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.
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 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
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 RESOURCES:
 Mike Selig
 https://twitter.com/MikeSeligEsq 
 Paul Grewal
 https://twitter.com/iampaulgrewal 
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 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 

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.

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.

I shouldn't say token, I should say 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.

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He is a counsel for digital asset department at Wilkie, Farr, and Gallagher, which is a law firm based in New York City.

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.

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.

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.

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.

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.

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.

First of all, were you surprised at this ruling in general?

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.

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.

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.

And Mike, you started talking about this.

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.

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.

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.

never a security when it was a part of a broader investment contract and security transaction.

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.

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.

So I think I got that part wrong in your precision of language.

That's why you guys are lawyers and I'm not.

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.

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 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

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?

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?

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.

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.

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 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.

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?

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.

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.

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.

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