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SEC vs. Ripple: New Crypto Legislation Could Affect the SEC v. Ripple Lawsuit!

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TRANSCRIPTION OF VIDEO:

Flashback, Thursday, July 29 AM. 

Friday, July 30.

Notice of Appearance of a Trial Attorney for the SEC was filed?

Jeremy, it’s time to shoot Legal Briefs.

She’s buying a Stairway to Heaven.

Hello this is attorney Thien-Vu Hogan and welcome to Legal Briefs. It seems something WAS filed in the SEC v. Ripple case last Friday so it does seem likely the Ripple lawsuit WILL be moving forward for now and, while Jeremy is working on other things today WE will be looking at something very exciting and it’s the new U.S. legislation defining a digital asset versus a digital asset security and I am going to tell you what the new legislation does with cryptocurrencies, which is actually really well thought out and smart and then we will apply the law to XRP and finally talk about what effect the law will have if it passes before the end of the Ripple lawsuit.

We’ve said since we started discussing crypto legal issues that the SEC has been systematically increasing its attacks on crypto currencies culminating in the SEC v. Ripple lawsuit and that the problem is one that needed to be fixed by Congress and NOT by the Courts. And after Congress sitting on its hands for years – it seems it has finally come up with a game plan.

In any case, let’s take a look at the proposed legislation and here it is:

Right away notice that the proposed legislation is an Amendment of the 1934 Securities Act – this is a law that  amends the current law and amends it by among other things making a distinction and defining cryptocurrencies in one of two ways.

Section 101(a) defines a “Digital Asset Security” and this will be cryptos that are “securities’ and subject to oversight by the SEC.

Looking at page 4, a digital security is defined as a digital asset which “Provides the holder of the digital asset with any of the following rights. And then if you see Roman Numeral I-IV, it basically is defining what you traditionally think of as a security – “Rights to profits, interest or dividends … voting rights.”

Section (ii) is where it gets interesting.  Here in an interesting twist, this definition of a digital asset is basically what former Director Hinman was talking about in his speech that he was probably deposed about last week. The law defines a security as a digital asset where the platform is not fully built out and for which the money from the sales “fund the development of the proposed service, goods or platform of the issuer.

And THAT IS IT.  If the digital asset does not act like a traditional security – like a share of a company, and the money from the sale is not used to build the digital platform, then it’s NOT a Digital Security and NOT subject to regulation by the SEC.

So next, what you’re really waiting for …  let’s apply this law to XRP.

The first part of the test is whether XRP has any of the hallmarks of a traditional security.  If you own XRP, do you have an equity interest of voting rights in Ripple? No, absolutely not. That’s an easy one.

The second part of the test is whether the service, good or platform was “wholly operational” at the time of the sale.  Or is the money from the sale used to fund the development of the platform? This part of the test is a little more complicated but certainly the XRP ledger, etc. which is the base of the Ripple Platform is and has been “wholly operational” for some time. You can make an argument that certain of the newer products that Ripple has deployed in the last couple of years are new and that XRP sales money was used to DEVELOP them but Ripple’s business is the software that “surrounds” the platform and definitely does not seem the kind of the thing the legislation envisions as  a “Digital Security.”

So it certainly seems that if this legislation passes, XRP is not a “Digital Security” asset and not subject to regulation by the SEC.

But let’s imagine this legislation passes and becomes law in a month or two and the SEC v. Ripple lawsuit is still going on.  Are you wondering what I was thinking of?  Can the law apply retroactively even though Ripple was already sued?

Well,  the United States Supreme Court gave us an answer in 1994 in the case of Landgraf v. USI Film Products.  The Landgraf case was a sexual harassment case but it involved application of a change of law during the pendency of litigation and provides a framework for our XRP analysis.

First in our analysis is whether retroactive application of the law would be Unconstitutional.  The US Constitution says in Article 1:

“No state shall..pass any ex post facto law or law impairing the obligation of contracts.”

Ex post Facto is latin for “after the fact” and the drafters of the Constitution were very concerned about a Central government targeting people by passing laws that made something illegal after the fact.

But over time the Courts have held that the Ex Post Facto Clause really applies in only two situations: (1) to criminal statutes; and (2) where the after-the-fact law imposes greater civil penalties on the subject.

So here, applying the new law to Ripple’s situation, we pass those two tests because the law is not criminal and none of the Defendants are charged with a crime and also because in this specific case the law would NOT create greater civil penalties, in fact, it would probably lead to the end of the lawsuit.

And that leads to the next part of the analysis which is to decide if Congress INTENDED the legislation to apply retroactively and from my review of the legislation I didn’t see it addressed. And when that is the situation, the Landgraf case tells us to look at the EFFECT that the statute will have. If the law INCREASES the parties’ liability for past conduct, it’s not applied retroactively.

And some parts of this law would increase liability, especially for exchanges.  But as to whether XRP is a security or not, as we know from our analysis earlier, under this law, XRP, especially the current form of XRP is NOT a “Digital Asset Security” so in that case the new law HELPS Ripple and therefore it will very likely be applied retroactively.

This is especially true because as you can see the legislation is very smart in that it only changes the “Definition” of what a security is in the crypto space.

The law doesn’t change any of the reporting or registration requirements for securities in any way. And that is consistent with retroactive application because you are not changing substantive obligations but only definitions.

So our conclusion from applying this pending law to the SEC v Ripple case is that the Courts would likely apply the law retroactively and under this new definition at least a large part, certainly the last few years of Ripple’s business practices, XRP would be defined as just a Digital Asset and NOT a Digital Asset Security and therefore NOT subject to SEC regulation. This would mean XRP is a Digital Asset and subject to regulation by the Commodity Trading Commission and Not the Sec and large parts of the SEC lawsuit would become Moot.

This bill was just introduced and we don’t know a timeframe for passage or IF it will pass. But it certainly clarifies Digital Assets in a common sense way. Thanks for watching and have a great day.

Thien-Vu Hogan
Thien-Vu Hogan
Attorney Thien-Vu Hogan is the founding and managing partner of Hogan & Hogan.