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

Transcript

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 U.S court has ruled that xrp is not a security the question of course is is if xrp is not a security how can all of the other tokens that the SEC alleges our 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 the crypto Market has been up xrp has been up

um 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 are joined today with Paul Grewal and Mike selig they are both experts in this field and I think will provide some insight into the implications of this and the decision itself so guys we're going to get right to the episode but before we do I want to thank the sponsors that made this possible including our number one recommended crypto exchange Kraken go create an account Kraken Pro has easily become the best crypto trading platform in the industry

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also the ambier mobile wall is coming soon for both IOS and Android and if you want to be a beta tester you can sign up at ambuyer.com app and since you stayed to the very end of this ad read you should know that Amber is airdropping its wallet token to early users for simply just using the wallet so if you want to get started with ambier all the links that you need are in the show notes xrp is not a security that seemed to be the ruling of a U.S court just yesterday it happened we want to get some legal Minds in on this conversation we've got two of the best in our industry Mike selig joins us he is a counsel for digital asset department at Wilkie far and Gallagher which is a law firm based in New York City Mike's been on Bank

list before uh last time we talked I think we're talking about the SEC it's uh the year of the SC of the SEC I think Mike so it's great to have you back good to be here we also have Paul Grewal 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 it's great to be back thanks Ryan all right I want to go through this in two parts first let's talk about the decision and your legal brains will be able to pick this apart far better than mine so I want to spend some detail there and then once we do that once we

establish that uh we can talk about the implications but before we do I want to just spend a moment to maybe celebrate what just happened uh I for one am very excited and I saw your Tweet here Paul most days I love being a lawyer today is one of them uh you were referring of course to yesterday the date you got this news um I think all of crypto was really celebrating in a celebratory uh mindset and I I want to ask why why was yesterday an important day for you Paul judge Torres and her decision made several rulings that we think are um transformational

um 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 have frankly been getting the crap kicked out of us seemingly on on a regular basis part of that was um 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 um saw just one blow up after another and one scandal after another that really taught a lot of innocent hard-working creative good people with negativity and um and worth in ways it simply wasn't fair so I think for for many of us if I

could 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 hard working and fair and frankly with no skin in the game was was looking at these issues so important to so many of us and saying are you serious SEC is this really the basis upon which you want to regulate such an important industry in the United States I think that was as much of it as anything else I I will definitely agree with you I I felt like um it's been a theme of 2023 um regulatory overreach has felt like a theme this regulation by enforcement and it felt good to have some checks and

balances at play and that's after all is the the idea of the court system that's where they come into play as a check and balance against um the legislative and executive branch I think we we saw that today um Mike what were your thoughts when first of all were you surprised at this ruling in general like I it was not on my radar at all I didn't even know that um this ruling was was imminent were you surprised at the timing of it and uh the result so we were all waiting uh for this ruling to drop and and we had no idea when but we expected it at any day and and you know it came when it came but I think we've built up over all these years uh this notion that the SEC is interpreting the Howie 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 um the wahi case uh the coinbase case now uh Ripple telegram kick Library a number of these cases and the SEC has kind of gotten its way in some of these we've not had the Monumental ruling where we had a you know a court say that the 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 that implicate the Securities laws but it's not necessarily a security in every case it's not the security itself and so this was really a surprising win really for for the Ripple team and for the industry more broadly I don't think any of us were necessarily expecting that the court would go so far as to say look we're separating the crypto asset from the investment contract very clearly here and there are certain instances when you can sell the crypto asset and it's not going to implicate the Securities laws so let's get to the what's happened that was our uh celebratory round and Mikey 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 I'm wondering if you could paint in the shades of detail here uh 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 form found that this is not an investment contract and therefore not a security xrp on Exchange is 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 all right that that I think is are the Monumental pieces of this ruling um the the last part though is Ripple selling xrp directly pursuant to contracts was an investment contract and

thus a security Ripple had Fair noticed that doing this without registration was illegal so I think the idea here is that at some point when Ripple was selling xrp to investors these maybe institutions it was a security and then xrp became not a security at some other point in the process this piece of the of kind of the Court ruling seemed somewhat vague to me but we've got sort of the start case where xrp starts as a security we've got the end piece where now it's not security according to the the Court ruling Paul I'm wondering if you could kind of make sense of this for us so uh 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 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 um of trading on exchanges and in fact the trading on the 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 and fear that the SEC has shown is that through its Theory it has suggested

