What's In The Hinman Emails?

The Hinman emails have finally been unsealed, and they are potentially as explosive as the community hoped—although not necessarily directly useful to Ripple.

First, Some Background

Back in June 2018, Former Director of the Securities and Exchange Commission's Division of Corporation Finance, Bill Hinman, gave a speech at Yahoo Finance All Markets Summit, in which he discussed crypto regulation. Hinman stated that ETH was not a security, even if it had been at one time (due to the presale and then-centralized nature of the enterprise), thanks to the degree of decentralization it enjoyed by that stage.

Like all public speeches given by SEC officials, the content was discussed internally over a period of weeks, feedback was given by other staffers, and edits were made. The "Hinman emails" refer to the messages and documents that show that internal discussion, which Ripple believed to be important in its court battle the SEC, which hinges on whether XRP was and is a security.

Hinman Takeaways

The full impact of the Hinman emails will take some time to emerge, but there are a few key points for starters.

• Firstly, staffers had a number of concerns with Hinman's speech, some of which were addressed in the final version, others of which were not.
• A specific concern was that Hinman's characterization of Ethereum went beyond the Howey test and instead of providing more clarity, would cause "greater confusion" in the market.
• Hinman actually lined up a call with Vitalik Buterin and the Ethereum Foundation to confirm the view that ETH was not a security.
• There was conflict within the SEC about the right way to characterize ETH, and indeed whether there should be any explicit statement about its status at that time.
• Despite the lack of clear and consistent messaging, Hinman's speech (which was supposedly "personal opinion") was repeated as the party line and referred to as guidance by the SEC on subsequent occasions.

So What?

A big part of the mystique around the Hinman emails has arisen from the fact that the SEC has fought hard in court to keep them sealed. That, to the Ripple and wider crypto community, has suggested they have something to hide. One of the enduring narratives has been the EthGate conspiracy: That Ethereum received a free pass from regulators, while other cryptos (like Ripple) received harsher treatment.

The documents include commentary on BTC as well as ETH, with one staffer arguing that the speech should show restraint (i.e., lack of clarity) in order to provide the SEC with greater room to maneuver in the future. "Although we do not want to suggest that BTC is a security, taking too strong a position... might be a wedge that could undermine SEC efforts towards other crypto-assets where the asset is a security."

The emails may not provide the knock-out blow to the SEC the Ripple community was hoping for. However, they do help to paint a picture of a chaotic, dysfunctional organization that has doubled down on its failures and repeatedly claimed there is regulatory clarity—and taken enforcement action—where there is none.

Ripple's Chief Legal Officer, Stuart Alderoty, explains:

2/ We now can all see Hinman ignored multiple warnings that his speech contained made-up analysis with no basis in law, was divorced from the Howey factors, exposed regulatory gaps, and would create not just confusion, but “greater confusion” in the market.

— Stuart Alderoty (@s_alderoty) June 13, 2023

Ripple CEO Brad Garlinghouse followed up with the personal and industry impact the SEC's actions had had.

It’s absolutely unconscionable that a regulator – when presented with so much pushback on what he was about to say / how he compiled this fake “test” in the first place – decided to move forward anyway, and throw an entire industry into chaos. https://t.co/9qzKOiPWsA

— Brad Garlinghouse (@bgarlinghouse) June 13, 2023

"An investigation must be conducted to understand what or who influenced Hinman, why conflicts (or, at the very least, appearances of conflicts) were ignored, and why the SEC touted the speech knowing that it would create 'greater confusion,'" Ripple Chief Legal Officer Stuart Alderoty wrote in his thread.

Paul Grewal, Coinbase's Chief Legal Officer, suggested that the Hinman emails vindicated the exchange's claims in their own court case with the SEC:

"The regulatory gap." Proof from the Hinman emails of what we've been saying to the Third Circuit, to Congress and to the SEC itself: that the securities laws are incomplete when it comes digital assets, that securities law aren’t meant to rule over all digital assets, and that… pic.twitter.com/IgPJvEyqq2

— paulgrewal.eth (@iampaulgrewal) June 13, 2023

In short, the Hinman emails show a regulator in confusion, with conflicting claims and opinions—contrary to Gensler's often-stated position that the crypto industry has all the clarity it needs. While this may not benefit Ripple directly, there's a wider point at stake here. As Adam Cochran explains in a lengthy tweet thread, it "paints the SEC into a corner".

• There's some validity to the argument that a crypto asset could start out as a security but "morph" to become a commodity when it becomes sufficiently decentralized. Gensler hates this idea.
• If the SEC wants to argue ETH is a security today, they have to accept that "reverse morphing" is possible, because at one point, they did not consider it a security.
• Moreover, they would have to argue that only secondary sales are relevant, because the Ethereum Foundation is no longer selling ETH, and is not the fundamental developer of Ethereum.
• This breaks a bunch of precedents on current securities law, since it would imply that promoters of an asset are responsible for all secondary sales.

Cochran concludes: "It may not seem like there is a smoking gun here - and there certainly wasn't one for Ripple. But I think Ripple's lawyers knew what lay in that nuance, and they just threw this entire industry a bone - and for that I applaud them."

25/25

So which is it Chairman:

-Can securities status morph over time with decentralization?

or

-Is securities analysis immutable with commonality only bound by the primary sale or the *promotion* of the secondary sale? pic.twitter.com/osdbIRZOFk

— Adam Cochran (adamscochran.eth) (@adamscochran) June 13, 2023

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