hi everyone this is charles hoskinson broadcasting live from warm sunny colorado sitting in the office it's december 22nd 2020 and as i promised yesterday as i learned a little bit more about what's going on with ripple i'd go ahead and keep you guys in the loop uh so there's indeed a wells notice it looks like was sent to ripple which is why they replied and they did a very unorthodox thing where they actually released a summary of their well submission which is the rebuttal so generally what happens is if the sec is going to go after you um they do something uh they they send you a letter or you know a communication called a wells notice and then you reply to it and then they make a decision whether to file a lawsuit or not generally speaking if it gets to the wells notice stage about four or out of five times they pursue an enforcement action about 20 of the time they drop it give or take so anyway in the show notes i've included a summary of ripples well submission response it's about six pages long and they provide kind of a factual background an introduction they go ahead and provide a little bit of an analysis with the howie test and then they kind of ended on some policy reasons why it would be problematic uh if uh howie was applied so there's a lot of stuff here it's pretty meaty document and it's a very compelling response so based upon the response that they have it's obviously dependent on facts and circumstances it doesn't really look like the sec has a very strong case the other thing that's incredibly puzzling is the chairman of the sec is going to be leaving here towards the end of the year and so basically this colossal very high profile securities case would then be handed to an interim chairman starting next year in a completely new political administration so it's very very strange very unorthodox never really seen something like this before and it's typically not done they mentioned on-demand liquidity products they they mentioned statements from the doj and fincen back in 2015. uh they mentioned the unique node list the validators uh where the super majority is not in the hands of the ripple company uh and it definitely is going to have an impact on the space as a whole if this is it continues its way through so most likely outcome is that nothing is going to happen in the next few weeks and if there is going to be a filing in court that's probably going to occur january february time horizon and then this would be a litigation that would take potentially quite some time it could be greater than a year to two years of effort and it would definitely create regulatory clarity on what is a security and what is not a security uh but according to things that the sec has already said and done uh and their statements they've made on bitcoin and ethereum and the facts and circumstances of the xrp case i don't believe that um xrp is the security under the those standards and statements and it'd be quite problematic for the sec to capture this under their definition because it would inadvertently uh capture most of the cryptocurrency space if desired there's really no way to satisfy it and it's not clear how would you even operate a system for example if somebody was responsible for reporting if the reporting entity goes out of business the protocol and currency are still there so then who reports for it if ripple was to be a security then every u.s holder of xrp would be holding securities and actually in violation of securities laws themselves and they would lose all liquidity in the united states but then enjoy uh because they've already been approved as a currency or another instrument abroad uh different forms of liquidity abroad so it's incredibly puzzling case it's uh quite bizarre uh and just unbelievable to me that it would be issued right before christmas uh just a few days before the end of the year and when there's a transfer of power from one administration to another one group to another group and it looks like it looks like a bad decision all things considered so you guys should read the wealth submission the counter argument the summary that xrp put out and if there is a lawsuit we'll all be able to read that together but nothing's going to happen in the next few weeks it's going to take a little while and this is kind of the final threshold before they file as i mentioned four out of five times when it gets to this point they do twenty percent of the time they don't given the unorthodox reality of things uh they probably uh they probably will take this one a little bit more seriously uh and uh obviously uh ripple's gonna activate their billion dollar war chest to turn on their pr and media machine uh for us as an industry um this is really an existential moment for the us government to really get serious about whether they want to be a major player in the cryptocurrency space or not you know the probably the most poignant thing in this entire document is right on page six uh in section four c where it says no foreign regulator has determined that xrp is a security in fact the opposite is true the united states would be an unfortunate outlier you know the u.s likes to believe it controls the whole world and it runs every regulatory agency but the reality is it doesn't and that's becoming very clear as we go into the 21st century and this is kind of a bellwether test on whether it makes sense as a cryptocurrency infrastructure company to base your infrastructure company in the united states and do business in the u.s market or whether that market is closed off or not so as an industry it's in everyone's best interest whether they be ethereum or cardano or a polka dot for this to to be won by uh ripple um you know frankly there's no upside and giving such broad powers to a regulatory body uh where that regulatory body has no checks and balances or oversight and can basically arbitrarily at any point just decide oh well we're going to you know ruin your entire ecosystem there's eight years of history here for better for worse there's a lot of things that have happened a lot of steps have been taken and it's a very different ecosystem that it was in 2012 and that's true for most cryptocurrencies bitcoin included at a particular period of time all the things that were true about ripple were also true about bitcoin there was only one operator and one distributor so it would have been almost certainly a security under the this uh this draconian definition of things and how does that benefit the industry it really doesn't so it doesn't help to call xrp as coin as some prominent people in the cryptocurrency space did in the response to this event it's not a funny event it's an existential event for the industry as a whole the good news is i think that ripple will prevail and i think that