that assets themselves can be Securities independent of the context in which they are transacted tourism blows that entire thinking out of the water and she does it in a very thoughtful methodical way okay 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 that part uh wrong and your your Precision of language that's why you guys are lawyers and and I'm not I'm just a you know Lily podcaster um 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 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 that the reason we know this is Judge Torres understood the law the law has been clear for a very long time you've got to look at these things transaction by transaction that's one of the reasons why judge Torres distinguished the transactions involving institutions uh in on the one hand and the transactions that took place on the

exchanges on the other and that distinction is everything and the sec's refusal for years now to acknowledge that distinction is what you know created so much um uncertainty for a lot of us judge Torres said enough because Sora 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 thank so thank you for that Clarity so um 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 did um the burden was on the SEC as the plaintiff in the case to prove what it was alleging in its complaint which is that the xrp asset itself was a security um and that's what the court considered deliberated on and ultimately rejected it didn't go so far and I think this is a reflection of the care with which she wrote her opinion that's just 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 um what is at issue when the SEC charges violations of the Securities laws is whether the transactions themselves constitute Securities transactions that trigger the authority and jurisdiction of the SEC and so because you can have investment contracts or any other type of security transaction that involves all sorts of things that might be Securities on the one hand you know Apple stock or debt instruments those sorts of things or on the other pure Commodities you can have Securities transactions that involve

transactions such as orange groves or pork bellies or other things that are planning not 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 Torres 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 um uh tokens all tokens or Securities it seems to be this this very um 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 I'm wondering what you might add to this and in your Tweet thread you you said uh something similar you made this distinction between the asset of xrp itself and investment contract he called this a massive win by the Ripple team against um the the SEC judge Torres clearly firms The View that the same crypto asset may be sold as an investment contract and therefore a security and as a standalone good so both uh the investment contract is the security not the crypto asset um what else would you add to Paul's explanation of of what just happened to your mic you know it's important to 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 the Court's decision here really firmly places xrp with these other types of Commodities and goods and of course they may be sold under circumstances where certain promises and commitments are made by the seller uh you know in the original 1946 Howie opinion you had a Land Management contract coupled with uh the Orange Groves and if the Orange Groves are later resold why should that be subject to the Securities laws and so I think we've seen you know Matt Levine kind of saying well this isn't how stock is sold and you know if you buy stock in a secondary Market uh you know it still sock but but that's a different type of

security and so really the investment contract analysis will require the SEC in every instance to 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 Howie 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 uh 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 that the assets are just grouped within the Securities laws because they have some investment characteristics so does this mean effectively that like the SEC would have to prove for every single asset that it passed like that it is subject to the Howie test uh and right that that the court the ruling just established that that is a fairly High bar to pass yeah I mean there was just a supreme court uh opinion regarding slack where they're dealing with traceability of Securities and some were sold as unregistered and some were subject to a registration statement and the Supreme

Court said you can't mix the two and say they're equivalent if there's fraud in the registration statement it pertains to the that you have to prove that those Securities you acquired were subject to that registration statement it's the same kind of analysis the SEC is going to have to do here they're going to have to prove that in every instance the way that was sold was in an investment contract and that's a really heavy burden for the SEC and it's on you know exchanges where there's blind trading it's very difficult to prove that people are are kind of undertaking to invest in some Enterprise and they understand all of these uh undertakings and Promises when they're just buying something that they think is more of a commodity either they might be using it to pay gas they might be using it for all sorts of

reasons within the ecosystem who knows why they're buying it but the SEC has to prove in every case that that reasonable purchase is based on an expectation of profits from the issuer or from some identifiable other and that that's a difficult burden so I think this case it you know this this order is very helpful uh for secondary sale cases uh as well as as some of these other um cases we'll get more into the implications I think in in a minute because I I think the implications are absolutely huge are absolutely massive for crypto in in various ways I want to ask though um Paul for those not familiar listening who are not familiar with kind of how the court system works um how binding is this sort of thing is

