Ep. 67. 101 Legal Briefing on Ripple & XRP Securities Ruling | Rebecca Matsumura, Fenwick

[00:00] Went to Equinox this morning, did a hard, hard workout. [00:04] took a steam after and I was like, it's time to detox. [00:08] and plug in. [00:09] and reset. Time to build. Time to build. Welcome to Boys Club Interviews. This is a show where we bring on people much smarter than us to talk about the new internet. I'm Natasha Hoskins. I'm Dina Burke. And this is Boys Club. Wait, is it just Boys Club? It's just Boys Club. The Boys Club podcast? No. Just Boys Club. Hello. Hey. We're back stateside. Back in the saddle. [00:39] Ring light and a mic stand. Works wonders. How are you feeling being back home? Feeling good. I mean, feeling sad because I'm not having like a glass of white wine at lunch with like four pieces of bread. But that's also why it's good that I'm home. [00:55] Okay, so on today's show, we had Rebecca Matsumura, who is an associate at Fenwick. And she also [01:09] in the crypto and Web3 legal landscape. And she came on and probably had a conversation that was [01:18] a lot more basic than the conversations she's been having lately. It was such a great interview, but I kept being like, okay, so to make sure I understand and for context, I was like, these are just nicer ways of me saying...

[01:31] I... [01:32] I need help. This is the cry for help. And she was so great. And honestly... She was so great. She was so great. How do you feel? Do you feel like briefed? Briefed. On what's occurring? Briefed. Fully briefed. And just... [01:44] 25, 30 minutes just action-packed with learning about... [01:49] security flaws, [01:51] the current state of the industry, what the Ripple XRP [01:55] ruling means for them and for holders and for the industry. So yeah, really great stuff. Yeah. I'd say that if you've been seeing the discourse over the past couple of weeks about Ripple and XRP and really needing a place to get a grounding, this is going to be a great interview for you. If... [02:14] your, I don't, we don't have to. Yeah, give somebody an out. Give somebody an out. [02:20] I'm just so present. We got so many notes in Paris about like. Let's save that for the feelings check-in. Okay. Okay. I'm having an existential crisis about the framing of this podcast. It's a great interview. Rebecca is fantastic. So give it a listen. Hey, Natasha, if someone wants to get into crypto or is looking for a better way to trade, where should they go? Oh, Dina, I'm so [02:44] We love you, Kraken.

[03:08] Rebecca Matsumura is an associate at Fenwick, where she does securities litigation for crypto and web through clients, as well as startup and token launches. Welcome to the show, Rebecca. Hey. We're so excited to have you on. It's been a long time coming. We wanted to have you on in particular to talk about the Ripple ruling that happened the week before last. Big news. Big news. Big news. The internet, well, crypto Twitter seemed to... [03:36] erupt in joy. [03:37] at that moment when we all found out. But as we've done more research, it seemed like the ruling maybe wasn't as clear cut as quote unquote, ripple isn't a security, though I did hear that phrase. [03:49] I want to say three or four times at ECC while we were there last week. So I think we're all, we're all needing an explainer. So we're particularly excited to have you on for that purpose. [03:58] Great. Excited to be here. Okay. So I feel like we should start for the listener on a TLDR on Ripple. So can you give us an overview on who Ripple is, what's going on, high level there? Yeah. And just, of course, before I begin, I have to give a disclaimer that the opinions I'm expressing here are mine. They're not the opinions of my current or former employers. I am a lawyer. I've heard another lawyer in this space use as an excellent disclaimer, which is, I'm not your lawyer. So anything I'd say here is not legal advice for any of the listeners. [04:28] should also mention that I worked at Ripple for a little over a year, working as litigation counsel, working closely on the SEC case, but nothing that I'm going to say is that information that's not publicly available about Ripple. So what does Ripple do? So Ripple is really dedicated to creating enterprise solutions that rely on crypto and particularly building on the XRP ledger, right? So a lot of their solutions revolve around kind of moving money across borders, trying to overcome the inefficiencies and difficulties in that sector.

