The Hinman Documents - What can we conclude?

The recently released Hinman emails are seen as an antidote to the SEC's strict crypto regulation. But what exactly do the documents reveal?

Exactly five years ago, the former Director of Corporate Finance at the SEC (William Hinman) caused a stir in the crypto sector. Because during his speech at the "Yahoo Finance All Markets Summit," he stated that Ethereum and Bitcoin are not securities.

The text of Hinman's speech, as well as internal documents about it previously kept under wraps, play an important role in the case years later Ripple versus SEC. And would have far-reaching implications for the rest of the industry. Although the SEC unsuccessfully tried in court to seal "Hinman documents", they were recently made public.

Ethereum: "no effect" - or is it?

The Hinman documents show a draft of the then SEC director's speech. In an e-mail exchange with his colleagues, he asked them to comment on the text and make observations. In doing so, he confirmed statements that were already known, namely that "we see no need to regulate Ether as a security." A colleague's comment stated this fundamentally: "We fully support the speech and agree with the message being communicated."

So the implications of Hinman's statements seem clear at first glance. And presumably make it difficult for the SEC to classify Ethereum as a security. This fact was already a thorn in the side of some of Hinman's colleagues at the time. They disliked the clear statement on Ether because it would lead to "difficulties" in "taking a different position" in the future, as it says in the documents.

Hinman's speech, however, predates the Ethereum network's operation under the proof-of-stake consensus mechanism. With the switch last year, Ethereum may have left itself vulnerable. This is because the current SEC chief, Gary Gensler, is particularly critical of the deployment of cryptocurrencies. The fact that Gensler continued to dodge the question of whether Ethereum should be regulated as a security may have been related to Hinman's speech, as is now becoming clear.

However, this does not fully clarify the classification of the second-largest cryptocurrency. Burdensome for Ethereum could be statements by Hinman that he apparently communicated with Ethereum founder Vitalik Buterin before his speech. "We also have a phone conversation with Buterin later this week to confirm how the Ethereum Foundation works," Hinman told colleagues. While this process would not be unusual for a regulator, there could be a conflict of interest here. Some speculate even that Hinman would have come to his judgment under the strong influence of the Ethereum Foundation.

Ripple - "It was worth the wait".

The statements in the Hinman documents could potentially have a favorable impact on Ripple (XRP), which has long been involved in a legal dispute with the U.S. Securities and Exchange Commission. Before the documents were published, Ripple CEO Brad Garlinghouse hinted at a positive impact on his company's defense. He stated that waiting more than 18 months for the documents to be published would have been "worth it."

From Ripple's perspective, Hinman's statements contradict the SEC's classification of XRP as a security. The SEC had claimed in court that Hinman had spoken only on behalf of himself during his speech, but not on behalf of the agency or his department. However, it is clear from the documents that there was internal collusion, including with Jay Clayton (the SEC's head at the time), before Hinman published his final version.

Exactly what benefit Ripple derives from Hinman's statements about Ethereum, however, is not initially clear. First, Ripple might draw the comparison to Ethereum to bolster its own defense. But Ripple's CLO, Stuart Alderoty, fundamentally disputes the validity of Hinman's statements. According to him, he should not have judged Ether publicly in the first place. Nevertheless, the company and its community see the publication of the documents as a clear victory. The trial could thus enter the decisive phase.

Crypto-Tokens: Effects, or not?

Meanwhile, the broader crypto sector is hoping for a positive precedent from a possible Ripple victory. If the company were to prevail against the SEC, the agency would have little leverage in its recent lawsuits against Binance at Coinbase, the thinking goes. Therein, some cryptocurrencies, including Solana (SOL), Cardano (ADA) and Polygon (MATIC), are also classified as securities by the SEC.

But Hinman's new papers basically contain no counterarguments in favor of individual tokens other than Ethereum and Bitcoin. Hinman does note in his speech that "there may be other decentralized networks where regulation of the tokens operating on them would not be justified." At the same time, he said, there are scenarios in which a company's success is the responsibility of the actions of "central actors." And so the securities laws would also apply.

According to new court documents Ripple claims that Hinman's ambiguous wording was no accident. Emails from Hinman allegedly show that the SEC was aware that his speech would cause confusion among investors and deliberately advised to spare the public further details. This course of action later gave the agency more flexibility to classify other tokens in its own way, it is alleged. Ripple also argues that redacted passages in the Hinman documents show that the SEC changed its own assessment of previously "irrelevant" properties of a token several times. For example, in 2018, the agency held that a token lockup for team members and early supporters was not indicative of an impact. Subsequently, the SEC revised this opinion and used it against the technology company Ripple in their case.

Little clarity and unanswered questions

Overall, the Hinman documents create further ambiguity in which the intentions of individual parties cannot be fully understood. They demonstrate a certain inconsistency on the part of the U.S. Securities and Exchange Commission. In preparing his speech, Hinman appears to have ignored the advice of his colleagues on several points. In turn, the colleagues themselves seemed to disagree on the legal framework in which cryptocurrencies should be classified. Therefore, the documents now published still show a picture of an authority reluctant to provide clarity on underlying issues. This fact could likely help Ripple and Coinbase in court.

Meanwhile, Hinman's speech refers to "sufficient decentralization," which could be decisive in whether individual cryptocurrencies are considered securities or not. This is seen as the first indication of what protects a coin or token from the currently criticized classification. According to the documents, both Bitcoin and Ethereum are unlikely to be securities. While there is no official recognition yet, at least the SEC seems to be confirming this with its actions so far, as many expected.

According to Paul Grewal (Chief Legal Officer of Coinbase), the Hinman documents ultimately point to a "regulatory gap." He believes that U.S. securities law is simply outdated. Regulating all cryptocurrencies under the existing guidelines will not work, according to him. It appears from emails with former director Hinman that members of the SEC have recognized this gap before. In this sense, the regulatory style of the U.S. Securities and Exchange Commission indeed has a crucial weakness.