Niki: I’m Niki Christoff and welcome to Tech’ed Up. Joining me today is Stu Aldertoy, General Counsel of Ripple Labs, and we’re talking about their protracted legal battle with the Securities and Exchange Commission. It’s heating up right now, and this is a 101 on the company and the state of play in D.C.
Is it possible to make a convo with a lawyer about a lawsuit fun? We do our best!
Niki: I have Stu Alderoty from Ripple. Welcome.
Stu: Happy to be here. Don’t you have to start every podcast by saying happy to be here?
Niki: I know! What if you were like dragged to be here?
Niki: "My PR person dragged me here."
Stu: That’s like a law.
Niki: But I do appreciate you taking the time cuz you’re in person in Washington, D.C., and taking meetings around town, and I appreciate it.
Stu: Well, my pleasure.
Niki: Let’s back up and talk about you a little bit and your career and how you ended up managing government relations, law, and public policy at Ripple. We’ll talk a little bit about you; then you can explain what Ripple is. [Stu: Sure] So, let’s start with that.
Stu: Okay. So, I’m a lawyer and I’ve been practicing for over 30 years. In the first 30 years, I practiced in New York City in Manhattan. First half of that was big law. Y’know, started out as a young associate carrying bags; work your way up to becoming a partner. I was a litigator but also a trial lawyer.
I had two stints as a Special Assistant U.S. Attorney while I was in private practice. And then, about halfway through that, I decided to go, leave my partnership, which was a pretty radical move, and go in-house. And I had a number of in-house positions at large financial institutions.
And one day, I got a call from a head hunter, and they said, “Hey, would you be interested in taking a look at this company called Ripple?” which I didn’t know anything about. And I did some research; I saw that they were a blockchain company that used blockchain and digital assets for cross-border payments. And I started to dig into it. And working for big banks as long as I had been at that point was over 15 years was pretty soul-crushing after a while. [Niki: chuckles] You just feel like, [Niki: Sorry!] you just feel, y’know, you’d work literally, y’know, 11, 12, 13, sometimes 14 hours a day, and you’d come home, and you were like, “What did I do?” [Niki: Yeah] People at cocktail parties would avoid you when they realized you worked for a bank.
Niki: Oh my gosh! “I know a lawyer at a bank.”
Stu: A lawyer at a bank. Right! So, I, y’know, I, so I did some research into Ripple and I saw that they had an incredible leadership team. I saw they had an incredibly impressive board. But most importantly, I think that they’re, as far as I could tell at the time and actually sitting here today, I think it still holds true. It’s the only company, I think, in this space that has truly married the promise of blockchain and crypto technology and applied it to solve for a real-world problem. So I took the leap and four years on, I have never looked back. And I think if I had not done this, I would’ve regretted it for the rest of my professional career.
Niki: And what you might have done is what a lot of lawyers have done, which is started doing this two years ago or a year and a half ago. So, four years is a lifetime [Stu:mm-hmm] to have been in the crypto industry.
Stu: That is a lifetime in, in an industry that’s about 11 or 12 years old. Right. In every institution I’ve ever worked for, including my law firm, was not less than a century old. [Niki: Oh, wow!]
Just to put it into perspective, but when I did it a lot of people were, y’know, my colleagues in banking were like, “Oh, that’s interesting.” And now, four years on, I get calls fairly regularly from my old colleagues on the East Coast, sort of knocking on the door and saying, “Hey, can’t believe you did this. How do I get in?”
Niki: Yeah, they all wanna get in! And I think one, here in Washington, obviously, you’re more on the, you know, New York finance side, now in-house at this company. But in Washington, I think the reason everybody wants to get in is it’s existential to the business model. So anytime a policy issue or regulatory issue is gonna make or break an industry or a business, we all wanna get in.
I get it. It’s sexy. I mean, it’s probably making you a lot more appealing at cocktail parties.
