good morning hi everyone this is charles hoskinson broadcasting live in my bathrobe from warm sunny colorado it is currently saturday 6 a.m well 6 35 a.m give or take i got my coffee with my broncos mug how about that watch the broncos anymore but i kept the mug anyway the news of the hour as i was scrolling through all my messages is that uh ripple has responded to the sec lawsuit and actually something is really fun i for the first time in my career have been mentioned in a foia request i guess i've reached that level of prominence where you have to request government records on me so i wanted to do a screen share and go through the 93 page response from ripple let's do that together huh okay okay if you guys can see my screen this is the coindesk article which has a link to the entire 93-page uh response that ripple gave uh most of its boilerplate and they're kind of going through all the claims about the howie analysis but there's a few interesting gems in here and i i figured i'd bring them up and they're really interesting let me see here ah yeah sorry i didn't put on my glasses so a little hard to see paragraph four is really unique it says uh the last part of it and bringing the case that alleges is an unregistered offering of just 1.3 billion or just over 1.3 billion uh from at least 2013 the sec has already caused more than an estimated 15 billion dollars in damages to those it purports to protect uh that's a really powerful statement and it reminds me of a bit of a movie that came out in over 10 years ago from the creators of south park which was team america uh and as they were going about trying to kill these terrorists they ended up destroying paris and causing all this chicanery and havoc uh and it does bring up an interesting point that sometimes enforcement actions can have the unintended or in some cases intended consequence of causing an enormous amount of harm to those purported to be protected and in this case it's measured by a magnitude of a factor of 10. so for whatever damages were caused allegedly or otherwise by the offering 15 billion in damages to the market alongside a loss of liquidity and so forth now another thing that they mentioned inside the complaint the counter complaint is that they were talking about well hang on a second here in paragraph uh six and seven and these others uh they they kind of go into the design of ripple and they mention the fact that the ledger has been running for almost 10 years and it's processed billions of dollars worth of transactions and that the ledger runs independently of the ripple organization so let's say for the sake of the argument that this lawsuit is successful and that the sec says okay you guys are bad actors and and ripple laps goes out of business it's unlikely but let's say that that occurs uh it's a fair argument to make that well this ledger thing and this xrp thing is still going to be running there's holders all around the world there's people all around the world and you know one of the core custodians goes down but the system will still function without us so that's the assertion that's basically being made here and they're trying to say hang on a second here we're a payment system and there's some weak arguments for example they mentioned that they reached prior settlements with other regulatory bodies in the united states and those prior settlements clearly articulated ripple as some form of a currency uh and they say well hang on a second how can the government say we're one thing but then say that we're the other thing uh from a moral and political sense that argument makes a lot of sense but from a legal argument doesn't hold any water you can be both now number eight is an interesting claim it says ripple has never offered or sold xrp as an investment uh xrp holders do not acquire any claim to the assets of ripple okay uh however there was 1.3 billion dollars worth of divestment and strategic distribution as part of their growth model and really the crux of this comes down to this concept of information at symmetry uh so the foia request that they submitted to the sec actually specifically mentions a whole bunch of people including me if you go to uh let's see here which page page [Music] should do these videos with my glasses on ah here we go yeah page number four it says all communications with the ethereum foundation and the relevant companies or individuals in the ecosystem not limited to vitalik butter and anthony diorio charles hoskinson mihai amir joe and gavin and they probably have jeff in there too yeah they got jeff okay so they read the books good for them um so first off they're not going to find anything uh requesting communications between the sec and me in this matter because we've never spoken they never reached out to me so your foil will return back if if successful an empty file for me but certainly there probably were communications between vitalik joe ethereum foundation and the sec at some arbitrary uh point in its history uh but basically the the crux of this is that uh information asymmetries are are what the sec is really harking at and some determination was made at the commission that ethereum was in a position that there were no meaningful information at cemeteries between the custodial actors like the foundation and the dapps and other people that in other words there was no privilege in what was going to happen where were things going to go the ecosystem was sufficiently decentralized with xrp and ripple i would argue that that's not entirely the case the reality is there's over 3 000 applications that are deployed on ethereum and at the moment those applications the many different entities are the value drivers of ethereum uh not the ethereum foundation it's extremely difficult to argue that if ripple the custodial company was to disappear overnight that there are equivalent actors or other value drivers for the protocol and system uh the system is highly reliant on ripple the company and highly reliant on ripple the company continuing to do things to grow and evolve and they are in a position of privileged information and they know when things are happening and the ecosystem does not know nobody has to go through vitalik and tell him stuff on a regular basis in order to get permission to do something in the ethereum ecosystem so there are thousands of independent announcements that will affect the price of ether positively or negatively made every single year in that ecosystem and so they try to liken themselves in paragraph 10 to oil they say for example ripple holds a large percentage of xrp but that does not and cannot render an investment contract well that's that's a fair point in a general sense and they cite exxon holding a large amount of oil or de beers holding a large quantity of diamonds and bitman and chinese miners holding a large amount of bitcoin okay uh but that's not necessarily