CryptoLaw founder and Ripple lawyer John Deaton said the SEC is “exploiting the legal uncertainty about crypto” to redefine what should be considered a security under the Howey test.
Deaton believes that the regulator’s litigation against crypto companies “pushes the boundaries” of what constitutes an investment contract and a common enterprise in the U.S. — which are the foundation of what defines securities in the law.
He said:
“The SEC under Chairman Gary Gensler has its own idea of how cryptocurrencies should be regulated today, but bears little resemblance to that decision—and it’s straying into dangerous legal territory in court.”
He wrote in an article published on Bloomberg Law that if the SEC’s actions continue unchecked they could have “enormous” economic and legal repercussions.
XRP’s ‘very nature’ is a security
Deaton wrote that when the SEC initially filed its complaint against Ripple he expected the regulator to point out certain XRP sales that could potentially have failed to pass the Howey Test.
However, the SEC’s complaint against Ripple claimed that every XRP sale ever conducted is a securities sale. The watchdog based it on the argument that XRP’s “very nature” is to be a security as it is the “very embodiment of an investment contract” in Ripple Labs.
Deaton said the SEC’s argument has no merit and said:
“This [the SEC’s argument] goes beyond anything the 1933 Securities Act and over 250 federal appellate and Supreme Court decisions about securities law ever imagined.”
Deaton argued that this is simply not true as many retail investors purchased XRP with no information about Ripple Labs. He added that the majority of people in his class action lawsuit have attested that they had never heard of Ripple Labs when they bought their XRP.
Furthermore, the XRP token is a bridge asset that facilitates cross-border payments and cannot be considered an investment contract under the Howey test.
Deaton argued that for an asset to be considered a security, it has to meet all three “prongs” of the Howey test — “it should be an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
He added:
“The SEC’s argument is the equivalent of the oranges in Howey being “the embodiment” of the scheme to sell the groves. If that’s the case, how does a corner grocer register an orange with the SEC?”
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