there the opportunity for the SEC to appeal this um it does this kind of cement this type of a decision in in precedent for those that aren't familiar with how the court system case law kind of works uh can you give us some details on that is this like the end of story xrp as a security uh or is not a security can never be called into question again or there there's some ways for that 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 um 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 korres in this case issued uh a ruling in what's called a motion for summary judgment that each party brought and that's basically a 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 of 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 a Securities transactions um 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 um final decisions that take those issues out of the case for now and park them until the overall or complete case is resolved what's critical here is that there was a third category of topics one main topic in particular that the judge considered which was the aiding and abetting liability of certain individual defendants for the Securities transactions that she found uh earlier in the opinion dealing with institutions there she said I can't decide that question purely as a matter of a lot because you all disagree on what the basic facts are so I've got to set that for trial but why does all this matter well before any party can take an appeal of

any part of the Judgment that they don't like there has to be a final judgment and a final judgment can only enter once everything's been resolved so what so here there's 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 one hand or the Ripple defendants on the other file an appeal to the second Circuit Court of Appeals and argue that there was some error down below now there are ways in which one party or another can request permission to take up a piecemeal appeal to focus on just a part of the case before having to wait until it's all wrapped up but that bar is super high very rare particularly in the second circuit so um the SEC could

try for example to pursue an interlocutory appeal of its loss it's massive loss on the um uh sales on exchanges piece of the opinion but that is not very likely to be accepted So eventually they will have their chance as will the Ripple defendants and and at that point in time the court of appeals which generally sits in panels of three judges will review this decision and ask themselves was there legal error here not not did we do we just simply disagree with what the judge did but did she commit certain errors um that warrant a reversal that's a high bar particularly when you have a decision at the trial court level that's so thorough so thoughtful as

judge torres's decision the final stop on the train of course is the Supreme Court in theory the party or or any party that loses at the court of appeals could go up to the Supreme Court or try to in order to get that Court um 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 fraud defense and purposes of being appealed to the second Circuit Court of Appeals

and that's going to be um absent some unusual situation the last dance in the Ripple case and how long will that take Paul if it if it occurs well uh it's going to take many months I predict for the trial proceedings to wrap up because Judge Perez is a busy judge she's got hundreds of other cases she has to manage at the same time and so just scheduling the trial is going to be problematic that could take six months that could take you know a year now she might decide to Fast Track this for other reasons but my point is you can't Bank on the trial court being done with this case for a while then you go to the second Circuit Court of Appeals those appeals can take as much as a year 18 months perhaps even two years and

then if one or more party wants to pursue the Supreme Court option there you go you 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 Ryan I just want to underscore one other point about the delay in the Appellate process in the meantime the SEC is stuck with this decision they are so certainly yeah this is where we get into implications here right because there are many uh tokens like I I don't even recall how long the Ripple versus SEC case has been ongoing it's it's a matter of years isn't it I mean this is it has been a matter of years and and I should be very clear about one point which is you're you also ask quite

reasonably what does this mean for these other tokens in these other cases yes yeah so this one trial judge in this one Court doesn't have the power to bind any other judge so it's not as if in a different case like ours our judge wouldn't have the freedom to make her own determinations on these same questions but here's the thing did Taurus's decision is highly persuasive it has persuasive uh Authority while the second or third or tenth judge doesn't have to follow her um decision automatically you've got a thoughtful 30-some page analysis of key issues um you've got a judge who has a great reputation as a thoughtful careful deliberate

um 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 uh precedent in in kind of case law then it it gets kind of reflected in court cases down the road because there are a lot of tokens that are in the state of of limbo as xrp was in the SEC for some reason thinks that they are a security and um you know there's no clear

determination but this this waiting this precedent will um I guess cement the the cement the evidence and and cement the the decision that none of these tokens are securities I think it's gonna it's gonna it's gonna have a massive impact on that question I mean the way to think of another way to think about this Ryan is people find and replace and judge Taurus'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 Maddox cordana I mean you could pick any number of assets including those that are at issue in our cases the logic holds

there's nothing different about the tokens that would change any of Judge porus's analysis yeah in that portion of the opinion that's why this thing is such a a blockbuster obviously for the xrp parties it's critical but this is about much more than just people who happen to be uh trading an 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 as 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 trains all at once in your portfolio