a fair argument uh when you actually start analyzing going deep about it the problem that the sec seems to have reading their complaint and going through the prior statements that they've made especially when they were examining bitcoin and ethereum was that it's a problem when you both hold a large amount of the asset and you enjoy a privileged position of information in the ecosystem because you can use that privileged position to strategically divest your large positions this is the whole point of insider trading laws and this is the whole point of consumer protection the sec was literally created to protect the retail investors that was their mandate from 1933 on and because where did they come from they came from rampant predatory speculation in the 1920s so that mandate they've had for over 80 years and they take very seriously and when you look at ethereum as an ecosystem or bitcoin as an ecosystem block stream in the ethereum foundation other custodial entities are not informed about the vast majority of commercial surprises and events that occur so whatever privilege information they have internally that is not enough for them to actually get a good idea of the direction of the market uh and and so that is a that that's a very big difference i would say in the analysis of ethereum then in the analysis of ripple uh now they can counter argue that but then i'd say okay well what are the top 10 or 20 dapps in the xrp ecosystem that are distinctly different from your company your custodial company can you point to those and they actually didn't encourage the development of a dapp ecosystem they didn't encourage people to list currencies in xrp independent currencies there was no ico movement in ripple even though there could have been one they didn't encourage people to write smart contracts in ripple there was a great product called codius it never got off the ground it would have actually probably run ethereum and the entire d5 revolution could have been run on xrp but they didn't really do that much there and had they i guarantee you that it would have been actually in this counter filing of all these other people and they would have been able to get very close to the information asymmetry argument that's occurred okay so it goes on and on and on and on and on and there are a few things here that i think are are just blatantly unfair and i think there are some things that are extremely fair and they raise broader policy questions one thing is blatantly embarrassing well bitcoin and ethereum are totally controlled by the chinese government go [ __ ] yourself that's asinine absolutely asinine uh that's not a concern yes the centralization of mining power in places like china and the supply chain of asics in china is indeed a problem from an egalitarian mining viewpoint but by no means is the protocol beholden to that particular government and that's a pathetic argument to make yeah don't even make it it's beneath and it's just completely political uh that hasn't and no judge in the world is going to pay any attention to that so you're not going to get any brownie points from a legal sense but you can whine and complain to the regulator about it however there is something that i absolutely agree is a very fair argument uh so they said the way that the securities exchange commission went about this where the complaint the sec filed kind of pretended like they just showed up out of the blue and started having a conversation with uh ripple and they're now here on a white horse to save people they very fairly point out that the sec had been talking to ripple for over two and a half years two and a half years of dialogue back and forth knowing full well that ripple was divesting so if they had the opinion that it's always been a security and this should stop then why didn't they intervene when they first started talking to them two and a half years ago why now and the eight years later and giving them an opportunity to continue harming investors for two and a half years why didn't they file some form of injunction or try to stop them right at the beginning of the investigation why did they wait for continued divestment operations and growth of the business you know and so that that's an incredibly fair point from a regulatory view it's unfair for a regulator to watch you for eight years and then decide arbitrarily somewhere during that period that your conduct was problematic for that entire eight years after they've been engaged in dialogues with you for two and a half years i think the issue here is the wrong regulator is going after ripple the concern i think they have is they just think it's profoundly distasteful that chris and brad sold 600 million dollars worth of xrp and gave it to themselves i and honestly it should be the cftc in my view that's going after xrp there is an ecosystem there it is actually decentralized there are probably more than a million people who hold xrp and it is in a sense infrastructure that actually has use and utility we can argue whether that use in utility is competitive or valuable but billions of dollars of value are transacted on a weekly basis in this ecosystem and people are clearly using it as a currency in certain cases and it's a pretty good one uh when you compare it to fiat currencies i mean if wire transfers worked on the ripple protocol we would all instantly have money and we'd have a lot more security than uh what the existing system has okay the problem is that by saying it's a security to go after chris and brad it feels like an overreach and it feels like an uncomfortable analysis of this whole emerging information asymmetry sufficiently decentralized hidden fourth pillar of the howie test that's starting to be built and it's counterproductive to our industry it's counterproductive to what the sec has been trying to do letting a nascent industry define itself and grow by applying such a heavy hammer in this particular case also it's inexcusable to have a lack of interagency cooperation and coordination the fence and cftc and the sec have to talk to each other and have a joint viewpoint on how to handle enforcement and you can't have some regulatory bodies come in and say hey we're going to treat it this way and then another regulatory body come in and say hey we're going to treat it this way or else what you're doing is telling american entrepreneurs well guys uh you're going to be both a commodity and a security and a currency and we're going to regulate all you in every single way so you're going to have to be a money transmitter and apply to these commodity regulations and apply to these security regulations all at the same time and your competitors maybe we're not going to hold them to any standards or any regulation or anything like that so i can understand the frustration there and i can also understand the frustration of we're going to talk to you for