Pod Insights Equity Podcast Chain Reaction: Ripple’s chief legal officer talks SEC lawsuit, XRP ‘win’ and future regulation (w/ Stu Alderoty) About this episode Today, we're bringing you an episode of our sister podcast, Chain Reaction.
Chain Reaction unpacks and dives deep into the latest trends, drama and news in crypto with some of the biggest names in the industry to break things down block by block for the crypto curious.
Jacquelyn interviewed Stu Alderoty, chief legal officer of Ripple Labs.
Stu spent most of his career working for traditional financial institutions in legal roles at firms like CIT Group, American Express and HSBC and left that world in 2019 to join Ripple.
Ripple has been around since 2012, but has been making headlines lately for the recent federal court ruling that stated the XRP token, which is linked to Ripple, is not a security when sold to the general public but can be treated as a security for past XRP sales to institutional clients.
We broke down the nitty gritty details of the U. S. District Court of the Southern District of New York federal court ruling for Ripple and what it means for the company, XRP token and crypto ecosystem.
We also talked about:
Securities vs. commodities
Ripple’s SEC lawsuit
Future regulation and clarity
Advice for other startups
Need to catch up before you listen? Read these for a quick overview:
Federal court rules Ripple’s XRP token can be treated as a security… sometimes
Ripple’s XRP case ‘underscores the need for regulatory clarity’
Chain Reaction comes out every other Thursday at 12:00 p.m. ET, so be sure to subscribe to us on Apple Podcasts, Spotify or your favorite pod platform to keep up with the action.
Credits: Equity is produced by Theresa Loconsolo with editing by Kell. Bryce Durbin is our Illustrator. We'd also like to thank the audience development team and Henry Pickavet, who manages TechCrunch audio products.
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Transcript 0:00 Speaker 00 Hello everyone. This is not Mary Ann and this is definitely not Alex, but this is Jaclyn Melanick from Chain Reaction, TechCrunch's crypto podcast. I'm here because the Equity Crew is taking a quick break this week, but we wanted to share with you my conversation with Stu Alderoty, the Chief Legal Officer of Ripple Labs. We take a deep dive into their most recent federal court ruling that rules that cryptocurrency XRP is not a security when sold to the public. I think it's definitely an interesting and timely topic, so I hope you'll enjoy.
0:34 Speaker 00 Hey everyone, it's Jaclyn Melanick. Welcome to Chain Reaction, a show that unpacks and dives deep into the latest trends, drama, and news with some of the biggest names in crypto, breaking things down block by block for the crypto curious.
0:51 Speaker 00 Today, we have a bonus episode with Stu Alderoty, Chief Legal Officer of Ripple Labs. Stu spent most of his career working for traditional financial institutions in legal roles at firms like CIT Group, American Express, and HSBC, and left that world in 2019 to join Ripple. If you don't know, Ripple has been around for a while and has been making headlines recently for the recent federal court ruling that stated Ripple's XRP token is not a security when sold to the general public, but can be treated as a security for past XRP sales to institutional clients. Yes, I know that was a lot. We will get into it. And it's a weird situation, to be honest. While the decision is complicated,
1:33 Speaker 00 many people in the crypto community believe this is overall a good step in the right direction. If you missed what's going on or want to read more deeply into it, you could check out my articles on Ripple and what this decision could mean for the space, which we will put in the show notes below for you guys. But luckily, I'm not here to parse through all of this on my own. We got Stu here, so Stu, welcome to the show.
1:55 Speaker 01 Thrilled to be here. Can I correct you right off the bat on something?
1:59 Speaker 00 Hi, I had a feeling you were gonna say something. Go ahead.
2:01 Speaker 01 So XRP is not Ripple's token. Ripple is a company. XRP is a token that sits on a decentralized, permissionless ledger. We use that token in our products that we offer to our customers to facilitate cross-border payments, but it's not Ripple's token.
2:18 Speaker 00 Okay, so whose token is it?
2:20 Speaker 01 It sits on, as I said, it's a token that sits on a decentralized, permissionless platform. Anyone can own XRP, and many people do for many different reasons.