[04:56] system. Their CEO likes to talk about the fact that, you know, under the current system, not using Ripple's products, the fastest way to get money to London is to get on a plane and fly to London, right? And then that's, you know, between New York and London, like two really sophisticated, integrated financial hubs, and not to mention if you're trying to get money, you know, to more remote corners of the globe. And so Ripple has a suite of products that are designed to address that problem and come up with new solutions. Some of them rely on crypto, some of [05:26] the XRP ledger the most is something that they call on-demand liquidity and their product where they basically allow you to convert one currency into XRP and then convert that currency into a different currency, which is... [05:39] you know, without going into like, I could have this forever without being too nerdy, a lot more efficient than the way that we do it otherwise. No, that's super helpful. So we're in enterprise land right now with Ripple. Yeah, yeah, that's an important point. They don't sell products to retail, right? And they never, as far as I know, they never have. Okay, okay, that's, that's super helpful context. Okay, so that's Ripple. That's like a bit of a grounding for this company. [06:01] What is this ruling about? What happened? Give us sort of the overview on the lawsuit with the SEC and then the ruling that came out last week. [06:09] Sure. And I'm actually, if it's all right, I'm going to step back and talk a little bit about. We love a step back. [06:15] Yeah. So let's put ourselves all back in 2020. Right. And in 2020, what's happening in the legal landscape with crypto is that the SEC has been kind of slowly building some cases. Right. So they've had a lot of, you know, negotiated settlements, particularly around ICOs with companies that didn't have the wherewithal to fight. Right. So they go to this to a to a blockchain company and they say, we think you're selling securities. We think you're doing it unregistered.

[06:39] you can just go ahead and give us your money now and shut down. And a lot of people like reasonably, like accepted that. And they were like, yeah, absolutely. I don't want to spend the rest of my life litigating against the SEC. Let's just get this over with. I'll move on to something else. Then there were a couple of cases where, you know, folks did kind of put up a fight, like Kik and Telegram, where they said like, no, we're really going to litigate this. And they lost pretty quickly and then ended up getting shut down. Ripple was filed. The case against Ripple was [07:09] really, really a lot of wherewithal to fight back against the SEC, right? So they hired some of the best lawyers in the space, put it to the SEC and said, no, we're not going to roll over. We're not going to do this. And from the beginning, the momentum has been very different than a lot of these other cases, right? Where it isn't a different one every single motion, but definitely the big picture, you know, what's been going on has been Ripple fighting back against the SEC and making a lot of progress, which we haven't seen in other cases. And so the ruling that just came [07:39] after all of this money that was spent on both sides, after all of these motions, summary judgment comes up before the court, which is basically both sides saying, we agree about some of these facts. Can we get rid of part of the case without going to trial? Okay, so what happened then last week was not a... [07:59] Conclusion. [08:00] to the case [08:02] it was an interim step. Is that an accurate categorization? Or? I think big picture, that's right. So there are a few things that remain in the case, but they're pretty small. Overall, like the major issues that people cared about, which is for Ripple's sales of XRP as security has been resolved. And so the case is done. And so what the court said was, you guys agree on enough of the facts that I can make this determination. We don't need to send it to a jury. We don't need to have further fact development and figure out what happened. You guys agree about what happens. Now all I have to do is apply the law to that.

[08:32] What remains in the case is the issue of whether Ripple's executives aided and abetted Ripple's sales that the court found to be on registered securities. That's a really small issue compared to the bigger picture of was Ripple selling on registered securities. [08:45] Okay, can you explain the ruling a bit for context and then I have some questions about the exact wording of it? Yeah, absolutely. So I think the way the SEC has wanted to frame the question in all of these cases is something like, is XRP a security, right? Was Telegram, was Grams a security, was KIC a security? And the court said that's not the way security flaws work. [09:06] And I personally think that that is the biggest, most important takeaway from the industry, which is that the court did not answer the question, is XRP a security? [09:14] Because that's actually a question that's not cognizable under the theories that are being advanced here. It doesn't make sense. Right? Like we've all heard about the Howey test, like the Howey test doesn't apply to assets. The Howey test applies to transactions. [09:26] So what the court did was look at three different transaction types that Ripple had engaged in and looked at the specifics of those and said, is this type of transaction a securities transaction? Is this type of transaction a securities transaction? Is this one? I think some people's takeaway was like, sometimes XRP is a security and sometimes it isn't. Actually, the court didn't look at that at all. The court looked at whether in particular types of transactions it was sold as a security. [09:48] Okay, I want to better understand the Howey test because... [09:52] People throw it around all the time. [09:54] People on crypto Twitter love to joke around about it, and I have a very loose... [10:00] understanding of what it actually is and means for the world and for the industry. So could you give us a primer on that so that I can understand the jokes really more than anything? Glad to be of service. So the Howie Tets comes from a Supreme Court case that was trying to figure out what the term investment contract means in the Securities Act. So in the Securities Act, where it's talking about the things the FCC gets to regulate, there's this laundry list of like stocks,