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with arbitrum experience web 3 development the way it was meant to be secure fast cheap and friction free 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 uh some of the implications of this Downstream and I want to touch on a few of those with with both of you um one is existing token teams uh exchanges uh 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 in some of the cases that have been put forward by the SEC they have alleged that tokens like Solana token slight from filecoin tokens like Matic tokens like Adam token like tokens like cardano are uh our Securities as well how can that possibly stand up now that xrp is is ruled not as security is does that just that argue 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 well I think as to the tokens themselves there's no difference the logic holds judge forest was clear in um

distinguishing the tokens on the one hand from transactions involving the tokens on the other so to be clear could there be uh transactions involving those assets that you listed and or others that might be deemed Securities in the same way as the institutional transactions in the xrp case where deemed Securities transactions yeah for sure if there's an investment contract that kind of wraps it correct correct and so you know it's going to be important for new new projects or existing projects to be mindful that um just because you're you're dealing or peddling in um orange groves doesn't mean you still can't be on the hook for a Securities Law violation right that's Howie and that's that's xrp as we says

to the first class but separate apart from that on the exchanges themselves I don't think there is any credible way um for anyone to uh argue that these other tokens are securities when xrp is not in that scenario Ryan there was one other part of judge torres's ruling that relates to this it'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 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 that 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 one side of a 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 um expecting profits based upon the reasonable efforts of the seller I'm not sure like what that situation might look like but it's 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 clear the assets themselves they're not they're not Securities and the transactions on those exchanges are involving those exchanges are not Securities transactions yeah and I think you might have um the situation like in Gary plastic which is you know a seminal Securities Law case that the SEC references all the time where you have an asset like a credit uh a CD um 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 uh 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 in another exchange and it's not it's really the investment contract that you're dealing with that that's the security it's it's not the CD it's not the the xrp it's not any token itself so some of the allegations right now by by the SEC I believe is uh they've called coinbase uh I think the binance case as well and the legal Securities Exchange like listing legal Securities and I may have the terminology off but doesn't this completely blow that argument uh like out of the water like is that I mean I I don't want Paul maybe to comment on his own case but Mike

what's your take on this I think the SEC has been trying all along to conflate these initial sales with secondary sales or ongoing sales that occur in you know in secondary cases and and if you look at all of the the judicial decisions that we've gotten so far if you look at kick telegram Library all of these deal with sales by the issuer section five violations by the issuer or Underwriters you know 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 uh 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 uh support the sec's position uh even the most friendly cases like telegram to the SEC because they all deal with these sales by and issuer and the Ripple case makes pretty clear that those would be part of an investment contract but that doesn't make xrp itself an investment contract and the telegram Court agreed telegram Court said that ton is not itself a security it's computer code um in the library case if you look at the order uh the judge also said that the 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 you know in a letter to the judge in our case in advance of our hearing yesterday the SEC claimed that in library the judge Drew no distinction between um those different scenarios and of course um that's patently false and a simple review of the hearing transcripts and orders from the library case makes clear the judge again was very thoughtful very careful in distinguishing between creating on secondary exchanges outside the scope of the injunction in that case and activity by the issuer who committed

the section five violation so existing token teams got to be feeling good right now exchanges uh feeling good on the back of this with the cases there 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 to acknowledge here that this is just one judge's decision um just in the southern district of New York and so there are other courts that might disagree and so it's not uh you know 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 uh 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 pouring over the Howie cases for years now and you cannot point to a single one that says the Orange Groves are the security and if you separated out from this this contract it's going to be a security like there's like pay

phone lease back Arrangements the pay phones whenever the Securities the 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 it could be an active participant as the SEC is 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 to hold it you lock it up for a period of time before you sell it you're making sort of uh a contractual arrangement with this promoter and that just doesn't exist in in many of the cases you know when somebody buys an nft on open C 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 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 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 issue or 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 degenerate your profits you're buying gold or silver and you have this receipt that the whiskey 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 going to select all these different types of whiskey I'm gonna select the best whiskeys and you're going to get all these profits because it's going to be the best you know arrangement of whiskeys for you and that's a little bit different right because you're relying on that person and you're buying it from that person but if you then go and buy these whiskeys in the secondary Market that

doesn't make them Securities you don't have that Arrangement you don't have the materials saying that this guy's gonna go uh you know generate profits for you and that's really the point the Court's making here you know if you're not reaching out to all these different invest purchasers and kind of making certain promises to them like you're gonna go and get something listed on exchange after you've purchased it in 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 the issuer so 99 of those uh listening to this episode they're not exchanges they're not an existing token team and they're not a team that that's looking to issue uh tokens their everyday kind of crypto