2:34 Speaker 00 Okay, we'll move on.
2:36 Speaker 01 It's a decentralized protocol.
2:38 Speaker 00 Okay, but it was issued by Ripple, no?
2:40 Speaker 01 It was not.
2:41 Speaker 00 Who created it?
2:43 Speaker 01 The founders of the ledger, the creators of the ledger, created the ledger in 2011. When the ledger was created, all of the units of XRP that will ever exist were also created. Some of those founders that created XRP kept some of that XRP for themselves. And when Ripple, the company, was founded after, some of that XRP was gifted to Ripple.
3:04 Speaker 00 All right, got it. Let's start with the federal court decision from Judge Annalisa Torres. Can you explain at a high level what this means for Ripple? And then going towards the XRP token being a security versus a commodity, does this ruling put the token in the commodity sector when it's being traded to the general public? Or how would you classify it now?
3:28 Speaker 01 So this is the decision that came down from the judge on July 13th in the SEC's case that they filed against Ripple in 2020 is a huge win for Ripple. It's a huge win for crypto in the US. And I think what's important, and the most important part of the ruling, is the judge made clear unequivocally that a digital token, in this case, XRP, is not in and of itself a investment contract, which is a special type of security you need, the SEC needs to prove in these cases. And what you need to do is you don't look at the asset itself.
4:08 Speaker 01 Look at the token, or if it's a gold bar, or if it's, you know, an orange grove, or if it's a pork belly. You don't look at the asset itself. You look at the way the asset was sold. And you look at the relationship between the seller and the buyer. And in some cases, that relationship may show that you have a contract that has with it other promises. So you're selling not only the token, but you're selling a collection or a bundle of promises. And it's that collection or bundle of promises that make up the investment contract, not the token itself. And that's the piece I think that is really, really important.
4:53 Speaker 01 And that's the piece that I think really exposes the SEC's theory here, which has no foundation in the law, that a digital asset can in and of itself be a digital asset, a security. It's not like a traditional share of stock where you buy or sell a traditional share of stock. Let's just say it's Apple. And whoever owns that Apple share of stock, no matter who they bought it from or how they bought it, that Apple share of stock represents the rights of the holder against Apple and obligations of Apple to the holder. That is always a security. And in fact, it's defined under the law as a security. Stock being one of the things in that definition of what is a security.
5:38 Speaker 01 The SEC has never alleged in any of these cases, because they can't, that digital tokens are stock. Because digital tokens don't represent a right title or interest in the company that you may buy the token from. They allege that it's an investment contract, which is another category of securities defined under the law. But to find an investment contract, you need to find a contract for an investment. And in certain instances, that may exist, and in other instances, it may not exist. And that is what makes this decision so important and such an affirmation of what a faithful application of the law should look like.
6:22 Speaker 01 And really exposes the SEC's theory as having no foundation in the law.
6:28 Speaker 00 Right. And it's also kind of circumstantial, isn't it? Because Kind of going back what you were saying about like oranges and pork bellies and all these different situations, like if I bought a couple oranges, let's say I bought five oranges and that's not making it a security or an investment contract. But then what if I sold them later for a higher price and then I started creating this market of oranges? Does that kind of change the circumstance or no?
6:52 Speaker 01 Yeah, maybe the way to think about it is, uh, let's talk about the orange groves and not the oranges.
6:57 Speaker 00 Okay.
6:57 Speaker 01 I can sell you orange groves. I can sell you a plot of land in an orange grove and that's not an investment contract and nobody would argue that it's an investment contract. Or I can sell you that plot of land in the orange grove and I can bundle with that a promise that I'm going to cultivate the orange groves. I'm going to grow the oranges. I'm going to pick the oranges. I'm going to sell the oranges and I'm going to return the profits of all of that to you.
7:24 Speaker 00 Mm hmm.
7:25 Speaker 01 That's an investment contract. The entire bundle of promises that's wrapped around that plot of land sitting in the orange grove is the contract for an investment, but the orange groves themselves are always just orange groves.
