See all Bankless transcripts on Applepodcasts

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 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 Graywill and Mike Selig. They're 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 1 recommended crypto exchange, Kraken. Go create an account.

Kraken Pro has easily become the best crypto trading platform

in the industry. The place

I use to check the charts and

the crypto prices, even when I'm not looking to place a trade.

On Kraken Pro, you'll have access to advanced charting tools, real-time market data, and lightning-fast trade execution, all inside their spiffy new modular interface.

Kraken's new customizable modular layout lets you tailor your trading experience to suit your needs. Pick and choose your favorite modules and place them anywhere you want in your screen.

With Kraken Pro, you have that power. Whether you are a seasoned pro

or just starting out, join thousands of

traders who trust Kraken Pro for their crypto trading needs. Visit pro.kraken.com to get started today.

Enter Mantle, an entire ecosystem dedicated to the adoption of decentralized, token-governed technologies. Mantle, formerly known as BitDAO, is the first DAO-led Web3 ecosystem, all built on top of Mantle's first core product, the Mantle Network, a brand new, high-performance Ethereum Layer 2, built differently from the other Layer 2s that you may be familiar with. Mantle asked the question, how would you build a Layer 2 if you had the technology of 2023? Mantle Network is a modular Layer 2 built using the OP stack, but uses Eigenlayer's data availability solution instead of the expensive Ethereum layer 1. Not only does this reduce Mantle Network's gas fees by 80% compared to other layer 2s, but it also reduces gas fee volatility, providing a more stable foundation for Mantle's applications.

The Mantle treasury is 1 of the biggest DAO-owned treasuries in DeFi, which is seeding an ecosystem of projects from all around the Web3 space for Mantle. Mantle already has sub-communities from around Web3 onboarded to help the growth of Mantle, like Game7 for Web3 Gaming, or EduDAO for In the World of DeSign, and Bybit for TPL and liquidity and on-ramps. So if you want to build on the Mantle network, Mantle is offering a grants program that provides milestone-based funding to promising projects that help expand, secure, and decentralize Mantle. If you want to get started working with the first DAO-led layer 2 ecosystem, check out Mantle at Mantle.xyz and follow them on Twitter at 0xMantle. Are you planning to launch a token?

Is your token already live? And are you granting your employees and contractors vesting token awards? And are you trying to figure out how to take care of taxable events for your team? Toku makes implementing a global token incentive award simple. With Toku, you will get unmatched legal and tax support to grant and administer your global team's tokens.

Toku will help you navigate across the lifecycle of your token from easy to use pre-launch token grant award templates to managing post-cliff taxable events with payroll. For legal, finance, and HR teams, it's a huge complex task to have to comply with labor laws, payroll, and tax obligations, tax reporting, and crypto regulations in every country that you employ someone. It's difficult, time-consuming, manual, and costly, and it's drawing more attention from global regulators and governments. Toku makes it simple for leading companies in the space, Protocol Labs, Hedera, Gitcoin, and many more to manage their token issuance compliance. So if you want some help navigating the complex world of token compliance, go to toku.com slash bankless or click the link in the description below.

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.

Good to be here.

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.

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

All right, I wanna go through this in 2 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 wanna 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 wanna just spend a moment to maybe celebrate what just happened. I, for 1AM very excited, And I saw your tweet here, Paul, most days I love being a lawyer.

Today is 1 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?

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 1 blow up after another and 1 scandal after another that really tarred a lot of innocent, hardworking, creative, good people with negativity and words in ways that simply wasn't fair. So I think 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, FCC?

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.

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 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? 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?

So we were all waiting for this ruling to drop and we had no idea when, but we expected it at any day and 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 Howey 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 court say that there's 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 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 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.

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 an XRP, it's not a security.

XRP itself is not a security in and of itself, even when offered through a securities transaction. That I think 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 kind of the court ruling seems somewhat vague to me, but we've got sort of the start case where XRP starts as 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?

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 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 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.

That's what

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.

Okay. All right. So I think I got that part wrong in your precision of language. That's why you guys are lawyers and I'm not. I'm just a 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? 100%

correct. And the way we know this, 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 1 of the reasons why Judge Torres distinguished the transactions involving institutions on the 1 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 this Torres said let me lay this all out so everybody can understand and she squarely ruled in favor of Exchange trading in the XRP case not being a security

Okay. Now I see you think 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?

He didn't. The burden was on the SEC as the plaintiff in the case to prove what it was alleging in its complaint, which was 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.

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

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 1 hand, 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. 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 Torr is so laser-like focused on that particular element.

And this seems to, we'll talk about the implications, but this seems definitely does 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 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 investment contract. You called this a massive win by the Ripple team against the SEC. Judge Torres clearly affirms the view that the same crypto asset may be sold as an investment contract and therefore 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 to your mic.

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 course 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. 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 Matt Levine kind of saying, well, this isn't how stock is sold. And if you buy stock in a secondary market, it's still stock, but that's 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 registration and trading in secondary markets. And so it shouldn't be taken lightly that the assets are just grouped within the securities laws because they have some investment characteristics.

