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The SEC Ethereum ‘Free Pass’ Theory and Why It’s Important for Crypto

Ripple recently celebrated its one-year anniversary. No, not the anniversary of its founding, but rather the anniversary of its legal dispute with the Securities and Exchange Commission, which on December 22, 2020 charged Ripple Labs and two of its executives with conducting a $1.3 billion unregistered securities offering.

The immediate effect of this charge was to tank the price of XRP, which fell from $0.517176 to $0.212070 on December 31. However, as negative as the SEC’s case initially was for Ripple, there has been significant fightback on various fronts, from XRP’s market performance to the dogged legal defense proffered by Ripple’s lawyers. In addition, members of the wider XRP and cryptocurrency communities — including attorneys working within the industry — have pointed out the serious inconsistencies inherent to the SEC targeting Ripple, and not Ethereum as well.

Proponents of the so-called ‘free pass theory’ have even highlighted that key SEC figures have professional and financial interests that naturally align them with Ethereum (and Bitcoin). They’ve therefore claimed that the SEC’s case against Ripple is potentially part of a conspiracy intended to damage Ripple and XRP. And while there may be no real proof that this is true, the contradictions and conflicts (of interest) attached to the SEC’s charges are ultimately positive for crypto in the long term.

What happens if crypto is cut off?

What is the Ethereum Free Pass Theory? How Does it Relate to the SEC’s Case Against Ripple?

The most prominent and credible proponent of the theory that the SEC has given Ethereum a free pass (and has also aimed to undermine Ripple) is John E. Deaton, an attorney and founder of Crypto-Law.US. Deaton summarized the core claims — as well as facts — of the theory in a Twitter thread published on December 27 , 2021.


As outlined by Deaton, the Ethereum free pass theory can be broken down into the following sub-claims. Note that these are generally supported by verifiable evidence and/or documentation.

  • Ethereum held its initial coin offering in 2014, organized by (among others) Vitalik Butring, Gavin Wood, Joseph Lubin and Steven Nerayoff.

  • In December 2017, the director of the SEC’s Division of Corporation Finance, William Hinman, met with ConsenSys’ Joseph Lubin. Multiple meetings between ConsenSys and SEC officials were also held in 2018, in order to lobby the regulator to provide ethereum with a regulatory ‘free pass.’

  • Also in 2017, the Ethereum Enterprise Alliance was founded. One of its members includes Simpson Thacher & Bartlett, the law firm at which Hinman worked before joining the SEC.

  • For the December 2017 meeting with the SEC, ConsenSys and Joe Lubin were legally represented by Jay Clayton’s law firm, Sullivan & Cromwell. Two months before the SEC filed its case against Ripple in December 2020, this same law firm assisted ConsenSys in its acquisition from JPMorgan of the Quroum enterprise blockchain, a rival to Ripple. It’s also worth pointing out that when Clayton became SEC chair in 2017, he was grilled by Senator Elizabeth Warren on how he would be barred from voting on the SEC on matters involving clients of his law firm.

  • In January 2018, Clayton met with Andreessen Horowitz’s Chris Dixon, during which meeting the SEC chairman instructed Dixon to round up key industry figures in order to prepare a proposal on how the SEC might regulate the cryptocurrency space (including ICOs).

  • Despite having been launched in 2012 and being the second-biggest cryptocurrency at the time, Ripple wasn’t invited to the meetings that emerged from Clayton’s January 2018 invitation. In the Safe Harbor proposal put forward by the SEC’s Hester Peirce in February 2020, only one cryptocurrency is actually mentioned: ethereum. This, for John E. Heaton and other proponents, is a curious detail, and suggests that only Ethereum-related industry players participated in ongoing talks with the SEC, to the detriment of rivals such as Ripple.

  • In June 2018, Hinman gave his famous speech in which he declared that ethereum is not a security. This followed numerous meetings between ConsenSys and the SEC.

