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Protocol | Fintech

Ripple’s top lawyer on SEC battle: We’re fighting for the crypto industry

"The regulatory morass is resulting in bizarre outcomes," says Ripple General Counsel Stuart Alderoty.

​Ripple General Counsel Stuart Alderoty

Ripple General Counsel Stuart Alderoty says the company is fighting for a larger principle.

Photo: Ripple

Stuart Alderoty spent nearly two decades working for old, traditional banks doing work that he described as "a little soul-crushing." Then a door opened to "a strange new world."

A headhunter reached out about three years ago to ask if he would consider becoming general counsel for Ripple, then a 7-year-old startup. Ripple uses blockchain technology to process payments, but also offers its cryptocurrency called XRP, making the company a pioneer in a small but fast-growing industry.

It seemed like a crazy idea.

"I'll be honest with you — I didn't know much about blockchain, I knew less about crypto," he told Protocol. But Alderoty was intrigued and eventually took the job in January 2019. It was a major career shift that he now compares to "jumping off a cliff" -- but "in a really exhilarating way."

"As a lawyer, the opportunity to enter a relatively nascent industry and help craft a regulatory and legal framework for that industry from a blank slate was an opportunity that I couldn't pass up," he said.

Fast-forward two years: Alderoty, Ripple's general counsel, now finds himself on the frontlines of a major legal brawl with the U.S. government in a case that could define the future of bitcoin, cryptocurrency and the entire blockchain industry.

In December, in a move that stunned the crypto and blockchain world, the Securities and Exchange Commission sued Ripple, its founder and executive chairman Chris Larsen, and CEO Brad Garlinghouse, accusing the company of raising $1.3 billion in unregistered digital-asset securities. The crux of the SEC complaint is that XRP is not a currency, but a security, and therefore subject to strict securities laws.

Ripple, Larsen and Garlinghouse "failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system," Stephanie Avakian, then director of the SEC's enforcement division, said in a statement.

The lawsuit rocked Ripple. The value of XRP dropped dramatically. Coinbase, a major crypto exchange, suspended trading in XRP.

In an interview with Protocol, Alderoty explained Ripple's defense against the SEC's claims, the lawsuit's impact on the company and how this legal battle could have a serious impact on the entire crypto and blockchain industry.

This interview has been edited for clarity and brevity.

Where does the lawsuit stand? I've read about Ripple's desire to depose a former SEC official, who's just been revealed to be former director William Hinman.

One of our defenses in the case is that the SEC failed to give fair notice to market participants about which digital assets they would consider to be what's called investment contracts under the law or, stated even more precisely, how they would go about determining which digital assets would be investment contracts under the law. Not only have they failed to provide fair notice, we believe and we've alleged that they've actually created mass confusion in the marketplace.

A person of ordinary intelligence really couldn't figure out what was on the right side of the SEC interpretation and what was on the wrong side of the SEC interpretation. Part of our efforts in defending the lawsuit is to understand how the SEC is thinking about these issues itself internally.

[Hinman], we believe, was a central actor in creating the narrative for market participants, and actually creating much of the confusion that we still live with today.

A key difference that's been cited between XRP and other cryptocurrencies is that Ripple issued 100 billion units of XRP all at once for the Ripple network, unlike bitcoin and ether, which are still being created through mining. Therefore, it's more of a security than a currency, the argument goes. How do you respond to that claim?

The timeline of that is somewhat important. Prior to Ripple being founded, the XRP ledger was created, and 100 billion units of XRP were created on the ledger. No more will ever be created. Then Ripple was founded, and a portion of that 100 billion was gifted to Ripple. I don't think that's relevant to the security analysis whatsoever. The security analysis, it's the sort of esoteric test from a 1946 Supreme Court case called the Howey case. It doesn't matter whether the asset is to be created or is created. What matters is: Is the asset sold as part of an investment contract?

And here, the fundamental, simplest way to think about this case and why the SEC is so wrong about this case, is that Ripple never sold XRP as part of a contract for an investment.

From a legal standpoint, whether something is pre-mined or whether something is mined, be it through proof of work or through proof of stake, I think is pretty irrelevant to ultimately to the legal question that needs to be decided.

How has the case impacted Ripple's business?

Let me just take a really macro view. We think about the importance of this case, and the impact of this case much more broadly than Ripple. We think that this case is incredibly important to the digital asset industry in the United States.

That was actually my next question...

We're fighting not only to get to the right result for Ripple. We're fighting to get the right result for the industry. The industry should not be left to guess which tokens will show up one day in the crosshairs of the SEC and which tokens won't.

XRP is a token that's been freely and actively traded in a massive secondary market for more than eight years. If I were to check today, the volume of XRP trading is probably approaching $2 billion. The fact that you can have the SEC wake up one day on an asset that has been massively adopted, massively traded globally, and say after eight years, "Well, we think that this asset is now security. We need to treat it very differently." The industry can't operate that way.

