have facts, you don't need a trial. When the judge ruled,

• 21:26Speaker 03

  for example, that the institutional transactions were securities transactions, she ruled, obviously, in favor of the SEC on that and against the Ripple defendants. Her rulings in favor of the Ripple defendants on all the other questions were also final decisions that take those issues out of the case for now and park them until the overall or complete case is resolved. What's critical here is that there was a third category of topics, one main topic in particular, that the judge considered, which was the aiding and abetting liability of certain individual defendants for the securities transactions that she

• 22:05Speaker 03

  found earlier in the opinion dealing with institutions. There, she said, I can't decide that question purely as a matter of law because you all disagree on what the basic facts are. So I've got to set that for trial. Why does all this matter? Before any party can take an appeal of any part of the judgment that they don't like, there has to be a final judgment and a final judgment can only enter once everything's been resolved. So what, so here, there's gotta be a trial first in order to wrap up the outstanding issues in the case. And only then can the SEC on the one hand, or the Ripple defendants on the other, file an appeal to the Second Circuit Court of Appeals and argue that there was some error down below.

• 22:49Speaker 03

  Now, there are ways in which one party or another can request permission to take up a piecemeal appeal, to focus on just a part of the case before having to wait until it's all wrapped up. But that bar is super high, very rare, particularly in the Second Circuit. So the SEC could try, for example, to pursue an interlocutory appeal of its loss, its massive loss on the sales on exchanges piece of the opinion. But that is not very likely to be accepted. So eventually, they will have their chance, as will the Ripple defendants. And, and at that point in time, the Court of Appeals, which generally sits in panels of three judges,

• 23:32Speaker 03

  will review this decision and ask themselves, was there a legal error here? Not, not did we, do we just simply disagree with what the judge did? But did she commit certain errors that warrant a reversal? That's a high bar, particularly when you have a decision at the trial court level that's so thorough, so thoughtful, as Judge Torres's decision. The final stop on the train, of course, is the Supreme Court. In theory, the party, or, or any party that loses at the Court of Appeals could go up to the Supreme Court or try to, in order to get that court to issue a decision. And of course, if the Supreme Court rules, that's the end. There's no other place to go in our system. But the Supreme Court only takes a handful of cases. The bar to get to the Supreme Court is super high.

• 24:16Speaker 03

  They have the discretion to say no, for whatever reason they wish. And that's why only a tiny percentage of cases make it up there. And that's why, if there's going to be an appeal here, it's gonna, for all intents and purposes, be an appeal to the Second Circuit Court of Appeals. And that's going to be absent some unusual situation, the last dance in the Ripple case.

• 24:38Ryan Sean Adams?

  And how long will that take, Paul, if it, if it occurs?

• 24:41Speaker 03

  Well, it's going to take many months, I predict, for the trial proceedings to wrap up because Judge Torres is a busy judge. She's got hundreds of other cases she has to manage at the same time. And so just scheduling the trial is going to be problematic. That could take six months. That could take, you know, a year. Now, she might decide to fast track this for other reasons, but my point is, you can't bank on the trial court being done with this case for a while. Then you go to the Second Circuit Court of Appeals. Those appeals can take as much as a year, 18 months, perhaps even two years. And then if one or more party wants to pursue the Supreme Court option, there you go. You've got another six, 12, 18 months on top of this. So we're looking at the possibility

• 25:23Speaker 03

  here of years before there's a final resolution. But Ryan, I just want to underscore one other point about the delay in the appellate process. In the meantime, the SEC is stuck with this decision.

• 25:35Ryan Sean Adams?

  They are. Absolutely. Yeah. This is where we get into implications here, right? Because there are many tokens, like, I don't even recall how long the Ripple versus SEC case has been ongoing. It's a matter of years, isn't it? I mean, this has been--

• 25:49Speaker 03

  It is. It has been a matter of years. And I should be very clear about one point, which is, you also asked, quite reasonably, what does this mean for these other tokens and these other cases?

• 26:00Ryan Sean Adams?

  Yes.