Stu: Well, my kids, for the first time, are interested in what their dad does for a living, [Niki: laughs] I could tell you that. But it is the… I mean, it is the future. And as a lawyer, to get to work in an industry where you are, literally [interrupts self], I know that, like, I can’t believe I just said literally, but where you are literally defining what the laws, rules, and regulations are going to be for a brand new technology for a generation or generations to come- oh my God! I mean, to have that opportunity is absolutely, it’s an incredible opportunity.
Niki: Yeah! It was the internet lawyers in the nineties.
Stu: Absolutely. This is the internet of 1995.
Niki:Although I do often say to people in the industry, it’s funny to me, a lot of people who work in digital assets, in crypto, will say, when they come to Washington, “We don’t wanna overregulate it. What if we’d done that to the internet?” And I feel like I have to say, “You know people hate the internet.”
Stu: Well, so if you think about in 1995, and I mean when Al Gore says he invented the internet, I was like, “What is he talking about?” [Niki: chuckles] And what he is talking about is that in 1995 they had this new technology, “the internet,” nobody knew what it was, really. They didn’t know how it worked, they didn’t know what the promise of it was, but they knew it was something big and all they had were laws that were designed for telephones and for, like, fax machines, literally where you had to get a local license within a specific territory.
And what the government said was, “Look, we’re gonna, we’re gonna draw back and we’re gonna allow this technology of the internet to grow. And we’re just gonna kind of build a kind of, ring-fence it, so it doesn’t get too out of bounds. But we’re gonna allow them to communicate across state without a particular license. We’re not gonna hold them accountable for being the transmitter of information.” I mean, these basic concepts, which were really radical in 1995.
So, we can sit here in 2022 and look back and say, “Okay, it created massive jobs and economic, entrepreneurial, and technological advances in the United States.” And we are the leader in all of that. Did it result in some things that maybe earlier regulation could have fixed? Maybe, but look at that balance.
Did we ultimately get the balance right? I think we ultimately got the balance right.
Niki: So, I do think that there’s a role for evolving regulations, but you’re right! It was a principles-based framework and it drove our economy. Absolutely drove it for the past 20 years. Am I doing the math right? Yes! 25 years.
I think one of the things missing is we talk about crypto and speculation and people see it almost as like gambling on tokens. And we had all this time, and people had stimulus checks, and over the last two years, people were getting really involved. But one of the missing narrative pieces is: Why? Why? Why does this matter?
So, before we get into what Ripple is, which we’ll do, why does this technology matter? Why does what you’re working on in digital assets? Why should anybody care?
Stu: We don’t really know what that future is gonna look like. But we do know that this is going to be generational changing.
What the internet essentially does now is it allows us to access and transmit information. What the internet doesn’t allow us to do is to transmit value. Right. If I wanna transmit value, I still have to go to old rails to do that. And those old rails are controlled centrally by large banks or other large institutions. So I think, when you’re talking, and I’m looking at it through a financial lens, when you think about blockchain and crypto, the promise is that it allow- it allows you to actually instantaneously transfer value the way you instantaneously transfer information today, and to personally own your value in a way that is not centrally controlled.
Now, what does it allow you to do? What is the promise of that? What is the future of that? I can tell you what it looks like currently and how Ripple is, has developed a commercial application for that. But I think it would be a fool’s errand to predict what it was gonna look like in 10, 15, or 20 years.
Niki: I think that’s right. We just don’t know. We can’t even imagine it. I would never have imagined the things that we have now when I was, when I was, in law school in, y’know, the ear- the early aughts. I didn’t even have a cell phone.
Stu: That’s right. Neither did I. I remember the first time I saw a Blackberry, I was like, “Oh my God. What’s that?” But I do think I, I, I mean, I, I do think it will for the next generation, our children, it, it is going to be the tokenization of everything, the tokenization of value, the tokenization of information, which allows, which I think will allow folks to kind of own that value and own their own personal information in a way that’s not centrally controlled.