How did we get through the looking glass where Coinbase is comfortable listing dogecoin, but somehow they're not comfortable listing XRP, the third-largest digital asset by market volume that's been in existence for eight years that's traded globally, because of the SEC suit? This is the regulatory morass we're in. That regulatory morass, I think, is resulting in kind of bizarre or perverse outcomes.

To your question about the impact on Ripple's business, we're a global company: 90% to 95% of our customers and flows occur outside of the U.S. Fortunately for Ripple, most other established economic centers like Singapore, like Japan, like the U.K., like Switzerland, have adopted a clear regulatory framework for digital assets.

Being a global company, do you want to be able to have a strong presence in the U.S.?

Absolutely. Will I sit here and tell you that it has not impacted our business? I can't tell you that. But fortunately, given that we're a global company, and given that the other geographies where we do business and have created clear regulatory frameworks, we're able to continue the business for most of our customers outside of the U.S.

If you think about the regulatory uncertainty and the chaos that the SEC has created in the U.S., they're basically ceding that innovation to foreign geographies.

There's a new SEC head, Gary Gensler, who's known as a crypto wonk and an expert on blockchain. He took the position after the case was filed. Do you expect that to have an impact on the case?

I think the prior administration, the administration that brought this lawsuit, I think they really demonstrated a fundamental lack of understanding about the industry, and the technology that underlies the industry. I think that's been proven by this lawsuit. I think it's been proven by some of the pronouncements they made while they were in office.

I think it is refreshing to have somebody like Gary Gensler in office because he taught blockchain and technology at MIT. Having somebody in office who knows the industry and knows the technology, I think that is far better than dealing with an administration that I believe simply did not understand the technology. What that translates into in terms of an opportunity to get to a clear regulatory framework in the U.S., I think that remains to be seen.

Are there ideas or proposals that you would like the SEC or Congress to explore when it comes to regulation?

There are a few things from a policy perspective that I think the policymakers need to keep their eye on. I would think of three things.

One is there's a lot of trading that goes on, both institutional and retail. So you want to make sure that the holders of these assets are protected at some level: consumer protection.

Two, you want to keep — to the extent you can — bad actors out of this space.

Third, there's a tremendous amount of concern around the impact of many of these assets on the climate. And I think all three of those need to come together. And there's no one regulatory body that I think can take ownership of all of all three.

So what I think needs to happen is we need to have a cross-functional working group among the key regulators, which is probably the SEC, the CFTC, the Department of Justice, FinCEN, Treasury and the industry to sit down through a formal rule-making process or a legislative process to see if we can get to a rational framework that balances regulation with innovation. So you don't have regulation that crushes innovation. There needs to be a balance.

We're not asking to be free of regulation. What we want is rational regulation that we can understand.

The analogy that has been drawn is if you think about what the Clinton administration was able to do in the mid-1990s with the internet, they recognized that they had an innovation that had a massive potential. They weren't sure what that massive potential would mean. But they knew enough not to regulate that new and fledgling innovation with laws, rules and regulations that were meant for rotary telephones and transistor radios.

You spent most of your career at traditional banks and financial institutions like CIT, HSBC and American Express. What was your initial reaction to the rise of bitcoin and crypto roughly a decade ago?

I've been practicing law for — hard for me to believe — 35 years now. The first half of that was with a traditional law firm, working my way up from associate to partner. The second half was in traditional financial services: American Express as managing counsel; at HSBC, as general counsel for North America; and ultimately, general counsel at CIT Group.

When I got the call from the headhunter placement firm to see whether I would be interested in the Ripple opportunity, I'll be honest with you, I didn't know much about blockchain, I knew less about crypto. I certainly was paying attention from afar to bitcoin. But I was immediately intrigued by the opportunity.

As a lawyer, the opportunity to enter a relatively nascent industry and help craft a regulatory and legal framework for that industry from a blank slate was an opportunity that I couldn't pass up; I really believe it was a once in a career opportunity.

But when I joined in January of 2019, the industry itself at that point was only about seven-ish years old. Every other institution I had ever worked for was more than a century old. It was still relatively young. And it was bubbling. But if you think about what has happened over the past two and a half years, it's gone from bubbling and simmering to boiling over.

The conversation, the interest and the inevitability of this industry, both in terms of the technology and the digital assets that support that technology, somewhere along the way that inflection point tipped.

The maturity of the conversation and the attention to this industry now compared to even two and a half years has grown exponentially.

What's been the toughest part of the transition? Less than two years after joining Ripple, you're now facing a major legal battle with the SEC.

The lawsuits, that's kind of what I'm built to do. When I was in private practice, I was a litigator. I was a trial lawyer. I also had two stints as a special assistant U.S. attorney for the government. I'm used to big, knotty, complicated regulatory and legal battles. Believe it or not, that's where I am most comfortable playing.

What's been most challenging in a good way is this is still incredibly entrepreneurial. If I look back, I've kind of played it pretty safe in my career — traditional law firm, associate to partner, traditional banks. So jumping off that cliff, doing something entrepreneurial, was a bit of a gut check. But I think in a really good way.

Working for banks as long as I have, after a while it gets a little soul-crushing. This has been really kind of exhilarating and rejuvenating personally and professionally.

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