• 26:01Speaker 03

  Yeah. So this one trial judge in this one court doesn't have the power to bind any other judge. So it's not as if, in a different case like ours, our judge wouldn't have the freedom to make her own determinations on these same questions. But here's the thing. Judge Torres's decision is highly persuasive. It has persuasive authority. While the second or third or tenth judge doesn't have to follow her decision automatically, you've got a thoughtful, what, 30-some-page analysis of key issues. You've got a judge who has a great reputation as a thoughtful, careful, deliberate jurist. And so even if the other courts, for example, in our case, or in the case against Binance, or Bitrex, or whatever,

• 26:46Speaker 03

  aren't, strictly speaking, required to follow her analysis, you can bet they're going to be studying it very carefully. And given the respect that she commands among her peers, it's going to carry a lot of weight.

• 26:57Ryan Sean Adams?

  And that's the way our system works, right? Once this is established as some sort of precedent in kind of case law, then it gets kind of reflected in court cases down the road because there are a lot of tokens that are in the state of limbo as XRP was in that SEC for some reason thinks that they are a security. And you know, there's no clear determination, but this, this waiting, this precedent will, I guess, cement the, cement the evidence and cement the, the decision that none of these tokens are securities.

• 27:35Speaker 03

  I think it's gonna, it's gonna, it's gonna have a massive impact on that question. I mean, the way to think about, another way to think about this, Ryan, is do a find and replace in Judge Torres's decision, particularly the portion dealing with trading on exchanges and look for all the references to XRP and just swap out the letters XRP and swap in Matic, Bawana, Cardana. I mean, you could pick any number of assets, including those that are at issue in our cases. The logic holds. There's nothing different about the tokens that would change any of Judge Torres's analysis of, in that portion of the opinion. That's why this thing is such a blockbuster. Obviously for the XRP parties, it's critical, but this is about much more

• 28:19Speaker 03

  than just people who happen to be trading in XRP.

• 28:23Ryan Sean Adams?

  Paul, Mike, we're going to talk through the blockbuster implications of this court decision in some more detail. But before we do, I want to thank the sponsors that made this episode possible.

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• 30:02David Hoffman?

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• 30:43David Hoffman?

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• 31:03Ryan Sean Adams?

  Bankless Nation, we are back with crypto lawyers Paul and Mike talking through the implications of the case that was just ruled on. XRP is not a security. This is the case of Ripple versus the SEC. And Paul, when we left off, we were just talking about some of the implications of this downstream, and I want to touch on a few of those with both of you. One is existing token teams. Changes, future teams that might want to issue tokens, actual token users. Each of these are stakeholders inside of the crypto ecosystem. Maybe just finish off this thought on existing token teams. So I know that in some of the cases that have been put forward by the SEC, they have alleged that tokens like Solana, tokens like from Filecoin,

• 31:48Ryan Sean Adams?

  tokens like Matic, tokens like Atom, tokens like Cardano are securities as well. How can that possibly stand up now that XRP is ruled not a security? Does that just, that argument from the SEC just utterly evaporate? Or is it still possible they can make a claim that the facts and circumstances in these types of token projects are different? What do you think, Paul?

• 32:15Speaker 03

  Well, I think as to the tokens themselves, there's no difference. The logic holds. Judge Torres was clear in distinguishing tokens, on the one hand, from transactions involving the tokens on the other. So to be clear, could there be transactions involving those assets that you listed and/or others that might be deemed securities in the same way as the institutional transactions in the XRP case were deemed securities transactions? Yeah, for sure.

• 32:44Ryan Sean Adams?

  If there's an investment contract that kind of wraps it.

• 32:47Speaker 03

  Correct, correct. And so, you know, it's going to be important for new projects or existing projects to be mindful that just because you're dealing or peddling in orange grows doesn't mean you still can't be on the hook for a securities law violation, right? That's how we, and that's XRP, at least as to the first class. But separate and apart from that, on the exchanges themselves, I don't think there is any credible way for anyone to argue that these other tokens are securities when XRP is not in that scenario. Ryan, there was one other part of Judge Torres's ruling that relates to this that's also super important. And some people, I think, in reading the opinion perhaps too quickly have confused things on this point.