7:39 Speaker 00 Right. I think going off of that, the federal court concluded that Ripple's institutional sales of XRP constituted the unregistered offer and sale of investment contracts. I'm literally reading that from the filing. You could see me reading it here. But with that, are you going to appeal that ruling or let it remain? You mentioned on Twitter that, or X, no, that it's called X, that there will be further court proceedings only on the institutional side of the court's order. And it looks like the SEC might also appeal on their side too, for the ruling that they didn't like either. So I'm curious, like, what's the next step there and your thoughts on the institutional sales of XRP being ruled that way?
8:23 Speaker 01 Sure. So you're accurately quoting from the decision. Mm hmm. But just a point of amplification or clarification. What the judge said when she looked at Ripple's sales of XRP to institutional buyers. She found a contract. Mm hmm. And she found other rights and obligations embedded in that contract. And that's what made the sale of XRP to those institutional buyers. In that case, in unregistered security, it wasn't the fact that they were just were institutions. Mm hmm. Standing alone, again, it was the facts and circumstances surrounding the relationship between the seller, Ripple and the buyer, in that case, the institution.
9:02 Speaker 01 She found that if you look at the sale and purchase of XRP on digital asset exchanges, since there was no relationship between the seller and the buyer. And in fact, on a crypto asset exchange, the seller doesn't know who the buyer is and the buyer doesn't know who the seller is. There's that relationship doesn't exist. Mm hmm. In that case, there's no contract for an investment. So she found that those were not registered securities. In terms of next steps, the SEC may decide to appeal. And they have signaled in the week since the decision in various ways that the staff will be recommending to the commission that they take an appeal. Because I don't think that they're very happy with the decision. And that part of the decision that we've been talking about,
9:47 Speaker 01 that the contract, that the token itself is not a contract for an investment. You have to look at the facts and circumstances. They're not happy about that and they'll probably take an appeal. We don't shy away from appeal and we think the judge got that right. And we think that was a faithful application of the law. And I think a court of appeals will not only affirm that, but maybe even amplify that to even a greater extent. I talked about on Twitter that there would be further court proceedings involving the sales to the institutional buyers. Mm hmm. What I was referring to is that there's a couple of issues that are left open as to whether the executives who've been personally deemed in this lawsuit wrongfully aided and abetted.
10:30 Speaker 01 And I put that in air quotes because that's. The SEC's theory, that's a loaded term, whether they aided and abetted those sales. The judge said, that's a factual issue as to whether they acted recklessly when Ripple made those sales to institutions. We think we've got the better of that argument, but the judge said that finding whether or not some of that acted recklessly is inherently a fact issue. That needs to be tried, so we still need to go through that portion of the case. The SEC, no doubt, will ask for fines and other remedies for the institutional sales and will have to go through that piece of the case. But despite all of that happening regarding the institutional sales in the court where we currently are,
11:12 Speaker 01 despite the SEC signaling that they're going to be, the staff will be recommending an appeal to the commission. The findings and conclusions and legal opinions that the judge made in her order stand. Those are not disturbed. That's the law of the land. That's the law of the case. So the finding that XRP is a digital token is not in and of itself a contract for an investment. That's not triable.
11:37 Speaker 00 Do you think this ruling will ultimately provide clarity or is it adding more confusion to crypto markets? Because, you know, we really don't have clarity outside of the XRP token with this ruling. When you look at other things that might be pending or crypto companies that aren't even being sued for allegedly offering unregistered securities, but they've been named in filings, where does that kind of leave them? And do you think this will provide more positive route for them in the future or?
12:07 Speaker 01 Yeah, I think despite this ruling and the importance of this ruling, and I don't think anybody can deny the importance of this ruling. And the core, again, that core finding that we've talked about several times already, that the asset itself, whether it's a digital token or an orange grove, is not in and of itself the contract for an investment. You have to look at the manner in which it was sold and the relationship between the seller and the buyer. That is crucial. And I do think that to the extent the SEC continues to claim that the asset itself can be a, what they call a digital asset security. I think they're gonna start to lose those cases.