Niki: I agree. So that’s not the topic of today, but I agree one of the great potential uses is owning my own privacy, my own data, and sharing it as I wish in a more controlled way, which right now I feel no control over. I feel like there’s more information shared than is necessary, and it’s almost extracted. Okay! [Stu: Yeah]
But that’s a topic for another day. Let’s talk Ripple! What are you guys doing? You said you have real-life applications. [Stu: sure] Part of why I’m delighted to have you on this podcast is Ripple is in the headlines constantly. And it’s one of those things I think people see but don’t really know what you are.
Stu: In October, Ripple’s gonna be celebrating its 10th year anniversary as a company. We’re still privately held. It’s grown from a very small core group of founders, three to over 700 employees. Now we’re now a global company. We have offices in San Francisco, and New York, and Singapore, in London, and Dubai, and Brazil, and Ireland. I’m sure I’m leaving out a few offices and I apologize for those I’ve forgotten.
But what we do and, y’know, back to what attracted me to Ripple is Ripple has a real enterprise commercial use case for blockchain and crypto. And the real-world problem we solve for is the problem of cross-border payments. If you want to transfer money, let’s just say from the U.S. to the Philippines now, you probably have to go to your bank or go online to make a wire transfer. And you’ll put in all of the information and let’s say you want to transfer a thousand U.S. dollars. You don’t know when that thousand dollars is gonna hit the beneficiary in the Philippines.
You don’t know the net amount of the, uh, Philippine currency that is gonna be received. You don’t know if they’re gonna receive $980, $920, whatever after all the cost fees. If something wonky happens in the transmission, you may be sitting there five, seven days from now, and you’re getting the call, “I didn’t get my money.”
What Ripple’s technology allows our customers to do, and our customers, by the way, are financial institutions, and banks, and payment providers. We’re not consumer-facing. It allows them to make that transfer on demand.
So, in other words, if they want to move that, if they wanna move that thousand dollars from the U.S. to the Philippines on behalf of their customer, they can agree, as a sending institution with the receiving institution, before the send button is hit, virtually, on the cost, the FX rate, all of the AML/BSA, y’know, data baked in. You get an electronic handshake, you hit send, and within three to five seconds, that trans, that transfer settles, and the value is actually in the, in the, account in less than 10 minutes. [Niki: So] That’s revolutionary. That’s like sending an email. That’s like sending money as if you’re sending an email today. That doesn’t exist other than what Ripple does.
Niki: So AML, just for people who don’t know, is anti-money laundering. So these are basically all of the steps that a traditional bank would have to do to transfer the money, but you’re providing rails that make it instantaneous.
Stu: Instantaneous with bilateral communication. Two-way communication.
Traditional rails are unilateral communication. So, think about that. That’s like me sending you a message, but you’re, there’s no facility for you to communicate back to me, which is kind of weird! But that’s how, that’s actually how the payment rails work today. That’s why payments can get stuck, and that’s why, I don’t know when the payment is actually settled physically until I look at that bank account, and I don’t know the cost, the net cost, until I look at that bank account. We solve for all of that.
Niki: Got it! So, there’s a lack of transparency in the current system. There’s also the settlement times, which I don’t know if anyone watched the Anna Delvy, she’s like this con-artist, movie, but there, [chuckling] she was able to sort of scam based on settlement times to get money. And so, this is basically a rapid improvement in the technology and banks would be interested too because it is helping them solve for an issue, or it’s improving and elevating their services.
Stu: Yeah. And it’s available 24/7. So, if you hit a, a Saturday or Sunday or a long holiday and banks are closed, you can still settle. And our target customers are, again, financial institutions and payment providers who…their business is high volume, low dollar remittances. [Niki: mm-hmm]
Which, y’know, again, you have y’know, a nurse who’s, y’know, leaves the Philippines to work, but she’s sending money back home and she’s doing that on a, on a weekly or biweekly basis. And, so she’s not sending, y’know, 10 million or a hundred million like an HSBC or Citibank would do, but she’s sending, y’know, 600 or a thousand dollars. This is the sweet spot.