[10:27] bonds, swaps on securities. Like I can't even list them all. Just like, like there's like 20 items, this huge long list. One of the things in the list is investment contract. [10:36] And that is the thing that to now the SEC has focused in on as a way of establishing its jurisdiction over crypto, right, of establishing that it has the right under the statute that gives it power to come after crypto and force rules on crypto and do whatever, you know, what it thinks it needs to do. [10:51] So the Howey case was one of the early cases, figuring out what does investment contract mean? How are we going to treat that? [10:57] And in that case, it was this company that was selling like orange groves in Florida. Right. And they were saying, like, you're going to buy this orange grove. You're going to buy the flant. But also you can buy a management contract from us. And then we'll package up all the oranges from all everybody who has our management contract and sell the juice. And then you'll get a fortunate share back of the proceeds of the profits that we get from this venture. [11:17] So they're pretending like it's a land sale, but really it's like a partnership in this orange juice making company. Right. And that's what the court says an investment contract is. And in explaining that, they kind of lay out these elements that become the Howey test, which is an investment of money. [11:33] in a common enterprise with a reasonable expectation of profit from the efforts of others. [11:38] So in Howie, you're giving money to the Howie company. The Common Enterprise is this orange juice company. And because of the way it was marketed, the people who are giving this money expect that they're gonna get profits by just sitting there and doing nothing. [11:50] Right. But they're not going to have to manage it. They're not going to have to figure out when to grow and pick the oranges and turn them into juice and how to sell them. Like how he's going to do all of that for them. Right. And they're going to get money from it.

[12:00] So that's what the Howey test is. And so up until now, that has been the kind of hook that the SEC has mostly hung their arguments about crypto on. I keep saying up until now because I think that one light, small change we might see after the Ripple ruling is that the SEC starts picking new things from the laundry list. I see. Okay. And saying that crypto is a security for some other reason, right? So they don't have to get around the Ripple ruling. That's one way they may distinguish it. [12:24] Okay. And can you talk about the issue if [12:27] crypto were to be deemed a security like the concern is that securities get regulated differently and there's more onerous and [12:34] regulation around something that's deemed a security. And so if crypto were to be put into that bucket, it would have a cascade effect downstream. Like, can you talk more about that aspect of it? Yeah. And I think probably, you know, in full disclosure, I'm like a really progressive Democrat. Like I love regulation. I think the SEC has a really important job to protect retail. I think securities laws should exist. And I think that in a lot of context, that, you know, onerous regime makes a ton of sense. Because they're protecting consumers and [13:04] getting rugged exactly right because the reason why securities laws exist is because unlike in other things like i buy this lipstick i can kind of look at the lipstick see how it works you know like figure out if i like the color on me whatever but with securities when i'm buying a share in somebody's company i don't know what's behind that curtain right and so the securities laws exist so that you have some reasonable idea about what you're buying and what you're supposed to get from it so just kind of big picture if some people will say the problem is that it's onerous i don't think

[13:34] there's a lot of context where onerous regulation makes a ton of sense and protects people. The problem with crypto assets being deemed securities across the board is that there's no way to comply. [13:44] It's impossible. Right, like let me tell you, like I said, like you said in my intro, like I work at a really good law firm on token launching with really great lawyers who take our jobs really seriously. If there was a way to comply with securities laws, [13:55] You can bet your britches that's what we would be doing. Okay. You can't do it in a decentralized project. It doesn't make sense because the security laws are written with the idea that there's a centralized entity, usually a company, that's in charge of everything and has all of the inside information in one place. [14:11] That is not a description that I would give to any of like certainly none of my clients and certainly no like true crypto or Web3 project. So. [14:19] the effects would be bad. Not good. Yeah, I mean, it's like, yeah, it's impossible, right? Like, we would just get to a point where, like, if you wanted to be a serious player, [14:29] If you want to comply with the laws, which like certainly all of our clients do, otherwise they wouldn't be paying so much money for us to help them. They want to do it correctly. Right. And right now, because there's kind of this gray area, like there's different ways that people are trying to comply and doing their best. If it really comes down that it's like, no, every crypto asset is a security and you have to comply with the [redacted address] that a centralized company does. Then kind of ironically, like I think all we're left with are the charlatans. Right.