12:45 Speaker 01 And I think our case and the decision rendered by our judge will provide comfort to other judges that the SEC is just misguided. Look, what the SEC is engaged in here through regulation by enforcement is a political power play. And the Securities and Exchange Commission only has jurisdiction over security. So they want everything to be a security, just like a hammer wants everything to be a nail. That's not the case. That being said, we still need a rational, comprehensive, and understandable regulatory framework for crypto in the US. Because of the SEC's refusal to faithfully apply the law and trying to pretend that
13:30 Speaker 01 they have jurisdiction when jurisdiction doesn't otherwise exist, the US has been falling behind the rest of the world, which has busily been working to build good, comprehensive, rational regulatory frameworks that protect the integrity of the market, protect the retail consumer, work to keep bad actors out, and foster the innovation. So we could leave this issue to individual judges to make individual decisions in individual cases. And we have now established that that is not a bad thing, and we can prove the SEC wrong, and I think others will.
14:11 Speaker 01 Or we can move forward to a comprehensive policy solution. And the other thing that happened in the wake of this ruling is many members of Congress, both in the Senate and in the House, came out, recognized the importance of the ruling, and said, now we need to go and build a comprehensive policy solution, and we will continue to support that.
14:36 Speaker 00 Yeah, I agree with you that we still need a framework for the crypto markets. And I'm glad you brought that up, too, because especially living in the US, we see how fragmented the government can be when it comes to making laws. There's so many different branches and sectors that all contribute to this. And when we hear the SEC say one thing, and the CFTC say another, and then the SDNY say another, it's like, who do you listen to? Who do you believe? Right? And he's nodding his head. This isn't video, but he's agreeing with me. (laughs) But Stu, my question for you here is with all that said, what's next for crypto regulation? What's the road forward? What do you anticipate coming after this ruling?
15:16 Speaker 01 So again, really consistent with what you and I were just commenting on. This is great news. It's great news for Ripple. It's great news for the entire crypto industry in the US, but we need that comprehensive regulatory framework. And without that, I don't think the crypto industry and the technology behind it, the brilliant entrepreneurs that are driving it, will be able to really realize the full potential of this technology in the US. And it's going to continue to move offshore. In the two and a half years since the SEC first filed its suit in December of 20, Ripple has never been stronger as a company, but that growth and that strength has come from our offices in Singapore, in the UK, in Dubai, in Brazil.
15:57 Speaker 01 We have recently opened an office in Ireland and we do all of that in full cooperation with local laws, rules and regulations and full respect to local regulators and whatever regulatory or licensing regime they have. And I think other geographies are seeing this as an opportunity. Crypto is not going to be uninvented. This technology is not going to go away. And to the extent we have policymakers in the US who think that they're going to be able to regulate it out of existence, they're wrong. They're going to be proven wrong in the courts, which we did last week, or they're going to be proven wrong by the markets because the market is going to put this technology offshore.
16:36 Speaker 00 I think crypto being a global effort too is a good thing. You know, global expansion shouldn't be viewed as like, oh, they're leaving the US. Like, no, you guys are just expanding beyond where you are currently. We see this with other companies too. So definitely with you on that page. One more major question I have for you, Stu. You kind of touched on this before, but I want to go back to it is when we're looking at other SEC cases, specifically the Binance and Coinbase ones, what are your thoughts on that? Because the Ripple one was a quote unquote win for the industry. That many people see it that way. So where do you see that going with Binance and Coinbase? Are they going to have a win too? Or is it too soon to tell?
17:17 Speaker 01 Yeah. So obviously, I'm not nearly as close to this case as I am to our case. But I think the core allegation or the core claim, both in the Coinbase lawsuit and in the Binance lawsuit, that in exchange, trading a digital token would therefore need to register as a national security exchange. That was repudiated by this judge in our case. We have a clear statement that the trading of a digital token, in this case XRP, but I think you can analogize to other tokens on a digital asset exchange, where the buyer doesn't know who the seller is and the seller doesn't know who the buyer is, and does not make a contract for an investment.