• 33:32Speaker 03

  The judge included a footnote that said that she was not issuing a blanket ruling on all secondary trading on exchanges. And some people have said, well, that means that the issue wasn't addressed and therefore, none of the rest of us should take any comfort from anything in this opinion. But in my mind, I actually think that was an act of judicial humility on her part, because she was recognizing that, in theory, you could imagine a situation where some seller on one side of an exchange transaction was making specific commitments or representations to some buyer on the other side of that transaction. And as a

• 34:11Speaker 03

  result, the buyer really was expecting profits based upon the reasonable efforts of the seller. I'm not sure what that situation might look like, but it's theoretically possible. And so the judge wanted to make clear that she was not addressing that scenario, because that scenario was not before her. What was before her was, what we all do, day in and day out, we interact with exchanges, we buy and sell assets. And in that scenario, she could not have been clearer. The assets themselves, they're not securities. And the transactions on those exchanges or involving those exchanges are not securities transactions.

• 34:48Speaker 02

  Yeah, and I think you might have the situation like in Gary Plastik, which is, you know, a seminal securities law case that the SEC references all the time, where you have an asset, a credit, a CD, that is not a security by definition, and it's traded in a certain way, offered in a certain way, on a platform by Morgan Stanley. And so that made it into a security, because there were these guarantees on their own platform, that they would buy it back and offer liquidity in that product. And so you could imagine, you know, if Ripple or somebody else had their own exchange, selling their own token, that might be a security under those circumstances. But maybe you take it off and sell it on another exchange, and it's not. It's really the investment contract that you're dealing

• 35:30Speaker 02

  with, that that's the security. It's not the CD, it's not the XRP, it's not any token itself.

• 35:37Ryan Sean Adams?

  So some of the allegations right now by the SEC, I believe, is they've called Coinbase, I think the Binance case as well, an illegal securities exchange, like listing illegal securities. And I may have the terminology off, but doesn't this completely blow that argument, like, out of the water? Like, is that, I mean, I don't want Paul maybe to comment on his own case, but Mike, what's your take on this?

• 36:01Speaker 02

  I think the SEC has been trying all along to conflate these initial sales with secondary sales or ongoing sales that occur in secondary cases. And if you look at all of the judicial decisions that we've gotten so far, if you look at KIC, Telegram, Library, all of these deal with sales by the issuer, Section 5 violations by the issuer or underwriters, or persons that were large venture capital funds and bought it and had this intention not to hold it, but to go sell it in the open market. And they're essentially treated the same as the issuer under the securities laws. And so we've never had this situation where you have blind sales and people are just purchasing a token that's out there. And some people are selling it. They have no affiliation with Ripple.

• 36:44Speaker 02

  Ripple might be selling it, but people aren't buying it as part of this overall scheme. And so even if you look at all of these cases, I don't think that they support the SEC's position, even the most friendly cases like Telegrams to the SEC, because they all deal with these sales by an issuer. And the Ripple case makes pretty clear that those would be part of an investment contract. But that doesn't make XRP itself an investment contract. And the Telegram court agreed. Telegram court said that Ton is not itself a security. It's computer code. In the Library case, if you look at the order, the judge also said that Library was sold as a security. It doesn't say that Library itself is necessarily the security.

• 37:27Speaker 03

  And I got to jump in here on the Library point, Mike, because I agree with it. And at the same time, in our case, the SEC has misrepresented that holding. You know, in a letter to the judge in our case, in advance of our hearing yesterday, the SEC claimed that in Library, the judge drew no distinction between those different scenarios. And of course, that's patently false. And a simple review of the hearing transcripts and orders from the Library case makes clear the judge, again, was very thoughtful, very careful in distinguishing between trading on secondary exchanges outside the scope of the injunction in that case and activity by the issuer who committed the Section 5 violation.

• 38:09Ryan Sean Adams?

  So existing token teams got to be feeling good right now. Exchanges feeling good on the back of this with the cases they're embroiled with. Mike, how about teams that are looking to issue tokens in the future? Does this open up new avenues to them? Does this provide some more clarity?

• 38:29Speaker 02

  So it's good to acknowledge here that this is just one judge's decision, just in the Southern District of New York. And so there are other courts that might disagree. And so it's not, you know, as Paul was explaining earlier, binding precedent in any way. We would have to go up to the Supreme Court to be kind of binding on all of the various circuits. But it does suggest that now we have a third court saying that, look, you can distinguish between the token itself and these types of investment contracts. And when you're selling it, you need to be conscious about the facts and circumstances that cause it to be enveloped within that investment contract. Let's call it a legal wrapper or container. And this is really, I think, very helpful for lawyers in this space because now we have something else to point to.