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

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 2 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 exchanges where there's blind trading. It's very difficult to prove that people are kind of undertaking to invest in some 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's a difficult burden. So I think this case, this order is very helpful for secondary sale cases, as well as some of these other cases.

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 kind of how the court system works, how binding is this sort of thing? Is there the opportunity for the SEC to appeal this? Does this kind of cement this type of a decision in precedent. For those that aren't familiar with how the court system case law kind of works, can you give us some details on that?

Is this like the end of story? XRP as a security or is not a security can never be called into question again, or are there some ways for the SEC to strike back here?

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 the United States District Court. So the finality and certainty of a trial judge's decision is something that is kind of 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 and defeat, you don't need a trial. When the judge ruled, 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, 1 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 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? Well, before any party can take in a feel 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 here, there's got to be a trial first in order to wrap up the outstanding issues in the case, and only then can the SEC on the 1 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. Now there are ways in which 1 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 at that point in time, the Court of Appeals, which generally sits in panels of 3 judges, will review this decision and ask themselves, was there a legal error here? Not did we 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' decision. The final stop on the train, of course, is the Supreme Court. In theory, the party 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. 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 going to, 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.

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

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 6 months. That could take 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 2 years. And then if 1 or more party wants to pursue the Supreme Court option, there you go.

You got another 6, 12, 18 months on top of this. So We're looking at the possibility here of years before there's a final resolution. But Brian, I just want to underscore 1 other point about the delay in the appellate process. In the meantime, the SEC is stuck with this decision.

They can't.

They are. Absolutely. Yeah.

This is where we get into implications here, right? Because there are many tokens. 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 a

court system for- It is. It has been a matter of years. And I should be very clear about 1 point, which is, you also asked quite reasonably, what does this mean for these other tokens in these other cases? Yes. Yeah, so this 1 trial judge in this 1 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.

Careful, deliberate jurist. And so even if the other courts, for example, in our case or in the case against Binance or Bittrex or whatever, 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.

And that's the way our system works, right? Once this is established as some sort of precedent in case law, then it gets 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 the SEC for some reason thinks that they are a security and there's no clear determination. But this waiting, this precedent will, I guess, cement the evidence and cement the decision that none of these tokens are securities.

I think it's gonna have a massive impact on that question. I mean, 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, BOANA, CARDANA. I mean, you can 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 Porras' analysis 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 than just people who happen to be trading in XRP.

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.

You know, Uniswap, it's the world's largest decentralized exchange with over $1.4 trillion in trading volume. You know this because we talk about it endlessly on Bankless. It's Uniswap. But Uniswap is becoming so much more. Uniswap Labs just released the Uniswap Mobile Wallet for iOS, the newest, easiest way

to trade tokens on the go.

With the Uniswap Wallet, you can easily create or import a new wallet, buy crypto on any available exchange with your debit card with extremely low fiat on-ramp fees, and you can seamlessly swap on Mainnet, Polygon, Arbitrum, and Optimism. On the Uniswap Mobile Wallet, you can store and display your beautiful NFTs, and you can also explore Web3 with the in-app search features, market leaderboards, and price charts, or use Wallet Connect to connect to any Web3 application. So you can now go directly to DeFi with the Uniswap mobile wallet. Safe, simple custody from the most trusted team in DeFi. Download the Uniswap wallet today on iOS.

There's a link in the show notes. MetaMask has something new. Introducing MetaMask Portfolio. MetaMask Portfolio is the best way to view your crypto portfolio from a holistic level. See everything across all the chains all at once.

In your portfolio, Metamask will report the aggregate value of all the assets in your Metamask wallets and even the other wallets you import too.

But Metamask portfolio isn't just a passive portfolio viewer.

It is a place to do all of the money verbs that make DeFi so powerful. You can buy, swap, bridge, and stake your crypto assets. So not only is Metamask the easiest place to see your wallets in aggregate, but

it's also a powerful battle station for all of your DeFi moves.

So go check out your Metamask portfolio because it's waiting for you

to open it up. Check it out at portfolio.metamask.io.

Arbitrum 1 is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web3 landscape. Hundreds of projects have already deployed on Arbitrum1, producing flourishing DeFi and NFT ecosystems. With the recent addition of Arbitrum Nova, gaming and social dApps like Reddit are also now calling Arbitrum home. Both Arbitrum 1 and Nova leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM compatible. On Arbitrum, both builders and users will experience faster transaction speeds with significantly lower gas fees.

With Arbitrum's recent migration to Arbitrum Nitro, it's also now 10 times faster than before.

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.

1 is existing token teams, exchanges, 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, 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?

Paul Meyers

Well, I think as to the tokens themselves, there's no difference. The logic holds. Judge Torres was clear in distinguishing the tokens on the 1 hand from transactions involving the tokens on the other. So to be clear, could there be transactions involving those assets that you listed 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.

If there's an investment contract that wraps it.

