CryptoLaw Founder Explains Why $XRP and $ETH Are Not Securities

John Deaton, a prominent highly-respected attorney closely monitoring the U.S. SEC’s lawsuit against FinTech firm Ripple, has shared his thoughts on why $XRP and $ETH should not be considered securities.

Deaton, Managing Partner of Deaton Law Firm, is the founder of CryptoLaw, a website focusing on U.S. legal and regulatory developments for digital asset holders, and the host of the YouTube channel CryptoLaw.

In a series of tweets, Deaton explained to his 258K followers the key concepts related to securities and how they apply to digital assets.

Deaton began by addressing the often misunderstood legal term “investment contract” and the misapplication of the Howey Test on social media. He cited the Securities Act of 1933, which defines the term “security” but does not explicitly list digital assets or software code. Deaton argues that In SEC cases involving digital assets like Telegram, Kik, LBRY, and Ripple, the relevant term is “investment contract.”

Deaton says that, according to the Howey Test, a digital asset or cryptocurrency (software code), by itself, is not a security. However, he does acknowledge that it can be marketed, offered, or sold as an investment contract, which can be considered a security. Deaton highlighted that the $GRAM token, $XRP, and $ETH are not securities, even though the $ETH ICO was an unregistered securities offering, and Ripple may have offered or sold $XRP as an unregistered security on specific occasions.

He emphasized that the underlying asset – digital code – is not a security, and there has never been a case in U.S. history where the secondary sale of that asset was found to be a security. Deaton used the example of the Howey Test, explaining that if an investor had sold the orange grove (from the Howey case) to a second buyer with no knowledge of the Howey Company, the subsequent sale would not be considered a security.

Deaton argues that regardless of whether the $ETH ICO was a securities offering or Ripple sold $XRP as a security between 2013 and 2018, neither $ETH nor $XRP is a security. He pointed out that every altcoin could be considered a security when first distributed, whether through an ICO or not.

In conclusion, Deaton urged the industry not to allow the SEC and Bitcoin proponents to take an unconstitutional shortcut by labeling tokens themselves as securities.

Paul Grewal, who is Coinbase’s Chief Legal Officer, agrees with Deaton that secondary sales of digital assets should not be considered securities since there is no investment contract:

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