Regulators aren't supposed to choose the market's winners and losers, yet it's hard to ignore how securities laws are applied differently to the Ethereum Foundation, compared to companies like Ripple.
As the Securities and Exchange Commission case against Ripple Labs winds down after more than two years of public scrutiny, a judge in the Southern District of New York (SDNY) contemplates whether judges will unseal the "Hinman Speech Documents." The documents refer to a 2018 speech by then SEC director of corporate finance William Hinman, which, absent explicit regulatory guidance, constitutes the best public instruction for crypto stakeholders to avoid an enforcement action.
The speech seems inscrutable. It declared one crypto asset-Ethereum's native token ether-as outside the securities laws. Subsequently, the SEC launched the case against a similar project to Ethereum-Ripple-seeking billions in penalties for a virtually identical offering that reasonably appeared to fit Hinman's criteria for ether. As a regulatory scholar, I am concerned about the inconsistency.
A conflicts of interest explanation suggests that Hinman had a financial stake in an entity promoting ether over competing coins like XRP. Separately the government watchdog organization Empower Oversight sued the SEC to obtain materials that show Hinman received millions of dollars in retirement payments from his former law firm, Simpson Thacher & Bartlett (STB) and that ST joined an alliance devoted to the exclusive promotion of Ethereum and even that SEC warned Hinman about the appearance of such conflicts.
In any event, unsealing the speech documents could clarify whether Ethereum's proponents influenced Hinman's speech. While Hinman himself starts the speech by saying that it only reflects his view, not the SEC's, the unsealing could show whether SEC officials had a view on the matter. Typically such speeches are approved by agency counsel before going public. Such findings could strengthen the defense's claim that the SEC failed to provide fair notice. If the SEC itself was confused or ambivalent about crypto policy, it follows that innovators and investors could be as well.
The case serves as an important referendum on " regulation by enforcement" as defined by Carol R. Goforth in Regulation by Enforcement: Problems with the SEC's Approach to Cryptoasset Regulation (2022). At issue are critical legal questions of whether the pursuit of enforcements against innovative technologies for lack of compliance and other purported harms are legitimate use of taxpayer resources versus a forthright delineation of policy by the SEC, if not Congress.
To Seal or Unseal: The Battle of Motions
To seal or unseal is a common debate in federal regulatory litigation. Former general counsel banking regulator Thomas Vartanian explains, "While transparency protects a free flow of information in the agency process, courts will often be asked to decide if the privilege is being over-used. Courts may examine the evidence at issue in camera so it is only seen by a judge who can then determine the legitimate boundaries of the protection with specific knowledge of the information in question.
The SEC's counsel moved to seal the documents "reflect internal discussions and deliberations by numerous SEC officials" which should remain "confidential. "SEC officials repeatedly express their views and positions on issues of programmatic significance to the SEC. The ability of agency officials to debate and collaborate with openness and candor would be hampered by the public dissemination of these documents," the motion to the court said.
Indeed the SEC's website lists Freedom of Information Act (FOIA) exemptions, notably for national security, trade secrets, and personnel issues.
The court already determined that the Hinman Speech documents are not subject to the "deliberative process or attorney client privileges." It may be a high legal hurdle for the SEC to claim that the Hinman speech was sufficient regulatory guidance and then refuse to make public the backup of the speech.
The notion that a regulatory agency could favor one actor at the firm or industry's request demonstrates the concept of "regulatory capture," a defining concept in the 1971 "Theory of Economic Regulation" by George Stigler, who subsequently won the Nobel Prize in economics. Stigler challenged the idea that regulation is conducted to protect the public but rather to serve industry. He noted how the SEC garnered the authority to limit selling expenses of mutual funds, thus limiting the growth of small mutual funds and hence reducing the sales costs of large funds. Building on Stigler, my own research of controversial "net neutrality" internet regulation across 50 countries over the last decade shows a similar trend of established firms (U.S. tech platforms) pressing for regulation to prevent market entry. While such "open internet" rules are proffered to ensure "the next Google," they do the opposite by imposing a set of price and traffic controls that limit the ability of entrant services and applications to compete and differentiate.
- Roslyn Layton
Leave a comment