John Deaton, the founder of CryptoLaw and Ripple lawyer, has accused the US Securities and Exchange Commission (SEC) of capitalizing on the legal uncertainties surrounding cryptocurrencies as a means of redefining what should be considered a security under the Howey test. Deaton claims that the regulator’s litigations against crypto companies are pushing the boundaries of what constitutes an investment contract and a common enterprise in the US. These two elements form the foundation of securities as defined by law. Deaton believes that the SEC under Chairman Gary Gensler has its own idea of how cryptocurrencies should be regulated, which strays into dangerous legal territory in court. He warns that if the SEC’s actions go unchecked, they could have “enormous” economic and legal repercussions.
SEC’s Claims Against Ripple Overstep the Mark
When the SEC initiated its complaint against Ripple, Deaton expected the regulator to point out certain XRP sales that could potentially have failed to pass the Howey Test. However, the SEC went further and claimed that every XRP sale ever conducted is a securities sale. The watchdog based this 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 disagrees and argues that the SEC’s claims have no merit. He states that many retail investors purchased XRP without any knowledge of Ripple Labs. Most people in his class action lawsuit have attested that they had never heard of Ripple Labs when they bought their XRP. Additionally, the XRP token is a bridge asset that facilitates cross-border payments and cannot be considered an investment contract under the Howey test.
Deaton further argues that for an asset to be considered a security, it has to meet all three “prongs” of the Howey test, which are “it should be an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.” He likens the SEC’s argument to the oranges in Howey being “the embodiment” of the scheme to sell the groves. He questions how a corner grocer can register an orange with the SEC if this is the case.