two and a half years after you did something eight years ago and then after the entire process right before the administration changes we're going to file something and pretend like we weren't talking to you for two and a half years and say that the you know everybody's blindsided by this sale of xrp which we all knew was occurring actually a public and a private sense for two and a half years since the investigation began uh so it's a really interesting case i think it's a pretty strong counter filing although it has a lot of political flair in it and uh i believe it's gotten to a point where this is no longer just a normal enforcement action uh there's going to inevitably because of lobbying going to be political actors getting involved senators congressman perhaps the white house itself the new chairman gensler is probably going to have a lot to say and think about this and it's uh it's going to be really interesting and at the end of the day i think this could have been handled very differently uh 1.3 billion dollars is what they're talking about they've already caused 15 billion dollars worth of damage it's a team america event it's a bad deal and i think that um it's counterproductive for the whole industry to to do these types of things in a perfect world in my view the cftc should have went after chris and brad and said okay well we're gonna say it's a commodity and we're going to say you guys are a cartel and you control a majority of the supply of the commodity and you're doing things to manipulate the price of that commodity and there are very strong regulations and laws and there's a reason why debeers doesn't operate within the united states um if their company and the totality of all their business conduct was dragged into the u.s almost certainly u.s regulators would have serious problems with the way that they do certain things so they operate outside of the that jurisdiction and for good reason um dragging this into securities laws is is extremely problematic for the industry what they probably should have done is force the issue negotiated with ripple labs to further separate the custodianship of xrp and force the further decentralization of xrp and make ripple spend money to facilitate that through a development trust and other such things and correct the information of cemetery problems and get brad and chris to agree to pay some form of a fine and move on it's obviously the case that they just wanted to make this a big thing so i'm dragged into it now the foia letter uh in practice they'll just get an empty file on me and they'll get some stuff from the other people assuming the request goes through and uh i guess we see the legal strategy now um one pillar is the other regulators and global and americans say it's not a security uh the next pillar is china bitcoin uh china controls bitcoin and ethereum and this is harmful to american competitiveness if you go after us another pillar is the sec is doing more harm than good by going after us and they can actually quantify that by the market depreciation uh another pillar is that the sec had ample time to intervene and they intervene in a super political inconvenient way that is uh not not really becoming of a regulator and another pillar is that the sec has to put up or shut up they can't say one ecosystem like ethereum is sufficiently decentralized and so we're going to give it a security pass and then an ecosystem like ripple is not sufficiently decentralized they actually have to provide deeper clarity for that or else they're unequally enforcing the law uh on different parties now if you go into the rest of it there's a very detailed uh point-by-point howie analysis and you know whatever you know it's there's a lot of this stuff and it's boilerplate and legalese and uh and this is just the beginning i don't think the rebuttal is strong enough for a dismissal and i think what's going to end up happening is that it will go to trial and i guess there's a request for a jury trial so we'll see but all things considered it's going to be a long haul it's probably going to be years before this gets fully resolved and it's going to continue to escalate and get political it's very clear that ripple is well prepared to to fight the sec and this is going to be a big lawsuit uh and i think the it's going to end up in a situation where we get regulatory clarity at the very least we're going to get clarity on uh what constitutes sufficiently decentralized being defined through the lens of information and cemeteries we're going to get also a lot more clarity on best practices for enforcement regardless of how you feel about this i think it is a bad deal when a regulator intervenes and it harms retail investors and a regulator intervenes and it harms after they've talked to somebody for two and a half years you know either [ __ ] or get off the pot and it's not it's not reasonable to just let something drag out especially when you're concerned about the behavior if you have legitimate concerns that an unregistered security is being dumped on retail investors why would you let the firm continue doing that for two and a half years when you have the ability to stop them as an american company it makes no sense and that can't continue in this industry it also brings a broader meta question about unification of regulation the american regulatory system is not competitive if you have 5 or 10 or 15 different agencies have 5 or 10 or 15 different opinions and you can fully with one and then somehow be treated as a criminal for the other that makes no sense at all and this case demonstrates that in a profound way there was every opportunity in 2015 when the other members of the treasury department were looking into ripple for the sec to come in and hold an opinion about this for whatever reason they passed on that and they should have gotten involved and that was absolutely the time to bring a lawsuit like this and it probably would have been significantly more effective you know in a perfect world as i said it would have been much easier to negotiate a spinning out of the ripple protocol to kind of kick it to a a sufficiently decentralized uh state and then let it exist they seem to offer that courtesy to block one when they gave them a 24 million dollar fine for their erc 20 offering without harming the investors of the eos protocol they allowed that to exist independently of the organization and i'd argue that was a much more egregious offering than anything xrp has done so not very much clarity kind of fun to indirectly be dragged into it and we'll see what happens it's going to be a fun case to follow i hope this i hope this helps you guys with some clarity in the matter it's a good read it's on coindesk.com ripple response to sec lawsuit over xrp sales and they also give a link to the foia request in the article uh and so let me know what you guys think cheers