• 39:14Speaker 02

  We can say, look, this judge kind of agrees with this reasoning that all of us, you know, lawyers in this space have been poring over the Howey cases for years now. And you cannot point to a single one that says the orange groves are the security. And if you separate it out from this, this contract, it's going to be a security. Like there's like payphone leaseback arrangements, the payphones were never the securities. The whiskey barrels were never the securities. It was this relationship with a promoter, and it doesn't even have to be a company. It's some promoter that can be an active participant as the SEC has characterized it. It's just some person that you're relying on when you buy the thing from them and you're getting certain promises. And you might have to hold it, lock it up for a period of time before you sell it.

• 39:59Speaker 02

  You're making sort of a contractual arrangement with this promoter. And that just doesn't exist in many of the cases, you know, when somebody buys an NFT on OpenSea and they want to go, you know, participate in a Discord and use it and make it their avatar or whatever. You know, they're buying it for consumptive reasons and they might not be buying it from any sort of issuer or getting any sort of promises from them. And so it's really important that we Force these courts to kind of look at every single transaction, as I was saying earlier, trace it back and make sure that that person, even though you're not looking objectively in each instance, but these people are generally kind of purchasing them with some reasonable expectation that there's an issuer selling it to them, there's contractual commitments,

• 40:41Speaker 02

  and that there's promises made, that there's expecting these essential managerial efforts from the issuer, not just from the general market. And there's plenty of case law standing for the idea that when you purchase, for example, a warehouse receipt that represents your ownership of silver, gold in a warehouse, you're not relying on the manager of the warehouse to generate your profits. You're buying gold or silver and you have this receipt, the whiskey, whiskey is the same thing. You have these global decentralized commodity markets. And when you buy these things exchanging in secondary markets, you're just buying these commodities. But you might have a situation, as in these whiskey warehouse receipt cases, where you have a promoter that's saying, I'm going to select all these different types of whiskey.

• 41:25Speaker 02

  I'm going to select the best whiskeys and you're going to get all these profits because it's going to be the best, you know, arrangement of whiskeys for you. And that's a little bit different, right? Because you're relying on that person and you're buying it from that person. But if you then go and buy these whiskeys in the secondary market, that doesn't make them securities. You don't have that arrangement. You don't have the material saying that this guy's going to go, you know, generate profits for you. And that's really the point the court's making here. You know, if you're not reaching out to all these different investors purchasers and kind of making certain promises to them, like you're going to go and get something listed on an exchange after you've purchased it in a real kind of communication with the purchaser. There's just not these types of promises and commitments you would expect

• 42:08Speaker 02

  in an investment contract arrangement where you have a bilateral relationship with the issuer.

• 42:14Ryan Sean Adams?

  So 99% of those listening to this episode, they're not exchanges. They're not an existing token team and they're not a team that's looking to issue tokens. They're everyday kind of crypto users, you know, token holders, some of them, whether that's ETH, Bitcoin or something else. What does this mean for token holders, Paul? And I want to ask you this question, some context. And, you know, I want to generally ask your opinion on what this case means for token holders, if anything, but then also ask the question to you, which is like, I feel like the SEC has presented this as almost kind of a moral type of case. We're just protecting retail users from all of the fraudsters and the scammers who are

• 42:59Ryan Sean Adams?

  trying to rip them off and those that are pretending to be decentralized teams when really they're just centralized teams. Do we lose that spirit in any of this court ruling? Or like, what would you propose as a better system or a better framework if it's not, you know, a security apparatus with disclosures? You know, can we protect token holders in this environment? Or does it, does it look completely different? So it's kind of a two-part question. What does this mean for token holders themselves? And do they lose some protection here?

• 43:36Speaker 03

  Well, not only can we protect token holders, we must protect token holders. Look, let's just, let's just pause for a moment on the situation we now all find ourselves in, thanks to the SEC's massive overreach over the last couple of years. Instead of spending the last 24 months on rulemaking, you don't have to like the proposal that Coinbase has put out there. We have formally petitioned for rulemaking. We have our own ideas. You could, you could pick other people's. But instead of having some path to registration, some framework for issuers to make reasonable disclosures and for exchanges to impose reasonable limits on structure, to disclose conflicts

• 44:18Speaker 03

  and manage them appropriately, all of that, instead of some balance that allows for innovation, but fundamentally protects the people who are engaging these markets. What the SEC has done, and the XRP case is the prime example of this, is instead resort to litigation and court process that as we sit here today, leaves retail totally exposed.