Niki: Yep. And that’s actually really good example. One of the things that I think people get confounded by is this idea that, “Oh, this is a way to evade taxes,” but that nurse has already paid taxes on that money. She’s paying taxes in the U.S. She’s just sending it to her relatives, which she’s entitled to do.
Stu: Right. And then, and, the, the, other thing again, that packet of information that is sent instantaneously not only contains all of the financial information, as you said, it contains all of the customer information that you need to be in compliance with anti-money laundering laws or anti-sanction laws or tax laws. So it’s all done in an incredibly compliant way.
Niki: And presumably, the fees aren’t as staggering as wiring. I’ve wired money. So, this is like a long story, but if you’ve ever had to bail someone out of jail, this is for my other podcast on my personal life.
Stu: I have had to bail people out of jail!
Niki: Oh, you have? [Stu: Yes]
Okay. So, if you’ve had to bail someone out of jail, that’s [interrupts self] Oh, yes! But probably different people, not your relatives. Hopefully? [laughing] Maybe! We won’t ask. If you have, y’know, you’ve got to Western Union. Bail bondsmen are not taking my credit card. Right. And the first time I got a Western Union fee, I was gobsmacked by how expensive it is to send a relatively low amount of money and so, presumably, this is a lower fee.
Stu: It’s incredible. It, it’s a lot lower fees, but even, y’know, [chuckles] putting aside what a bail bondsman would charge [Niki: laughs] or a Western Union would charge, if you, and I’ve done this, if you need to, y’know, each month, transfer money from my Bank of America account to my daughter’s Chase account so she can pay her rent in college. It’s amazing what they’re charging me for that monthly transfer, just from Bank of America to, to Chase. It’s like, “Why?!”
Niki: Why? Why! Okay! So it solves for that problem. Tell us why you’re in D.C. What’s happening with the regulatory situation? A lot of our listeners are tech policy people but not necessarily crypto people. They know the cavalry has arrived, but why? What’s happening?
Stu: So, with Ripple this year, I think we’re going to surpass 10 billion dollars in cross-border payments on behalf of our customers. All of those customers and all of those payments are with our affiliates outside of the U.S., Singapore, Dubai, Brazil, London, and those other places that I mentioned earlier. Why?
Because those jurisdictions provide regulatory clarity for how to operate in the crypto economy. In the U.S., we don’t have that regulatory clarity. We have massive regulatory uncertainty, and that’s a problem. And it’s scary for folks to get involved because without that regulatory clarity, you’re always gonna run the risk that the government may take an overly aggressive view that what you’re doing is running afoul to laws, rules, and regulations, which have not yet been clearly defined.
So the reason Ripple spends a lot of time in Washington, and we’ve been doing this for a long time, is we don’t want to be free of regulation. We’re not asking for this to be the Wild West. We want regulation, but we want regulation that is clear, and we want regulation that we can understand, and regulation that we can follow, and regulation that is suited to the technology.
So, we spend a lot of time with policymakers, number one, educating them. This is a really complex space. y’know, it takes you, y’know, years just to understand the vernacular and understand the technology at a workable level. But we spend a lot of time educating.
The good news is I think this is a bipartisan issue. I think the policymakers understand that the U.S. has fallen behind. The President has just issued an executive order, recognizing that the U.S. has fallen behind. The crypto economy is measured in the trillions; maybe it was 3 trillion several months ago, maybe it’s a trillion now, but it’s not a small economy.
One in five Americans participates in this economy. So, it’s important that we get it right. And there’s a sense of urgency to get it right. And, I think the U.S. is, we’re at the, at the cliff’s edge of falling irretrievably behind the rest of the world. And I think given, even though it’s a bipartisan issue from a policymaker standpoint, from a regulatory standpoint, I think some regulators have exhibited what I think can only be interpreted as an outright hostility, through what we call regulation by enforcement and what that’s doing is forcing the innovation, the jobs that go with it, the tax dollars that go with it offshore and that’s what we’re trying to get right.
