hi everyone this is charles hoskinson broadcasting live from warm sunny colorado again on the same thing ripple ripple ripple um so anyway this is one of those uh interesting cases i said as facts materialize uh i'll keep you guys informed so we heard about it from a tweet yesterday and then fortune and coindesk and wall street journal covered it and uh then today there was the um counterfiling summary that rip provided and uh based upon that as i mentioned there was about an 80 chance the sec would pursue something so given that christmas is here and all this other stuff i thought for sure that uh nothing would come about that until at least a week or two a few hours uh after i made that video the sec announced the enforcement action against uh ripple and um uh they dropped a 71-page document that they follow southern district of manhattan uh so it did take a little bit of time for me to kind of read through it and take a look at key facts materials i and it's uh definitely a very interesting very unique case um it's not just against ripple but it's against two of the principles of ripple chris larson and brad garlinghouse the former ceo and founder and the current ceo and uh when i read through the entire document it blew my mind that it's not a 10 b5 case which would be securities fraud from what the what the sec is claiming so they request jury trial and it's very clear that this is a heavy-handed enforcement action this is not something that i think they're gonna want somebody to pay a fine uh the crux of the matter comes down to brad and chris according to the sec document about 1.3 billion worth of xrp was divested over an eight year period um about half of which to retail at about half the institutional if the numbers were right and brad and chris apparently got somewhere in the magnitude 600 million dollars personally now whether you think xrp is a security or not uh the fact that the principles of the company personally paid themselves 600 million dollars uh and that it seems like the company uh source its substantive operations funds uh from the sale of xrps is the matter that is causing uh the sticking point and what justifiably does piss off uh the sec especially given that the ripple company is equity financed and so it would be one thing if you had a large self-sustaining ecosystem where there's a lot of network value in that ecosystem and you don't need a custodial entity for it to function and you're equity financing a company to contribute appreciate value there it's another thing entirely for one entity to run the whole show and then for that entity uh when it has the option to use institutional investors sell equity to finance the growth of their ecosystem as they did as they were getting vc capital for their company instead to choose to finance operations for the divestment to retail investors of an instrument so uh this is definitely a big one and uh it's it's uh a lot larger than i expected um the problem is that the enforcement mechanism is very heavy-handed and ham-fisted in my prior statements i said that you know i don't think xrp is a security and i think in its current form its current use and the level of decentralization ecosystem has uh that that's certainly true now was it it was a ripple of security uh at some point during its life i'm sure a fair argument could be made that in 2012 2013 2014 uh those early years that there were security-like um characteristics to ripple that probably could have made it in security but uh that's probably was true of ethereum and it was certainly true of bitcoin in the early days and they have this concept of sufficiently decentralized uh that they've been kind of pushing around as a new standard the crux of the matter is that there's allegations of or at least a specter of market manipulation a specter of a horse and pony show information at cemeteries and evidence that the principles enrich themselves with 600 million dollars from divestment these are the facts of the case that are brought out and they're they're not flattering in any certain matter so who the hell knows what this is all going to turn out and the problem is that to get recourse and actually uh pursue an enforcement action under this model it creates problems for the industry as a whole it broadens the how we test in ways that are not just inconvenient they're dangerous to innovation in the united states on the other hand i can understand why the sec would bring the suit they'd say if you guys believe so much in your ecosystem and you had access to drayson horowitz and all this money in silicon valley why didn't you just hold on to your xrp and continue growing your parent company through vc investment and then once the ecosystem is sufficiently decentralized and broad and powerful then go ahead and divest why did you pay yourself first uh regardless of whether the ecosystem is greater or not and when you have the opportunity to use regulated smart money as opposed to retail money so it's um definitely not clean and this is definitely a uh is going to be a [ __ ] show for the entire industry and as with all of these cases when you have uh flirting with a 10b5 situation you're probably going to have a lot more to say from former employees current employees affiliates and associates for example there was already some things in the court filing about them offering large sums of money to get listed on certain exchanges and so forth and emails that came up and these types of things and that paper trail will only get deeper over time some foreign some domestic uh you know the other thing is that the sec is a civil agency it doesn't put people in jail it just charges them with securities violations but it's very common in large enforcement actions for multiple agencies to get involved in those enforcement actions it would not surprise me reading what's in the sec filing if we saw more agencies get involved at some point future and go beyond just civil actions and potentially go to criminal actions market manipulation and this type of behavior is not really well tolerated in the united states and once you have a target on your back and the regulators are pursuing it there tends to be a dog pile effect that occurs if they can get through that so in the coming weeks it wouldn't surprise me to see more said about this but it's certainly larger than i thought it was it it's one thing to say hey we're gonna have a big tussle about something being a security it's another thing saying we feel that the conduct of the principles of the company is uh materially predatory towards groups of people and presenting evidence that they've divested 600 million on the backs of these people uh and basically when they could have easily equity financed the company and grew grown the company so uh not clean not pretty and it's gonna be uh pretty pretty rush rough uh for uh for everybody on that side of the aisle now the open question of whether xrp security or not is a very interesting one i still believe given the facts of today that xrp is not a security and even if it was to be ruled to security and chris and brad suffer consequences for that from engorgement to other things uh who would run the ecosystem the system would still likely run there would still likely be adherence there'd still likely be network traffic and consensus nodes and these types of things so on the outset it doesn't look like it makes much sense to apply that standard the problem is that standard has to be applied to do what they want to do which is to hold the principles of the company personally liable for what they feel is misconduct uh counter to the goodwill of uh instant of retail investors so it's um it's not a pleasant situation in that respect anyway i highly recommend you guys take a look at um the 71-page document the sec uh pushed out it has some surprising information inside of it and again it's kind of surprising they released it right before