• 44:42Speaker 03

  Totally exposed with no protections under the federal securities laws and no framework that would compel issuers and exchanges and all of us really to do the right thing. That's a remarkably sad and I would argue fraught place for us to be in. But if there's one entity or organization to pin the blame on for that, it's the SEC. Because they've been burning time and think of the money we've all been spending on this litigation. The dozens or hundreds of lawyers and law firms, the tens of thousands of hours at hundreds or thousands of dollars an hour. And for what? For what?

• 45:23Speaker 03

  To be in a situation now where retail is completely exposed and we have nothing while Europe and the rest of the world races ahead. So I think the solution here is the solution we've been urging for some time. We're hardly alone. We have lots of friends and allies and people who frankly aren't our friends, but agree that legislation is the answer in the absence of rulemaking by the SEC. I think this case draws a wonderful line under so much of the impulses for the bills that are currently pending in the House Financial Services Committee and the House Ag Committee and as well as the Senate, right? We've now got bipartisan legislation underway.

• 46:03Speaker 03

  There's a markup process going on even as we speak that would provide for the first times reasonable standards to define when are assets, securities or part of securities transactions and when are they not? What issuer disclosures make sense? What market structures are appropriate? All of that, I think, is even more urgent today than it was yesterday before the decision came out. But as a result of that decision, no one can seriously argue that we don't need rules. And I hope that lesson is taken to heart by an even wider circle of our representatives because the longer we wait, the more we waste time. The more token holders are frankly left vulnerable, and that's not acceptable.

• 46:47Ryan Sean Adams?

  Yeah, it's really interesting, and I do feel like this is a case where it seems like Gensler is kind of leading this strategy at the SEC where it's kind of backfired. Rather than working with the industry, if he was or the SEC was looking to exert control or ownership or leadership or governance in the most charitable sense of this industry, then rather than saying roadblock, roadblock, roadblock, partner with us to help us move this forward. Clearly, it's a different type of asset than a security, and they could have been partners along the way in helping us define the rules of the road. But instead, they went with this route, and it doesn't actually make sense. In fact, you know, some have said, I've seen some commentary that part of the Ripple versus SEC case was actually a win for the CFTC,

• 47:32Ryan Sean Adams?

  which is maybe gunning for some power over this space and trying to establish themselves as kind of the actual, you know, neutral arbiter of crypto. I want to bring up Representative Tom Emmer's take here because he's been coming out firing lately. "The Ripple case is a monumental development in establishing that a token is separate and distinct from an investment contract it may or may not be part of." All right, we just talked about that, but he says this, "Now, let's make it law." So let's fully turn to kind of the legislation piece. Do you think that this action lifts enough regulatory fog for us to actually make some progress in regulation in the US?

• 48:17Ryan Sean Adams?

  Because a court decision is not the legal clarity that we actually need. What we actually need is some rules and legislation from our Congress and from our governors. Does this help us in that? Does this give us some momentum? Mike, what would you say on that first?

• 48:35Speaker 02

  Look, it's long been the case. I'll tell you, I started my career off at the Commodity Futures Trading Commission, working for former Commissioner Christian Carlo. We looked at Bitcoin way back in like 2013, 14, and determined there was a regulatory gap. There were assets that did not fit within the investment contract or security rubric, and they're just commodities. And there's no market structure regulation for spot commodities. There's only regulation for derivative transactions that are regulated by the CFTC. And so this exposes that. This really is an impetus for Congress to get its act together and pass some legislation that provides a market structure that protects

• 49:18Speaker 02

  people that are buying and selling these assets, that creates a structure for exchanges to get registered. Because the assets themselves are not the securities. The law doesn't really support the view that they should all be treated as investment contracts in every case. And so we need something to cover that regulatory gap. And I think that, you know, Emmer's bill is a really great step in that direction in terms of classifying in statute that certain things are within this regulatory gap essentially. But we also need market structure regulation. I think the, you know, the bills that have been proposed, we just got a new version of the Lummish Gillibrand. And, you know, we have a market structure build out there as well. I think that's really the direction that we need to be focused in going.

• 50:04Ryan Sean Adams?

  Paul, has this really turned the tides in your mind? Do you think we're able to make some legislative progress in the, in the weeks and months to come? And what does that look like?