[14:59] and the only people who will be left are the scammers. Is that because of the fluidity of these tokens and how they are so easily moved around and in a way that doesn't... [15:12] have everyone KYC'd and [15:15] So something goes up on Uniswap and it gets swapped and who knows who the counterparty is. And is it because of that? No, it's more because it's because of the decentralization, right? You could have a company that had a centralized token where they controlled everything and they made all of the decisions about the protocol and they and it's still traded on Uniswap and Coinbase and all of these places, right? Like that's possible. [15:45] with the market. [15:46] But in a decentralized project, there's nobody who has that information. Like who's going to do the registration? Who's going to put out the 10K? And who's going to fill out the form and say, here's everything that's going on that's important that you should know if you buy this token? Like literally who? Because there's no individual or company that has access to that information in a decentralized project. And it's all public anyway. Like it's already all out there. [16:16] all of this public information and publish it. Like it just, it's completely antithetical to the way that the security laws are set up. [16:22] Okay, okay, that's super helpful. So a piece that Fenwick put out, a blog post around this ruling, was this [16:29] line that was really helpful for me is it's the transaction, not the token. And that's what this ruling maybe summarized into one sentence is about is that XRP, which is the token of Ripple, what the ruling really came down as was looking at these individual transactions that were happening that the SEC was suing them for and making decisions on those transactions as opposed to

[16:52] making a decision on XRP as a security as a whole. Yes, that's exactly right. And if you think about it, the Supreme Court in Howie did not say that oranges are securities, right? Like that makes no sense. What the court said in Howie was the way that the Howie company was selling these orange groves was really basically they were selling kind of limited partnership agreements in their company, right? And then that made it a security, right? In the same way, all of these other cases after Howie are about things like live beavers for pelts and rare coins and like all of these things that [17:22] And so the Ripple Court rightly, I think, said the question in crypto cases is not whether the asset is a security, right? At least as long as we're talking about Howey and whether it's an investment contract. The question in those cases is whether it's being sold pursuant to an investment contract. And that's going to differ depending on the particularities of the transaction. So that's all clear-ish. I mean, I'm not going to say it's crystal clear, but we're tracking. [17:52] XRP on exchanges for quote unquote retail, or they called it, they kept using the word programmatic, which I'm not quite sure why that was the word that was used, but basically essentially for retail, for everyday people who are buying and selling XRP, that sale is not... [18:07] deemed [18:08] the sale of an unregistered security, but for institutional investors. So where and when Ripple [18:15] was selling XRP token to institutional money that did look like an unregistered security sale. Is that an accurate way to talk about what happened? Yeah. So the court looked at three different kinds of transactions, right? And the first were what they called institutional sales. And these were sales that were like pretty early in the kind of life cycle of setting up Ripple and figuring out what its products were going to be for the most part. And those were sales, like you said, to sophisticated institutions where, I mean, you know, it kind of to the core, it looks like a financing, right? Where they're buying this,

[18:45] of assets so that Ripple can develop products that use this asset. Ripple's making lots of disclosures to them. They're buying way more than they would need to participate in Ripple's products. And it really looks like what they're doing is similar to Howie, where they're kind of actually investing in the business, even though they're calling it an asset sale, right? That's deemed to be a securities transaction. And just for some context, poor Ripple was like so early in the industry, right? That they didn't have the benefit of like all the experience we have now. But the [19:15] And they treat them as securities, right? Because I think after the kind of ICO boom and all of the regulation around that and enforcement around that, people kind of realized like, yeah, those types of transactions probably are security transactions. But there's exemptions, right? And so you can kind of still do them in an compliant way. [19:45] monetize their own asset, blah, blah, blah, whatever their purposes were, those sales were deemed not to be pursuant to an investment contract, crucially because they're [19:53] the purchasers have no idea if they're buying from Ripple. And there's no reason to think that they're buying from Ripple, right? Because at this point, XRP is so decentralized that I think that the statistic the court uses that by 2017, less than 1% of sales on exchanges of XRP are from Ripple. [20:09] So if you're buying XRP, like the odds that you're buying from Ripple are actually pretty small. Right. And because of that decentralization, there's no reason to think you're buying from Ripple. So how would you possibly have a contract relationship with them, much less an investment contract with them? OK, that was me in 2017. That was one of the first tokens I bought was XRP. Did you hold it? Yeah, but like on wallets that I have no idea.