Correct. Correct. And so it's going to be important for new projects or existing projects to be mindful that just because you're dealing or peddling in OrangeGroves doesn't mean you still can't be on the hook for a securities law violation, right? That's Howie and that's XRP, at least as to the first class. But separate 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 1 other part of Judge Torrey'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. 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 none of the rest of us should take any comfort from anything in this opinion.

But it I actually did in my mind that I actually think that was a an act of judicial humility on her part because he was recognizing that in theory, you could imagine a situation where some seller on 1 side of an exchange transaction was making specific commitments or representations to some buyer on the other side of that transaction. And as a 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.

But yeah, and I think you might have the situation like in Gary Plastic, which is 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 with, that that's the security. It's not the CD.

It's not the XRP. It's not any token itself.

Some of the allegations right now by the SEC, I believe, they've called Coinbase, I think the Binance case as well, an illegal securities exchange, listing illegal securities.

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 Kik, 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, 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 Telegram 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 TUN 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.

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. 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 that 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.

So existing token teams gotta 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?

So it's good to acknowledge here that this is just 1 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, as Paul was explaining earlier, binding precedent in any way. It 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. 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 1 that says the Orange Groves are the security, and if you separate it out from this contract, it's gonna be a security.

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. 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, 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 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 gonna select all these different types of whiskey. I'm gonna select the best whiskeys and you're gonna get all these profits because it's gonna be the best arrangement of whiskeys for you. And that's a little bit different, right? Cause 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 gonna go 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 in an investment contract arrangement where you have a bilateral relationship with the issuer.

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, 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 in some context. 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 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 a security apparatus with disclosures? Can we protect token holders in this environment or 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?

Well, not only can we protect token holders, we must protect token holders. Look, 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 proposals that Coinbase has put out there. We have formally petitioned for rulemaking. We have our own ideas.

You can 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 and manage them appropriately, all of that, and set up 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, as is instead resort to litigation and court process that as we sit here today, leaves retail totally exposed. 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 1 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 that tens of thousands of hours at hundreds or thousands of dollars an hour. And for what? For what? 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 all 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 impetus 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. There's a markup process going on, even as we speak, that would Provide for the first time reasonable standards to define when is when our assets securities or part of securities transactions and when are they not?

What issue or 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 1 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.

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, some have said, I've seen some commentary that part of the Ripple versus SEC case was actually a win for the CFTC, which is maybe gunning for some power over this space and trying to establish themselves as kind of the actual neutral arbiter of crypto. I wanna bring up a 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 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 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?

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 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 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 bills that have been proposed, We just got a new version of the Lummis Jilla brand. And 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.

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

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 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 Emmer's commentary on Twitter.

Congressman Torres, his colleague, also weighed in on Twitter and lauded the decision that Judge Torres issued. These are 2 people who don't agree on very much politically. I think I'm safe in saying that. But they both, I think, acting in good faith and with their constituents in mind, agree a situation where institutional investors have more protections than retail is crazy, but that's the necessary conclusion or result of the SEC's approach here. And that's not just me saying that or others who practice in this area of the law.

It's 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 approach in this area, you know, it has pulled a absolute 180 on where it was just a short while ago. When when when we when we look at, you know, the revelations in the Hinman documents, and frankly, you don't have to look at the documents, you can look at the Hinman speech, it's clear. Folks inside the SEC acting in good faith, plainly acknowledge that many of these assets lay outside of the protections of federal securities laws.

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 on fair notice of the SEC's understanding or position on these issues when you just have twists and turns and contortions everywhere you look. That's why I think legislation has a real chance. Yeah, I was encouraged and I was optimistic, Ryan, before yesterday's ruling, but now I think we've got a real shot to make this happen.

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 full bull and fully optimistic. And I'm a little bit worried this is just kind of 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?

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 Kerr Gensler and those that serve him. He's a smart man. He's a strategic man.

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 9, I guess. We are much closer to Chapter

1

in the trio of trilogies. And I think 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 to lose, they'll likely pursue appeals and continue to want to maintain this sort of uncertainty and unsettled state 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 SDC reading that statement won it all. And could not

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

It is absolutely.

I read it.

It did not feel professional.

Is this the 1

that you're referring to? This 1 right here?

We're pleased that the court found the

XRP tokens. So they really wrote this. Yeah, that's not like the onion. That's like, it's hard to tell these days. That's the security exchange permission.

No, and you know.

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

Oh, absolutely. And look, lawyers and parties like to position narratives all the time. I'm not naïve 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 value of that claim 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. These kinds of statements, this kind of Orwellian celebration of a decision that plainly was a major loss and a major blow to the 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 London, England, and they're having a very different kind of conversation over here in Europe and around the world. And I worry about the United States' credibility on these issues. And credibility is a hard thing to earn, it's a needy thing to lose.

And I think the SEC is quickly giving up credibility that has taken decades for the United States to accumulate.

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 1, 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 wanna 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.

Well, we didn't get an Office Hours with Gary out of this 1. So even though they tried to spin it as a win, you know, I'm still waiting on that. 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. But I think it kind of casts some doubt on this, 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 as 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 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 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 pushing back on this administrative state overreach.

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.

Thanks, Ryan.

Thanks for having us.

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 you