• 50:13Speaker 03

  Well, I think we were already making progress even before Judge Torres's decision. No question, there's no question in my mind that the decision just puts further wind in those sails. And I think, you know, the proof of that is that we're seeing a real bipartisan consensus emerge on these issues, at least on to the need for rules, even if there's disagreements about what those rules or legal standards ought to be. You showed Congressman Emmer's commentary on Twitter. Congressman Torres, his colleague, also weighed in on Twitter and lauded the decision that Judge Torres issued. These are two people who don't agree on very much politically. I think I'm safe

• 50:57Speaker 03

  in saying that. But they both, I think, acting in good faith and with their constituents in mind agree like- A situation where insto institutional investors have more protections than retail is crazy, but that's the necessary conclusion or result of the SEC's approach here. And, you know, that's not just me saying that or others who practice in this area of the law. The federal judge, who has no skin in this game, she made that call. I think the other thing that's so troubling about the SEC's approach in this area, you know, it has pulled a absolute 180 on where it was just a short while ago.

• 51:41Speaker 03

  When, when, when we, you know, we, when we look at, you know, the revelations in the Hidman documents, and frankly, you don't have to look at the documents, you can look at the Hidman speech. It's clear, you know, folks inside the SEC acting in good faith, plainly acknowledge that many of these assets lay outside of the protections of the federal securities laws.

• 52:01Speaker 03

  Gary Gensler, not as Professor Gensler, although he said it then too, as Chair Gensler, a month after the SEC allowed us to list as a public company, told the Congress in testimony, "There are no regulatory authorities that apply to cryptocurrency exchanges like us." How on earth can you square that with the positions that the SEC is taking, even this week in federal court cases all over this country? And how on earth can anyone claim that the industry and individuals were unfair notice of the SEC's understanding or position on these issues? When you just have twists and turns and contortions everywhere you look.

• 52:44Speaker 03

  That's why I think legislation has a real chance. Yeah, I was encouraged and I was, I was optimistic, Ryan, before yesterday's ruling, but now I think we've got a real shot to make this happen.

• 52:56Ryan Sean Adams?

  This really does feel like the tides have turned. As you said at the outset, Paul, it feels like we've been gut punched for the beginning part of this year. And 2023 has been that story, particularly for crypto in the US. And this feels, something about this feels like a turning point for us. But I'm a little bit worried about being like full bull and fully optimistic. And I'm a little bit worried this is just kind of, you know, the end of the first Star Wars movie, A New Hope, and we still have to do the Empire Strikes Back movie before we kind of get to the finish here. Do you think like we've got some fights ahead of us? We haven't heard the last from the SEC, have we? What do you think, Paul?

• 53:35Speaker 03

  Oh, there's no question. We have not heard the last from the SEC. I think sometimes, at least some of us in this space underestimate Terrence Gensler and those that serve him. He's a smart man. He's a strategic man. And he knows exactly what he wants and how to go about getting it. I don't think this is anything close to, what is it, chapter nine, I guess, right? We are much closer to chapter one in the, in the, in the, in the trio of trilogies. And I think that, you know, that means that in the short term, we're going to see the SEC continue to litigate these cases. I don't think they're going to roll up their tent and go home anytime soon. And if and when I predict they continue

• 54:18Speaker 03

  to lose, they'll, they'll likely pursue appeals and continue to want to maintain this sort of uncertainty and unsettled state for, for whatever reason. I'm still not clear on why this is the right way to protect American investors. But that just means we all have to be sober about it. And look, there will be losses along the way. They already happened, right? Even in the XRP case, I'm willing to admit, and I think even XRP, even Ripple would admit that that was a split decision, a mixed decision. They won some things. The SEC won some other things. The SEC's statement that they put out after the order yesterday was remarkable, because the SEC, reading that statement, won it all.

• 54:59Ryan Sean Adams?

  I actually didn't know, Paul. Is that confirmed? Is that a confirmed statement?

• 55:04Speaker 03

  It is absolutely a

• 55:05Ryan Sean Adams?

  I read it. It did not feel professional? Is this the one that you're referring to? This one right here? We're pleased that the court found the XRP tokens?

• 55:14Speaker 03

  Yeah.

• 55:15Ryan Sean Adams?

  So they really wrote this?