xrp is going to win and i think that it was very stupid for the regulator to approach this case as they have done unless certain facts and circumstances materialize in the next 60 days to 90 days then indicate that there's something more than what is publicly known but on the surface with what we know what was said in the wells submission uh it just seems like a boneheaded thing similar to the fincen recent decision which was also pretty boneheaded and quite damaging to the industry as a whole but you know we in the cryptocurrency space uh we all knew this you know we knew that there was an uphill battle when dealing with financial regulation and there's a great degree of nepotism and corruption and uh and just counterproductive decisions that are made i will remind everybody that ripple made a decision to reward ben losky a man who caused profound damage and harm to the cryptocurrency industry in new york uh with a board seat and uh bringing him in so as long as a culture exists where those who do harm to our industry and to entrepreneurs trying to innovate and revolutionize that mentality is going to continue so not only do we need to win some short-term battles we definitely need to look at the policies as a whole and how this country handles financial regulation as a whole everything from investor definitions things like the howie test which really make no sense in the context of the 21st century we're no longer dealing with the 1940s i think we can do a little bit better uh and also the relationship of different actors in the ecosystem uh for example when you hold a cryptocurrency especially proof of stake cryptocurrencies this does give you certain rights these are distinctly different than the rights that you gain when you hold bitcoin or a security or a commodity or you know another asset we should live in a culture where we proactively try to align those with the best interest of the growth and stability and sustainability of the ecosystem as opposed to trying to to cut them up like some sort of bed of crusties to fit some arcane regulation or definition that's 70 years old or 80 years old or to avoid being in that particular box that's 70 years old or 80 years old and lawsuits like this and events like this they just at times show how short-sighted certain people can be or how certain people work for a small group of people to protect protect corporate interests as opposed to actually benefit consumers a lot of agency failures and regulatory failures in our industry there are a lot of problems in our industry and in many ways we're reliving the baronial age of the 19th century with the birth of wall street uh in the the wild west that it was and we're kind of doing that much faster than they did and we're seeing the similar types of behavior and collapses and so forth but the difference is that to regulate this industry you don't need to redo the regulation of the 1930s and 1940s you can regulate it in different ways and you can have different kinds of relationships with people so i think in many ways 2021 is going to be one of the most significant years in the history of our industry for cryptocurrency regulation in the united states and it's going to be the deciding year of whether the united states is a friendly jurisdiction the cryptocurrencies or hostile jurisdiction the cryptocurrencies and should the united states make the wrong decision i think cryptocurrencies are still here to stay i just think the united states will lose its edge and our fintech industry will collapse causing profound economic harm to the united states and we'll seed all of that abroad from our part we work mostly abroad we write software at home we do science at home but we don't pursue regulated activities at home and we do a lot of fintech innovation with governments in the developing world so we actually work directly with them and we talk about what do they want kyc and aml look like what do they want identity to look like and so forth it's very satisfying because you don't have an adversarial relationship with the regulator and you're also trying to improve things as opposed to comply with things but it's also frustrating because these systems in many cases are not batteries included they require a lot of hard work and that was the point of cardano to build a system that could accommodate all kinds of different regulatory models and all kinds of different use cases and as a financial operating system with that kind of utility is my belief that as we build up the system eventually entire economies can be run with this as the bedrock doing everything from property registration to peer-to-peer lending to insurance but also enforcement of regulatory regimes so making sure the right people get the right information making sure consumer protections are put in and making sure that there's rule of law within that economy especially in places where it's historically been absent this is a multi-year multi-decade endeavor they're going to be setbacks and it's not an easy endeavor and it's at times very frustrating but as i mentioned it's also at times very rewarding because when you do make progress you change people's lives i admire that ripple at least on its surface with its mission has been trying to innovate things like swift and interbank settlement and innovate the way that value moves around the world the reality is it shouldn't take five days to do a wire transfer and it shouldn't take enormous fees to be able to move large sums of money and uh with the systems that they've constructed there certainly is some innovation there and they always tried to take a hybrid approach where you have maximal decentralization and no centralized control with a cryptocurrency versus a central bank network where you have permission only and massive centralized control they were always trying to find that middle ground as an entity and they have done some great innovation like interledger and other things within that domain and it's quite unfortunate that this event has happened and before everybody says coin and print money out of thin air and these things the u.s government printed six trillion dollars out of thin air and continues to print trillions of dollars out of thin air so i don't for a moment want people to go and pick on a private company that creates creative ways to finance innovation this has nothing to do with some guy just making himself five bucks and walking off into the sunset if somebody wants to go and change something that's global scale they need capital in the hundreds of millions to billions of dollars and if i'm being told the u.s government can print money for a living then why can't ripple print money to services goal as tesla has done with their season equity offerings for example and now they've created