The Founder of CryptoLaw Explains Why XRP and ETH Are Not Securities

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John Deaton, a prominent and well-respected attorney who is intently observing the U.S. SEC’s lawsuit against FinTech company Ripple, has expressed his views on why $XRP and $ETH should not be considered securities.

In a series of tweets, Deaton explained to his 258k followers how the fundamental concepts of securities apply to digital assets.

Deaton began by addressing the frequently misunderstood legal term “investment contract” and social media’s misuse of the Howey Test. The Securities Act of 1933 defines the term “security” but does not list digital assets or software code explicitly. Deaton argues that the pertinent term in SEC cases involving digital assets such as Telegram, Kik, LBRY, and Ripple is “investment contract.”

According to Deaton, a digital asset or cryptocurrency (software code) is not a security under the Howey Test. Nonetheless, he acknowledges that it can be marketed, offered, or sold as an investment contract, which can be regarded as a security. Deaton emphasized that the $GRAM token, $XRP, and $ETH are not securities, even though the $ETH ICO was an unregistered securities offering, and that Ripple may have offered or sold $XRP as an unregistered security on occasion.

He emphasized that the fundamental asset, digital code, is not a security and that the secondary transfer of this asset has never been deemed a security in U.S. history. Deaton used the Howey Test to illustrate that the subsequent transaction would not be considered a security if an investor had sold the citrus grove (from the Howey case) to a second buyer who was unaware of the Howey Company.

Deaton contends that neither $ETH nor $XRP is securities, regardless of whether the $ETH ICO was a securities offering or whether Ripple sold $XRP as a security between 2013 and 2018. He noted that every altcoin could be considered security when initially distributed, regardless of whether it was through an ICO.

In conclusion, Deaton implored the industry not to permit the SEC and Bitcoin advocates to circumvent the Constitution by labeling tokens as securities.

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