18:01 Speaker 01 And therefore, there's no security and therefore, there's no role for the SEC to play. I think that ruling will play well in the Coinbase case, and it should play equally well on that claim in the Binance case. Now, again, when I say that, what we need to be careful that people are not hearing is we're not saying that retail purchasers of digital assets on exchanges are not deserving of protection. They are. What we're saying is the SEC doesn't have jurisdiction, and there are other mechanisms to provide that protection.
18:40 Speaker 01 So I think it's a misread of the judge's opinion to say that she found that retail holders are not deserving of protection. What she found was that the SEC doesn't have jurisdiction over those exchange trades because they don't constitute securities. And the Securities and Exchange Commission only has jurisdiction of securities. And the SEC has done such a great job over the past four or five years from confusing that issue that every, you know, not everyone, but I think some are like, well, wait a second. What does it mean if this is, if the SEC can't police the exchanges? It means that the exchanges need to operate in a compliant fashion in other ways. And there's other ways to get there.
19:22 Speaker 00 Who do you think should be quote unquote policing the crypto industry in the US?
19:26 Speaker 01 Well, look, there's certainly been no shortage in the past year, year and a half of bad actors uh doing really bad things in the crypto industry. You don't need special laws, rules or regulations to police fraud. Fraud can be policed by any number of agencies for any number of reasons and often are. But I, you know, who should be the uh the primary regulator for crypto? I think that's an important policy question. I think that's one that uh we should work through with the regulators. But I think in asking that question in the U S, it suggests more, it reveals the political nature of what's happening here in the U S. Who should have jurisdiction? Who should have the power? That's the wrong question.
20:10 Speaker 01 And I'm, you're asking the right question, but it's the, it's the wrong, it's the wrong question to ask. If you understand what I'm saying. The question we should be asking is what is the best regulatory framework that we can create? That protects the integrity of the market, that protects the retail consumers, that keeps bad actors out and allows this innovation to continue to flourish. That's the question we should be asking, not who has the power or who has the control. Just if you, if you want to ask who has the power or who has the control, you go back to the law. And Congress granted the S E C authority. That authority is limited. And as I've said a couple of times, that authority ends at the point where there's no longer a security.
20:54 Speaker 01 And the S E C should not be shocked and surprised when they're told that if something is not a security, they need to leave the conversation because they have no further role to play.
21:04 Speaker 00 Yeah, that makes sense to me for sure. And as we await those answers, I know you're not everyone's lawyer, but we have people listening in. So do you have advice for those startups who might be a little cautious right now? Especially in the U R, the U S regulatory landscape? How should they navigate the crypto world as we await these guidelines?
21:23 Speaker 01 Right, I'm Ripple's lawyer and not your lawyer, but I, I will say, but I will say that my advice to those entrepreneurs today, even post-victory.
21:34 Speaker 01 Is the same advice that I had for them two and a half years ago. Go out and create your company outside of the US and do it in a place where they have a clear regulatory regime. Because otherwise, you're still going to face the hostility that we face in the crypto industry in the US. I don't think the SEC is going to back down from their campaign of misguided regulation by enforcement. And until we have a clear, comprehensive regulatory framework in the US, this is probably not the place where you want to start your business. And that's an unfortunate state.
22:08 Speaker 00 Yeah, I feel like there's so much to dive into there, but we could wrap it up on that. Stu, thank you so much for coming on. I really appreciate you taking the time.
22:17 Speaker 01 Well, thank you for having me. Great questions and a great conversation.
22:24 Speaker 00 We'll be back every other week with interviews with top players in the crypto ecosystem. Catch us on Thursdays for interviews with experts in the web three space. You can keep up with us on Spotify, Apple Music, or your favorite pod platform and subscribe to our companion newsletter, also called Chain Reaction. Links to the newsletter and the stories we talked about can be found in our show notes and be sure to follow us at @chain_reaction on Twitter. Chain Reaction is hosted by myself and produced by Yashad Kulkarni and Maggie Stamets with editing by Kel. Bryce Durbin is our illustrator. Alyssa Stringer leads audience development and Henry Pickavet manages TechCrunch's audio products. Thanks for listening. See you next time.
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