Secret SEC Emails Released

In 2018, SEC Director of Corporation Finance William Hinman gave a speech in which he expressed his view that Ether is not a security due to being a decentralized asset without any controlling party.

It sounds good, but that same speech also created years of confusion over what cryptocurrencies do count as securities. It’s a question that still doesn’t have an answer, and is now the focus of SEC lawsuits against Coinbase and Binance.

But, somehow, there’s even more surrounding this infamous speech.

The Emails

That more is a set of emails tied to the speech. The SEC fought for years to keep these emails secret, but thanks to Ripple’s own-battle with the SEC, we now finally know what is in them.

The emails show a back and forth between Hinman and SEC officials over the language in his speech. They debated over the facts of the cases Hinman cited. They debated over his declarations surrounding Ether’s security status. And, most importantly, they debated over his interpretation of the Howey Test and how it applies to digital assets.

Sufficiently Decentralized

Hinman believes that cryptocurrencies aren’t a security if they are sufficiently decentralized. Not only that, but he believes that a crypto could start as a security and morph into a non-security once it reaches sufficient decentralization.

As the SEC officials pointed out in the emails, that’s an issue for the SEC, as it creates a “regulatory gap” between digital assets and securities law. In other words, there are many digital assets that might not technically be a security, but could benefit from regulation. In other other words, exactly what Coinbase has been saying for years.

However, that’s not the only thing the SEC expressed concern about in these emails.

Morphing

The SEC was very concerned about the concept of morphing (an asset going from security to non-security), and for good reason. For one, it opens up the door to arguments that other crypto assets are no longer securities. That could expose them to a massive headache. And for another, it possibly paints them as hypocrites. Let us explain.

The speech and the emails clearly show that at one point the SEC believed Ether was not a security. So, if the SEC was to argue differently today, they have to make the case that Ether has morphed from not a security to a security, thereby acknowledging the idea of morphing.

That is something SEC Chair Gary Gensler desperately wants to avoid, but now looks increasingly impossible to do.

The bottom line is this: the combination of sufficient decentralization and morphing opens the door to a new legal argument in defense of cryptocurrencies against the SEC.