The Securities and Exchange Commission (SEC) has lorded the sword of Damocles over fintech for years. It has used the blunt force of “regulation by enforcement” to make de facto rules against innovative companies rather than following the notice and comment steps required by the 1948 Administrative Procedure Act. Its lawsuits against Kik Interactive, Telegram and – most famously – Ripple shows the sledgehammer wielded for quick settlements that avoid judicial tests. But dozens of emails, if compelled by the court, could bring the agency’s reckoning.
The SEC took it too far with Ripple, accusing the enterprise blockchain company of failing to register the digital asset XRP as a security since 2013, even though it duly operates as a bona fide bridge currency. Exchanges immediately dropped trading of the Ripple currency XRP, and investors lost billions of dollars in value. The SEC’s flippant decision stoked a class-action firestorm from the ferocious, decentralized XRP community .
To justify its actions in court, the SEC has leaned heavily on the so-called Howey Test that an asset is a security if its value is derived by the actions of a third party. Fintech policy scholars debate whether the Supreme Court case about shares in Florida orange groves in the 1940s is applicable to blockchains and cryptocurrency.
In parallel, the XRP Army has organized into a putative class of over 60,000 retail XRP holders led by friend of the court John E. Deaton. They’ve crowd-sourced an investigation of evidence that Hinman while at the SEC earned $15 million in “retirement benefits” from Simpson Thacher, a law firm linked to Ethereum. This conflict of interest has also won the attention of Empower Oversight, a non-profit legal watchdog which filed a raft of FOIA requests. Such conflicts forced Clayton’s predecessor, Mary Jo White, to recuse herself from more than four dozen enforcement actions.
Adding yet another lawsuit against the agency, the watchdog’s FOIA requests have hit pay dirt, despite SEC claims that no relevant emails existed. These incriminating emails show the SEC’s lengthy process to explain away the unseemly payments to Hinman, including a memo by SEC ethics counsel and repeated warnings on criminal financial conduct.
Such brazen conduct is business as usual at the SEC. Outraged investors and consumers now seek justice in court, providing the reckoning that Congress should have imposed. This blasé acceptance to agency overreach could punish lawmakers in November.