christmas uh it's clearly something that they want to ensure is floating around their agency and floating around the news cycles prior to the regime change but i don't think this one's going to get dismissed i think this one's going to be in the courts definitely for a while i'm surprised they didn't go with a 10b5 given what they they presented kind of took it right up to the edge and then backed off uh and uh you know use your uh use your best judgment about where this goes now what does this mean for the industry as a whole um as i said broadening the howie test is always counterproductive or many cases counterproductive and it just shows you good governance matters checks and balances matter uh custodial standards matters transparency matters informational asymmetries are always problematic in the point of disclosures and the point of oversight is to ensure that they don't exist uh at least they don't exist in ways that are counterproductive to the most vulnerable in markets uh so there's gonna definitely be in 2021 a reckoning on the regulatory side and in the response to the regulatory side about how do we improve these governance problems that exist i don't think at the moment this suit will have any impact on any of the third generation cryptocurrencies there is a broader question about proof of stake in general and there's a big diversity of opinions about what does that mean and ethereum 2 is going to force that conversation because of its scale in the industry if we were all at the cardano size i think we could last another two or three years without any regulatory scrutiny or oversight and they would just kind of have a wait-and-see attitude but because ethereum is so large and has such an outsized influence and it is treated already differently um it's treated as a commodity i think their existence is going to provoke a broader conversation about proof of stake in general that is going to have a profound impact on the third generation cryptocurrencies and how they're regulated moving forward now uh ripple um probably won't but of course any broadening of the howie test would however if ripple is prevailed and it's not a security uh then it has the opposite effect in that it would greatly diminish the sec's capability to pursue um things on the proof of stake side or cryptocurrencies in general so it seems like they want to bet the farm on this one because there are facts and circumstances about the case that go beyond the academic application of howie and they go into the conduct of the principles of the company and how the principles of the company enrich themselves through the divestment of hundreds of millions of dollars of xrp and according to the sec exerted a great degree of influence and control over the price and attempted to manipulate the price in the market which is why i'm surprised it didn't become a 10b5 case that said this is the beginning of a process and again more regulatory agencies can come on and pursue up to criminal charges in addition to civil charges and there's going to be a long fight from here on out ripples extremely well capitalized company and they're represented by very competent council uh so they're not definitely not going to go down without a fight and because the principals and founders of the organization have dragged into this and that corporate veil is no longer apparent uh there really isn't a strong incentive to settle so much more will come you know as i said former employees current employees others will definitely talk and more evidence will be brought to bear and this is certainly a case that's going to be litigated for quite some time probably well over a year to two years it won't have an immediate impact on us the industry but it does have a definitional and clarity wise impact on uh securities laws as they are applied to cryptocurrencies in general and we'll kind of see where things go and what happens surprising document though very surprising i didn't expect quite that i and it was a long read as i mentioned 71 pages long that's uh that's a lot of stuff that's a lot of meat and potatoes and these are these are not easy documents to read because they contain a lot of technical language in terms of art and there's always of course a story now you have to be careful when you read it it's kind of like a divorce and you're reading the uh soon-to-be ex-wife's uh you know version of events of the marriage you know as uh well-intended as it could be it's probably not the fairest representation of facts and matters and the point of uh of a judicial system is to give people a chance to defend themselves so there will be a rebuttal and there will of course be things that were not mentioned which will certainly change the story and and so forth but in general the sec tends to have principles uh so these principles are that if you divest hundreds of millions of dollars when you don't have to on the backs of retail investors we're not going to like you very much uh that's a basic one especially when you haven't reached a certain level of success uh you know and they usually define that success as a self-sustaining ecosystem where you're no longer necessary to be around like it's okay for bill gates to sell his microsoft stock he's not really necessary for that company and he achieved a certain level of success there uh had he done it right after the ipo that'd be a different matter and securities laws reflects that and there are whole kinds of processes for insiders to divest and to be able to reach those milestones and some people take it up to the wire most people comply with that ripple had the opportunity to equity finance their growth as a company and use venture capital investment to develop out the ecosystem without divesting xrp organizations like the ethereum foundation do not because there's no equity to sell and there's no venture capitalist there so there is an expectation of some notion of divestment uh and you know you can say what you will about that it's a different financing model here's where they kind of double dipped and they had the best of both worlds and chose to utilize the more convenient of the two for liquidity and operational expenses and that's um an unlitigated but interesting area of law in the uh in the space as a whole so that's all i'm going to say about it there's nothing more to know probably no more videos coming as i said i didn't expect to see this so soon had i known it was coming today i would have read it first before making the video i made earlier um again i don't think xrp security with facts and circumstances as it is today um but the conduct of the insiders and how they've managed their treasury and what they've done with the ecosystem that's a different matter entirely and that doesn't to get recourse there it doesn't necessarily require ripple to be a security there are still many things that you can do in that respect as i mentioned it does not seem to impact the broader industry at the moment and a lot of people are going to opine on this especially since christmas vacations here and they have nothing better to do in the coming weeks and we'll learn a lot more and uh it would not surprise me to see more than one regulatory agency piggyback on this action either state or federal could be the southern district manhattan it could be irs or doj we'll see uh but uh that'll that'll happen probably after christmas there's no huge urgency there so anyway that's all i know here and uh your guess is as good as mine about where this one's gonna pan out where it's gonna go but it's going to get very messy some very nasty things are going to be said and done and probably a lot of friendships are going to be broken and a lot of lawyers speak and one thing's clear the real winner here are law firms they're going to be making seven to eight figures in legal fees before this is all said and done till next time cheers everyone and have a merry christmas