[20:33] So dumb. OK, Rebecca, this is this is great. [20:39] There was no security, like cheers. And so I need to understand, because from what I'm hearing from you, it's like, [20:45] okay, there's all these caveats and it's a little bit ambiguous in certain places, but like overall good news. And I am trying to reconcile that with the euphoria that people seem to be feeling around this ruling and why it's making folks feel so bullish about the space. What are people extrapolating out? [21:03] there's a header right now that says XRP is not a security. Read more here. So they're getting that language from Ripple. [21:12] So I will say, you know, I was also euphoric, right? Like, I think this is really, really good news. And I think that the reason why it's such good news is that up until this point, there has not been a case where the SEC has said, [21:24] a crypto asset is a security, and a court has said no. [21:28] Every time the SEC has said a crypto asset is a security and a court has been acidified, the court has said, you're correct, I should say. So this is a win, right? Like, this is a big win. Because if you think about what happens in court cases, right, like going forward when I'm, you know, defending clients in SEC investigations, we're saying, no, no, no, our client is different. Things are different here, distinguishing from all of these other things. And the SEC is saying, look at this litany of settlements and courts agreeing with us and other people agreeing with us. Like, everything's a security. [21:58] back to them and say, but Ripple. Not every court is not buying what you're selling. So I think that's really, really good news and a cause for celebration. I certainly celebrated.

[22:07] Got it. So we now have a ruling on our side. Well, not taking sides, but there is a ruling on the side. On a side somewhere. Yeah. Yeah. On the side of crypto. And that, you know, and that is a big deal. But of course, like, you know, and then kind of to get back to the caveats, because, you know, lawyers, I always have to bring the mood down. [22:27] It's one, like we won one battle. The war is still going on. Yeah. Right. Okay. And let's talk about that war. So the SEC, they continue to bring these cases, presumably, and there is a broader agenda that Gary Gensler seems to be pushing forth. How does this one individual ruling affect the sort of broader agenda? [22:50] tenor of what's happening at the SEC as it relates to crypto and even broader, like in the administration generally. Yeah. So this is rank speculation, right? Because I'm not at the FPP. I just like to caveat with that. But my rank speculation is that this doesn't change anything for them, right? Any more than after we lost Kik or Library. And we, I mean, the industry, like after the industry lost those cases, we didn't just like roll over and say, you're right, SEC, it's all security. [23:20] trying to, we're done with regulation by enforcement. Like that's not what's gonna happen. What I think the SEC will do is just continue along the path they were always on because their hope is that, you know, this is one district court case. [23:31] This is not binding on anybody. This isn't binding on the judge down the hall. This isn't even binding on Judge Torres in a subsequent case if she decides the facts are different. Or if she just changes her mind. None of this is binding. It's all just persuasive. And so I think what the FCC would be hoping, if I were them, is that this becomes one outlier case.

[23:48] And then every other judge looks at this a different way, distinguishes from Ripple. And then eventually, like, it just becomes this one outlier case where the SEC just keeps winning everything else. And she got it wrong, you know? Bummer. Yeah, yeah. Okay, I want to end with a question around what you think this opens up. You've talked a little bit about this over the course of this interview, but working with projects that are thinking about or working on launching tokens in a compliant way and working with startups who are in this space. [24:18] For your work and for an industry that you love, what do you think will open up with this ruling? So I think it's in some ways it was unsurprising to me, a lot of the stuff in the ruling. Like this really tracks with what I've been thinking for a long time is the way that how we should be applied to crypto assets and the way that this should be analyzed. So I'm not sure it changes anything dramatically. But what I want to say in response to your question, which is like kind of a different question, but really important, I think, for people to understand. [24:48] the need for decentralization more than ever. XRP has a reputation of being a really centralized coin that is controlled by Ripple and like, man, and I've heard people say like, if XRP isn't a security, nothing is a security. And that to me is the most dangerous take. [25:03] Because if you really look at the ruling and read it closely, a lot of the kind of logic that the court relies on relies on the fact that XRP is so decentralized. I mean, I'm not here to argue with people. I know a lot of people hate XRP. Put that aside. Whatever you think the reality is, the facts that were before the court, I can tell you this, were that XRP is a decentralized project. There are people buying XRP you've never heard of Ripple. There are people using XRP unrelated to Ripple's products because they like the attributes it has as an asset. There's a lot of development going on on the XRP ledger that has nothing to do with Ripple.

