Last week, the SEC released the Hinman Emails as part of their ongoing case vs Ripple. Additionally, almost a year ago the SEC had released a series of documents related to a 2018 speech given by former Director of Corporation Finance William Hinman. In the speech, Hinman argued that Ether (ETH), one of the largest cryptocurrencies, should not be categorized as a security. The release of these documents has had a significant impact on the industry, and has raised important questions about the SEC's approach to regulating cryptocurrencies.
The Importance of the Hinman Documents
The Hinman documents are important for a number of reasons. First, they provide insight into the SEC's thinking on the classification of cryptocurrencies. Second, they highlight the internal divisions within the SEC on this issue; specifically, they show the disconnect from within the agency itself and that they themselves cannot even agree on what a security is. Third, they suggest that the SEC may have been inconsistent in its enforcement of securities laws in the crypto industry.
This last point is huge, as the SEC’s stance has been so strict as of late that cryptos are securities, yet these emails now show how widely inconsistent they have been internally. This undoubtedly has had a negative impact on the agency's already struggling credibility within the crypto industry. Many have lost faith in the SEC to be able to handle innovation properly causing foreign companies to stay away from the US while also inadvertently promoting US companies to move out - such as Coinbase's threats to do so.
The Implications for Ongoing SEC Lawsuits
The Hinman documents have significant implications for the ongoing SEC lawsuits against Ripple, Coinbase, and Binance.US. In all of these cases, the SEC has argued that XRP along with coins being offered on Coinbase/Binance.US are securities. However, the Hinman documents suggest that the SEC does not even have a consistent definition of what constitutes a security in any of these cases. This could make it extremely difficult for the SEC to win. Not to mention, many from within the agency have been outspoken on its “regulation by enforcement” policy and that these cases hurt not only the crypto industry but innovation in general here in the US.
Brad Garlinghouse, Founder and CEO of Ripple recently released a video in which he discusses the implications of these documents and how they relate to the ongoing fight they have had with the SEC.
My 3 main takeaways from Garlinghouse's video:
SEC Chose Politics Over People
SEC Weaponized Lack of Regulatory Clarity
Hinman Docs Show Confusion from within the SEC
The Future of Crypto Regulation
The Hinman documents are likely to have a significant impact on the future of crypto regulation. The SEC/Gensler is currently working on new regulations for the crypto industry, and the Hinman documents will likely be a major factor in these discussions. The SEC will need to decide whether to adopt the Hinman test for determining whether a cryptocurrency is a security. If the SEC does adopt this test, it would be a major victory for the crypto industry.
The Hinman Test
The Hinman Test is a framework for determining whether a cryptocurrency is a security under U.S. law.
The Hinman Test has three factors:
Decentralization: The more decentralized a cryptocurrency is, the less likely it is to be a security. A decentralized cryptocurrency is one where no single entity has control over the network or the value of the coin.
Usefulness: The more useful a cryptocurrency is, the less likely it is to be a security. A useful cryptocurrency has a real-world purpose, such as being used to pay for goods or services. We often refer to these as Utility Coins.
Expectation of Profit: The less expectation of profit there is from investing in a cryptocurrency, the less likely it is to be a security. A cryptocurrency that is not expected to appreciate in value is less likely to be considered an investment contract. Although, there are many other factors at play on this one.
The Hinman Test is not a legal rule, but it has been influential in the SEC's enforcement of securities laws in the crypto industry. The SEC has not formally adopted the Hinman Test, but it has cited the test in several enforcement actions.
The Hinman Test is a helpful framework for understanding the SEC's approach to regulating cryptocurrencies. However, if history tells us anything, it is that the SEC may not always apply the test in a consistent manner.
The Implications for Investors
The Hinman documents also have implications for investors as well. If the SEC does not adopt the Hinman test, it could lead to more uncertainty in the crypto market combined with ongoing lawsuits. Investors will need to be careful about which cryptocurrencies they invest in, as they could be classified as securities and subject to SEC regulation if the agency gets its way, and exchanges may decide to delist various coins as a result of these cases. As of writing, Binance.US has removed all USD from its platform forcing all users to withdraw their cash. They have also come to an agreement with the SEC to move all customer funds and wallet keys back onshore and ensure that Binance Holdings, the global exchange and parent company of Binance.US, has no access to this information.
The SEC's Hinman documents are a significant development in the regulation of cryptocurrencies and have negatively impacted the SEC's credibility. The documents have raised important questions about the SEC's approach to this issue, and have implications for ongoing SEC lawsuits, and the future of crypto regulation.
In addition to the implications for the SEC lawsuits against Ripple, Coinbase, and Binance.US, the Hinman documents also have implications for other cryptocurrency companies. The documents suggest that the SEC may be more likely to classify a cryptocurrency as a security if it is centralized or controlled by a single entity. This could have a chilling effect on the development of new cryptocurrencies, as companies may be reluctant to launch a new coin if they fear that it could be classified as a security - at least here in the US.
The Hinman documents are a complex and important issue. I have only just begun to scratch the surface of the implications of these documents. However, it is clear that the Hinman documents are a major development in the regulation of cryptocurrencies, and they will have a significant impact on the future of this industry and whether or not the SEC can regain its credibility in the industry.
As always, thank you for reading. I hope you have a great start to your week, and I will see you in my next update!