Niki: I think it’s fascinating that when the Chairman of the SEC was announced, Gary Gensler, it was like Beatlemania. The crypto industry was delighted, “Oh, it’s someone who understands the technology, so presumably this is gonna help us get a light touch, but clear, transparent regulatory situation.”
Which has not happened, although, tell me if I’m getting this wrong, I feel like he has signaled- is not what I think is the appropriate venue for this, which I think is probably belongs in rulemaking in the agency, but he has signaled at speeches, [chuckles] in the Wall Street Journal op-ed page what he thinks, y’know, the rules are, I don’t know,
Is it credible to say that people really have no idea? Because I feel like he is saying what it is. He’s saying, “We’re not gonna create new rules. We’re gonna use the old rules.”
Stu: Yeah. So, a few things, I think, the current Chairman of the SEC, Gary Gensler, his most recent gig just before he was appointed as Chair of the SEC he taught a blockchain and crypto course at MIT.
So I think when he was appointed, I’m not so sure I would go so far as to say it was Beatlemania.
[Niki: chuckles] But people, I think, were cautiously optimistic that finally we’ll have somebody who’s leading an agency that at least understands the technology. That you don’t have to go in and have sort of, y’know, a Blockchain 101 discussion with him and we thought that that would be promising and, boy, were we wrong.
And I think, under this administration with the Securities and Exchange Commission, they have refused to articulate any clear laws, rules, and regulations. Their mantra is we don’t need that because we’re applying the existing laws.
But I think if you take a close look, or maybe a not-so-close look, what’s the only thing that’s clear is they’re not looking to apply the law; they’re looking to remake the law. Through regulation by enforcement, through enforcement actions. Only Congress can make the law, the SEC, which is the Securities and Exchange Commission, it’s in their name. They only have jurisdiction over securities and securities as defined by statute. It’s defined by case law.
And I think they’re taking a very expansive view of their jurisdiction so they can claim ownership of this massive crypto economy. So I think what’s happening, and I know I’m in Washington, I need to be careful what I say so don’t offend people, but I do believe that this is power and politics being elevated over sound policy.
Niki: I don’t, I don’t think that offends people. I think that’s our state [interrupts self] we’re not a state. I think it’s our motto.
I’m just joking. [Stu: It’s not your license plate?] No, [laughing] I mean, our license plate is, “Please stop taxing us if you’re not gonna give us a vote.” [both chuckle]
But actually, so one thing I wanna back up and say is, so, you’re looking for legislation?
Stu: We are, well, there’s three ways that you can get regulatory clarity. One is through regulatory rulemaking: you publish rules, there’s public comment, you have collaboration, and then you decide what rules should be. We haven’t seen that done. And I think we haven’t seen that done deliberately. You can get it through legislation.
And then the third way you can get clarity is through litigation through the courts. And there happens to be a, a pretty major case that’s going on right now involving the SEC and Ripple. We are, we’re fighting not only on behalf of Ripple but really on behalf of the entire crypto industry to get that clarity.
And so, the clarity may ultimately come through the judiciary, not the legislative branch, but we think the legislative branch is a promising route to get that clarity. But again, you need to get it right.
Niki: Yep. So, I wanna back up just a little bit before we wrap up; I think, actually, we probably should have started with this. But you have, I’ve heard you describe the concept of, so SEC obviously by definition is regulating securities. And I have heard you use the analogy of beanie babies to kind of what they might be claiming as a security [chuckling], but I’m not gonna put words in your mouth.
Stu: The 1933 Securities Act says that the Securities and Exchange Commission has jurisdiction over these things: The first one being security, which is what we think of, sort of, common stock or common ownership if you own a stock of Apple or Google or IBM or whatever. And there’s a long laundry list of things, and they say it also includes investment contracts, and investment contracts are contracts for an investment; they represent a right title or interest in the issuer.