users uh you know token holders some of them whether that's eth Bitcoin or or something else what does this mean for token holders Paul and I want to ask you this this question in some context and you know I want to generally ask your opinion on what this case means for token holders if anything but then also ask the question to you which is like I feel like the SEC has presented this as almost kind of a 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 um do we lose that spirit in in any of this Court ruling or like what would you propose as a better system or a better framework if it's not you know a security apparatus with with disclosures um you know can we protect token holders in this environment or does it does it look completely different so it's kind of a two-part question what does this mean for token holders themselves and do they lose some protection here well not only can we protect token holders we must protect token holders look um let's just let's just pause for a moment on the situation we now all find ourselves in thanks to the SEC massive

overreach over the last couple of years instead of spending the last 24 months on rule making you don't have to like the proposals that coinbase has put out there we have formally petitioned for rule making we have our own ideas you could you could pick other people's but instead of having some path to registration some framework for issuers to make reasonable disclosures and for exchanges to impose reasonable limits on structure um to disclose conflicts and manage them appropriately all of that balance that allows for Innovation but fundamentally protects the people who are engaging these markets what the STC has done in in 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 um that would uh compel issuers and exchanges and all of the all of us really to do the right thing that's a remarkably sad and I would argue broad place for us to be in but if if there's if there's only if there's one entity or organization to pin the blame on for that it's the SEC because they've been burning time and think of the money we've all been spending on this litigation the dozens or hundreds of

lawyers and law firms the tens of thousands of hours at hundreds or thousands of dollars an hour and for what for what to be in a situation now where retail is is completely exposed and we have nothing while Europe and the rest of the world races ahead so I think you know the solution here uh is the solution we've been urging for some time and we're hardly alone we have lots of friends and allies and people who frankly aren't are 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 asset 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 um yesterday before the decision came out but as a result of that decision no one can seriously argue that we don't need rules um I and I hope that lesson is taken to Heart by an even Wider Circle of our Representatives because the longer we

waste 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 it's really interesting and I do feel like this is a case where um it seems like Gensler is kind of leading 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 in the most charitable sense of this industry then rather than saying roadblock roadblock Road block 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 um in fact uh you know some have said I've seen some commentary that uh part of the Ripple versus SEC case was actually a win for the cfdc which is maybe gunning for some power over this space and trying to establish themselves as kind of the the actual you know um neutral Arbiter of of crypto I want to bring up a representative Tom Emmer's take here uh 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 let's fully turn to kind of the the the legislation

piece do you think think that this action lifts enough regulatory fog for us to actually make some progress in uh 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 uh Mike what would you say on that first look it's 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 Christine 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 people spot Commodities there's only regulation for derivative uh transactions that are regulated by the cfdc 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 that 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 I think that you know Emmer's bill is is a really great step in that direction in terms of classifying in statute that certain things are within this regulatory Gap essentially but we also need Market structure regulation I think the you know the bills that have been proposed we just got a new version of the lamish drill brand um and you know we have a market structure build uh out there as well I think that's really the direction 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 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 sales um and and I think you know the proof of that is that um we're seeing a real bipartisan consensus emerge on these issues at least on to the need for rules even if there's disagreements about what those rules or legal standards ought to be you showed Congressman Emmer's um commentary in uh on Twitter Congressman Torres his his colleague also weighed in on Twitter and uh lauded the decision uh that judge Torres issued um these are two people who don't agree on very much politically I think I'm safe on saying that but they both I think acting in good faith and with

their constituents in mind agree like 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 you know that's not just me saying that or others who practice in in this area of the law the federal judge who has no skin in this game she made that call I think the other thing that's so um troubling about the sec's approach in this area you know it has pulled a absolute 180 on where it was just a short while ago um when when we when we look at you know the revelations and the hidman documents

and frankly you don't have to look at the documents you can look at the hidden speech it's clear um you know folks inside the SEC acting in good faith plainly acknowledged that many of these assets lie outside of the protections the federal Securities laws um Gary Gensler not his 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 and testimony there are no regulatory authorities that apply to cryptocurrency exchanges like us how on Earth can you square that with the positions that the SEC is taking even this week in federal court cases all over this country and how on Earth can anyone claim that the

industry and individuals were unfair notice of the sec's understanding or position on these issues when you just have twists and turns and contortions everywhere you look that's why I think legislation has a real chance um yeah I was encouraged and I was I was optimistic Ryan before yesterday's ruling but now I think we've got a real shot to make this happen this really does feel like the tides have turned as he said at the outset Paul it feels like we've been gut punched for uh 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 a turning point for us but I'm a little bit worried about being like full Bull and fully optimistic and