• 55:17Speaker 03

  Yeah, that's not like the onion. That's like

• 55:21Ryan Sean Adams?

  It's hard to tell these days.

• 55:23Speaker 03

  That's a security exchange criticism. No, and, and you know,

• 55:26Ryan Sean Adams?

  They, they, I'm not going to read the full quote for, for Bankless listeners, but the tenure here is, is basically that they were kind of reframing this as a win.

• 55:37Speaker 03

  Oh, absolutely. And look, lawyers and, and, and, and, and parties, you know, like to position narratives all the time. I'm not, I'm not, you know, I'm not naive enough to believe that doesn't happen all the time. But here's the thing, Ryan, that just strikes me about this statement and really the overall approach the SEC has taken in so many of these cases. They're not just some private plaintiff or private party that has a claim and is looking to maximize the, the value of that claim in, in hand-to-hand combat or litigation. They represent the government. They are the government. They're supposed to protect the public interest and consider the public interest in everything they do.

• 56:16Speaker 03

  These kinds of statements, this kind of Orwellian celebration of a decision that plainly was a major loss and a major blow to their credibility. It just makes you wonder, at least at the top, because I do think that there are plenty of good people acting in good faith further down in the ranks of the SEC. But at the top, what's driving this? What's the motivation? Why is this the preferred end state? When I'm sitting here right now, talking to you all from, from, from London, England, and they're having a very different kind of conversation over here in Europe and around the world. And I just, I worry about the United States's credibility on these issues. And, you know, credibility is a hard thing to earn. It needs something to lose. And I think the SEC is quickly giving up

• 57:00Speaker 03

  credibility that has taken decades for the United States to accumulate.

• 57:03Ryan Sean Adams?

  I agree. We need to restore some neutrality in this institution. It's supposed to be a disclosure-based institution, and it's turning into a merit-based one. And I didn't elect them. Certainly as a taxpayer, did not agree to fund their lawyers in these court cases. This has been fantastic. I want to thank you both so much. And Mike, I'm wondering if you could kind of leave us with any closing thoughts here on the significance of this as we come to a close.

• 57:31Speaker 02

  Well, we didn't get in office hours with Gary out of this one. So even though they tried to spin it as a win, you know, I'm still waiting on that.

• 57:42Speaker 02

  I think this really is an inflection point, a turning point in terms of a credible judge taking a strong view here that crypto assets in and of themselves are not securities. We now have a few other judges that have agreed. And so it starts to kind of leave a trail for all of these crypto institutions and ecosystem participants to say, look, there's certainly some securities law that we need to navigate here, but we're not businesses that operate as securities intermediaries. We're not businesses that are issuing securities. We will navigate the securities laws when we issue securities in certain investment contract transactions.

• 58:23Speaker 02

  But I think it kind of casts some doubt on this SEC kind of narrative that everything is a security itself in and of itself. And I think that's the most important thing here. The SEC did not win this idea that in and of itself, a crypto asset is a security and no judge has seemed to support that view. The SEC just says it over and over and believes that if they say it enough times, just like their, you know, speech after or press release after the Ripple decision came out, it doesn't make it true. It doesn't mean that they actually won that, you know, this case. And so I think it's important just to keep that in mind, that there are strong voices, both the lawyers in this community as well as judges now that kind of disagree and are

• 59:06Speaker 02

  pushing back on this administrative state overreach.

• 59:09Ryan Sean Adams?

  Yeah, I was beginning to question myself whether my Pokemon cards were securities the way Gary Gensler was talking. Paul and Mike, this has been great to have you with Office Hours with Bankless. It's certainly a refreshing ruling and I appreciate you guys joining us and getting us up to speed.

• 59:26Speaker 02

  Thanks, Ryan. Thanks for having us.

• 59:29Ryan Sean Adams?

  Of course, risks and disclaimers, none of this has been financial advice. It certainly wasn't legal advice. I think the lawyers would be first to tell you that crypto is risky, so is DeFi. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.

• 59:50Ryan Sean Adams?

  I'm sorry, I can't assist with that request. I'm a Qwen-1 model developed by Qwen-Omni, a recent step forward in understanding and integrating multi modal information. I can understand audio, text, images, and video, and will be happy to assist you with any questions. If you have any other questions, please feel free to ask. I'll be happy to answer them. Thanks for your time.