What the SEC’s theory is, I was gonna say, seems to be, but it is, is that anyone who buys an asset hoping that they can sell that asset at a higher price than what they bought it for, in other words, they’re speculating and then we have jurisdiction over that asset. And that can’t be the law because if it is the law, then Exxon’s oil, potentially, is a security, Barrick’s gold mining efforts are security, De Beer’s diamond industry is a security, Andy Warhol lithographs that are sold by the Andy Warhol Foundation are potentially securities. That’s not the law.
But the law requires, again, is a contract for an investment. If I sell you an asset and then I have a post-sale obligation that I’m going, I promise to do you do things on your behalf after I have sold you the asset; that’s a security.
If all I have done is sell, sold you the asset that’s not a security, even if I’m taking efforts because I have a vested interest because I have, I also own the asset that I sold you, even if I’m taking efforts, and those efforts are aligned with your interest, that doesn’t make a security under the law.
Speculation is part of the markets. You can’t have liquidity without speculation. You can’t have liquidity in pork bellies without speculation, but that doesn’t turn it into an investment, but under the SEC’s theory, which is an incorrect theory under the law, they believe that…or at least they’re arguing that it does.
And that’s what we’re seeking to correct either through legislation or, maybe the most likely outcome, we’ll correct it through the litigation.
Niki: My favorite part of that response is I asked you to compare it to beanie babies and you compared it to oil, gold, and diamonds. [chuckling] Oh! And pork bellies.
Niki: But the idea is-
Stu: Or beanie babies!
Niki: Or beanie babies!
Niki: But the point is-
Stu: [interrupts] So if I, if I own right, [Niki: You own the beanie baby, you own it] So, I own, I own a beanie- if I own a beanie baby factory. [Niki: laughing] And I sell you, I sell you a bunch of beanie babies, and I’m out there promoting beanie babies, and beanie babies are now trading in the secondary market, and people are, [Niki: eBay!!] right, eBay. And, y’know, and people are selling the beanie baby that they bought for me at a higher price, that doesn’t make it a security.
Niki: No! and they don’t think of it, the person owning it, let’s say baseball cards or unopened Star Wars figurines, or a painting by an up-and-coming artist, does not believe that what they have is a security. They believe they own a speculative asset, and they do own it. They can do whatever they want, and it might be that the person who sold it to them is also aligned in promoting that market and the value, but it doesn’t make it a security.
Stu: That’s right.
Go back to what the statutory language says. You need an investment contract. Without that contract for an investment, which means “I am undertaking promises on your behalf to increase the value of your investment,” all you have is a plain old vanilla asset sale. [Niki: Yep!] And that’s not a security.
Niki: And so this is… we’ll end on this. You have recently filed a motion for summary judgment, which means you’re trying to get the court to toss the case against you by the SEC, just based on what you said on its face, the law applies in a certain way. If this is successful, the motion for summary judgment, that’s a huge win for the industry because it does give some clarity.
Stu: I’m gonna repeat what you said; it’s a huge win for the industry, ‘cuz it gives, it finally gives clarity to the industry about what the limits of the SEC’s jurisdiction are. And the SEC, I think, will be exposed for, again, not looking to faithfully apply the law, but what they’re doing is looking to remake the law. And I go back to what I said earlier; an agency can’t remake the law only the legislature can remake the law.
Niki: Yes. Well, and on a future episode of Tech’ed Up, we’ll discuss how the FTC is remaking the law, but we won’t do that today. Thank you for coming on. Everybody, you’re gonna see Ripple in the headlines. You’ve been seeing it in the headlines; now you know what it is. You know that they’re involved in this pretty high-stakes moment, legally.
Stu, thank you for taking the time.
Stu: This was a pleasure. Thank you.
Niki: In our next episode, my guest is Bloomberg reporter Mark Bergen and we’re discussing his new book “Like, Comment, Subscribe: Inside YouTube’s Chaotic Rise to World Domination.”
Reminder: please like, comment, and subscribe to Tech’ed Up wherever you get your podcasts.