I'm a little bit worried this is just kind of uh you know the end of the first Star Wars movie A New Hope and we still have to do The Empire Strikes Back movie before we kind of get to the to the finish here uh do you think like we've got some fights ahead of us uh 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 one yeah I think sometimes uh at least uh some of us in this space underestimate uh Terry Gensler and and those that serve him he's a smart man he's a strategic man and he knows exactly what he wants and how to go about getting it I don't think this is the anything close to

um what is it chapter nine I guess right we are much closer to chapter one in the in the in the in the Creole of trilogies and I think that um you know that means that in the short term uh we're gonna see the SEC uh uh continue to litigate these cases um I don't think they're gonna roll up their tent and go home anytime soon and if and when I predict they continue to lose they'll they'll likely pursue appeals and continue to want to maintain this sort of uncertainty and unsettled state for for whatever reason I'm still not clear on why this is the right way to protect American investors but that just means we all have to be sober about it and look there will be losses along the way they already happen right even in the xrp case I'm willing to admit and

I think even even Ripple would admit that it was a split decision a mixed decision they won some things the SEC won some other things the SEC statement that they put out after the order yesterday was remarkable because the SEC reading that statement won it all and could I actually didn't know Paul is that confirmed is that a confirmed statement it is absolutely feel professional is is this the one that you're referring to this one right here we're pleased that the court found that SRP tokens yeah yeah so they really wrote this yeah that's not like the onion that's like it's hard to tell this place that's the security Exchange Commission no and

and you know I'm not going to read the full quote for bit for bankless listeners but the tenure here is is basically that they were kind of reframing this as a win absolutely and look lawyers have to believe that doesn't happen all the time but here's the thing Ryan that just strikes me about this statement and really the overall approach the SEC has taken in so many of these cases they're not just some private plaintiff or private party that has a claim and is looking to maximize the the value of that claim um uh in in hand-to-hand combat or

litigation they represent the government they are the government they're supposed to protect the public interest and consider the public interest in everything they do these kinds of statements this kind of orwellian celebration of a decision that plainly was a major loss and a major blow to their credibility it just makes you wonder um at least at the top because I do think that there are plenty of good people acting in good faith further down in the ranks of the SEC but at the top what's driving this what's the motivation why is this the preferred end State when I'm sitting here right now talking to you all from from from London England and they're having a very different kind of conversation over here in Europe and around the world and I just I worry

about the United States is credibility on these issues and you know credibility is a hard thing to earnesty 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 uh institution and it's turning into a merit-based one and I didn't elect them certainly as a taxpayer did not agree uh to fund their lawyers in these court cases uh this has been fantastic I want to thank you both so much and Mike I'm wondering if you could kind of leave us with any closing thoughts here on the significance of this as we come to a close well we didn't get in office hours with

Gary out of this one so you know 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 of credible judge taking a strong view here that crypto Assets in and of themselves are not Securities we now have a few other uh judges that have agreed and so it it starts to kind of leave a trail for all of these crypto uh institutions and ecosystem participants to say look there there's certainly some Securities Law uh 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 uh 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 um and I think that's the most important thing here the SEC did not win this idea that in and of itself a crypto asset is a security and no judge has seen team to support that view the SEC just says it over and over and believes that if they say it enough times just like their you know speech after or press release after the Ripple decision came out it doesn't make it true it doesn't mean that they actually won uh that you know this case

and so I think it's important just to keep that in mind that there there are strong voices both uh the lawyers in this community as well as judges now that kind of disagree and are pushing back on this this administrative State overreach yeah I was beginning to question myself whether my uh Pokemon cards were Securities the way Gary gunsler was talking uh 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 the lawyers would would be first to tell you that uh crypto is risky so is

D5 you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're glad you're with us on the bank list Journey thanks a lot