a battery power revolution okay the world is different in the 21st century and monetary policy is no longer the sole dominion of a single entity and we no longer trust institutions to do these things properly and if we're going to outsource the private industry our healthcare our aerospace industry our fintech industry then we might as well outsource to them the same fundraising capitalization tools that the government holds dominion so say what you will about this particular entity i do think that there's value that they provide for the ecosystem and i think that their conduct has not crossed the threshold at least with the facts that i have today to indicate that this enforcement action was necessary in fact it's quite the opposite it is not only unnecessary it is irresponsible and dangerous for a regulatory body that is just about to experience profound change of leadership to do this and then burden the next set of leaders with that with that unfortunate task of litigating i would never do that if i was a ceo of a company about to retire in nine days i wouldn't call up somebody and say hey i'm going to go buy your company and the next ceo is going to have to figure that out that's what steve ballmer did with nikia acquisition to sasha and adela it was a horrible mess and it was an irresponsible thing to do during the changing of the guards you never do this in a regulatory setting so that alone is a disqualifier and mnuchin and his regime in the treasury department they've certainly done some very questionable things but recent regulatory events where they're setting fires on the way out are just profoundly distasteful and as an industry of course will survive and will push forward uh but you know this is just an indication that we need to fundamentally change our relationship with regulators um from our part we'll reach out to our friends in the congress in the senate and from our part of course we'll reach out to the relevant regulatory bodies and monitor the situation and try to get more clarity and more understanding of not only what is this but then what's going to happen next what's the treatment of proof-of-stake for example what are the custodial standards going to look like what are the definitions of defy moving forward what are the kycml standards for example with the fincen recent ruling they just said hey you have 15 days during the holiday to talk about it and we're not going to give you any clarity at all on how to comply so good luck and we'll let you know if you screw it up could you imagine that you know a police officer knocking on your door saying hey by the way we're going to be watching you very carefully and if you commit any crimes we're going to arrest you or write you a ticket you say okay well what crimes are you watching me or what would you like me to do he said we can't tell you that but we'll be watching that's effectively what fincen just did with this new wallet standard they said there's new standards we're not going to tell you what they are or how to comply with them but we will enforce them good luck this is not a proper way of regulating society it's not a proper way of running a government especially a democratic republic and there will definitely be many many many litigations in the coming months and statements the coming months for us as an industry we have money now as an industry we have political power now as an industry we have senators that like us as an industry we're no longer a nascent industry there are hundreds of billions of dollars at stake and this constituency is not going away and there's vested interest with the fangs the facebook amazons netflix's the googles the microsoft's and so forth to get involved in our industry at some point because there's trillions of dollars at stake and as a consequence the regulators no longer have the ability to run buckshot over us as an industry so there's definitely going to be some pushback and that pushback is going to get more aggressive and these regular bodies are going to start losing court cases and when they start losing then things will probably go in a very different direction and this probably is going to be the bellwether case if they choose to pursue it that will fundamentally change the progression of things in the united states so that's all i know i hope you guys can read the uh the reply of the wells wells notice and form your own opinions um but you know we as an industry do have to stand together especially when there's overreach and we as an industry have done a pretty good job of doing that from time to time um i think it was a bit distasteful for ripple to say that bitcoin and ethereum are susceptible to chinese control it's a bit xenophobic it doesn't really make sense yes the mining capacity is there and that's certainly an interesting thing but let's be clear here if the communist party of china makes a decision to try to co-opt or influence the ethereum network they're going to be forked out very quickly and it's the same for bitcoin so these are social systems and they have the ability to bounce back from centralized control and the very same arguments the sec is making against ripple ripple is now making against bitcoin and ethereum for a particular control mechanism i will remind ripple that their unique node validator list is an invitation only club you know they they decided how that was going to work with proof of stake systems like cardano and tazos and algorand it's a permissionless system you just have to hold the asset to have influence over it i don't get to determine that it's a key difference there so the industry really does need to stand together and the industry really does need to look at bellwether moments and the recent fincen ruling and the fatf travel rule application and this particular case are definitely big challenges in 2021 but i remain optimistic that not only are we going to overcome these challenges that i think ultimately it's going to actually reset america and put us in a much better regulatory environment for cryptocurrencies as a whole and allow us to be innovators again because that's what we do best in america we're innovators and i'd like to make sure we stay that way because if the world works better when we are all right that's all i know thank you guys so much for listening and uh i'll let you know uh the minute that we get more details but it's unlikely we will until a lawsuit is filed as i mentioned there's a four out of five chance at this point given the number is that a lawsuit will be filed but it is the case that with the changing of the guards the new administration may choose to drop this matter altogether so nothing has yet been filed uh the wells notice is kind of the last step before that step is taken so we'll see what occurs cheers