  • On December 22, 2020, the SEC charged Ripple Labs and two of its executives with selling an unregistered security. This case a couple of weeks before Hinman left the SEC, and only one day after Clayton stepped down as chair.

  • Two months before the lawsuit, One River Asset Management invested $1 billion in bitcoin and ethereum. Three months after leaving the SEC, Clayton joined One River in order to advise on cryptocurrency-related matters. Hinman joined Andreessen Horowitz’s cryptocurrency fund as an advisory partner in June 2021.

These are the core claims — and facts — of the free pass theory. Basically, they add up to the bigger claim that at least two senior members of the SEC — Jay Clayton and Bill Hinman — had professional and financial interests which led them to take not only action to benefit Ethereum, but also to disadvantage Ripple.

Indeed, it’s very arguable that, by working with law firms involved in Ethereum, and then by joining ethereum-invested funds as advisors, Clayton and Hinman benefitted themselves by giving ETH a ‘free pass’ and also by damaging a rival.

Was Ripple Done Dirty?

Of course, it could be countered that such benefit was the inadvertent effect of Clayton and Hinman doing their jobs as they should have done anyway. And yes, there’s no smoking gun confession from either that they intended to enrich themselves at a cost to Ripple.

Still, there’s a very apparent conflict of interest here, and one which undermines the SEC’s case against Ripple. Even if Clayton and Hinman weren’t intentionally or consciously conniving to help Ethereum and undermine Ripple, it’s just not sound policy to have regulators gainfully employed in sectors — and by organizations — they’re supposed to be regulating. Has the SEC and US federal government not heard of confirmation bias?

Looking specifically at the SEC-Ripple legal battle, the inconsistencies and conflicts at the heart of the SEC’s case suggest that it isn’t a very strong one. In fact, legal scholar and former commissioner of the SEC Joseph Grundfest wrote a letter to Jay Clayton and the SEC’s commissioners a few days before the regulator initiated its legal action, arguing that the SEC had “articulated no material distinction between the operation of Ether and XRP that is relevant to federal securities laws.”

Grundfest also complained about the fairness (or lack thereof) of the imminent action, writing that imposing “securities law obligations on XRP while leaving Ether untouched raises fundamental fairness questions […] If the Commission is to maintain its tradition of fairness, Ether and XRP should be treated similarly; if Ether is to be allowed to trade freely in the market, so too must XRP.”

This chimes with reporting from crypto-focused lawyers on the ongoing developments of the case, with Ripple earning itself a few important victories up until now. Most recently, Judge Netburn issued an order in October requiring the SEC to show where Ripple explicitly created an expectation of profit via the purchase of XRP. Combined with the fact that the SEC didn’t seek a preliminary injunction against Ripple (as it did with Telegram), this all suggests that Ripple may end up securing a favorable settlement.

This would obviously come as encouraging news to individuals and companies working within the cryptocurrency sector. But what they should also take heart from (at least as long as they aren’t XRP holders and holders of XRP alone) is the fact that figures working within the SEC were already invested (indirectly at least) in the cryptocurrency market several years ago. And this investment has only deepened over time, with Clayton and Hinman’s new roles with funds being complemented by similar new roles with cryptocurrency enterprises for former CFTC chair Chris Giancarlo and former SEC official Brett Redfearn, among others.

In other words, with so many current and former regulators already professionally involved in crypto, it’s highly unlikely that the SEC or any other American regulatory body is going to take heavy-handed action against crypto. And while crypto may have been deprived of an end-of-year rally, this is at least one Christmas present worth celebrating.

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CryptoVantage Author Simon Chandler

About the Author

Simon Chandler

Simon Chandler is a journalist based in London. He writes about technology, markets and politics, and has bylines for Forbes, Digital Trends, CCN, Wired, TechCrunch, the Verge, the Sun, the New Internationalist, and TruthOut, among many others. His Twitter handle is @_simonchandler_

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