[25:33] That's the facts that the court heard. And that's what informed her ruling. So I don't want people to take away from this like, oh, wow, like, just like I think XRP is completely controlled by Ripple. Now I can completely control my token. Like, that is not what the court said, right? What the court really ruled on was that huge decentralized project like this that's been around for a decade and has tons of people building on it. It's not something that makes sense from the securities laws. And I think that that's kind of lost in a lot of the conversation and something I definitely want. You know, if there's one takeaway, I think the takeaway should be like putting aside whatever you think about XRP. [26:03] It is decentralized. That's what the court ruled on. Decentralization remains as key as ever. And then, you know, of course, I got like my bias. Like I think decentralization is important for like, I don't know, ethical reasons or something, but also for legal reasons. Also for securities reasons. [26:33] I'm on Twitter and most of the socials at Reba Matsumara. Amazing. Link in show notes. Thank you, Rebecca. Kraken is a crypto OG. They have more than 10 million clients around the world that trust them with their crypto needs. They're one of the largest crypto platforms out there with some of the highest security standards in the industry. So you can rest easy that your funds and your privacy are safe for the keeping. And if you need help along the way, as we all do sometimes, Kraken's award-winning client support team is available 24-7 every day of the year.

[27:03] This is a true story. I've actually hit them up a few times with very dumb questions about our account and they were so nice and so patient. It just takes a few minutes to get started today at kraken.com backslash boys club. [27:15] Okay, I've got a draft tweet. We need to do something about X, the X rerun today. Oh, we do, we do, we do, we do. [27:21] actually had a tweet ready for X, but it's not that funny. [27:25] But I opened it up on my computer and I saw it. [27:28] On Twitter. [27:30] And I almost took a screenshot and said, this looks like something I would design in Canva. It's so bad. Like, it's so the placement of it on the web app. I'm like, this is so embarrassing for them. I like that. It's a draft tweet. Okay. Is that your draft tweet? No, no. I've got a draft tweet here. [27:45] of this really great wine bar and ice cream shop. [27:49] In Paris. [27:50] that I went to a few times. [27:52] It has a sign outside that says no TikTok. [27:55] Like in big, bold letters, no TikTok. [27:57] And I have a video of me like zooming in on it. And then my caption was jokes on you. I'm only on Twitter. Nice. Should I send it? Yes. Okay. You should send it. Okay. What's yours? I don't have any. You don't have any? I've been tweeting. [28:10] I've been tweeting. I mean, I have a few like half-baked ideas, but I don't, I've been tweeting. I've been tweeting a lot. So I don't have any, I don't have any in the queue. I do have one that says fun only from here on out. Nice. I wanted to change our Twitter bio to fun only. [28:25] Yeah, I kind of like that. So, oh, just kind of. Well, I think that people were missing context for it. Yeah, of course. I think we can just start to build the context for it. That's part of the joke. It's an inside joke.

[28:35] Your Twitter bio being an inside joke is very on brand for us. Okay. Bye. Okay. Bye. [28:42] Dina, where are we going to be in September? We are going to be at Permissionless in Austin, Texas. Permissionless too. It's happening. And we're curating the culture track for the conference. So if you're into the stuff we talk about here, you should come and have a good time with us. So email your boss at... [28:59] Tell them that you need to go and buy your ticket now. They will never be as cheap as they are today. And we also have a promo code in our Discord for Boys Club members. Come hang in Austin. [29:13] This is where we make an ask. We're in our call to action era. It's CTA times. Rate and review this podcast. Subscribe to our newsletter. And if you're feeling extra generous... [29:25] Send it to one friend. [29:28] Thank you for listening. We love you. Bye.