$XRP: Cryptoanalyst explains what it takes to become a top-performing coin

On April 2, John Deaton, a prominent and highly respected attorney closely monitoring the US SEC’s lawsuit against FinTech firm Ripple, shared his thoughts on why $XRP and $ETH should not be considered securities.

Deaton, managing partner of the Deaton Law Firm, is the founder of CryptoLaw, a website focused on US legal and regulatory developments for digital assets, and the host of the CryptoLaw YouTube channel.

In a series of tweets, Deaton explained to his 258,000 followers the key concepts related to securities and how they apply to digital assets.

Deaton began addressing the often misunderstood legal term “investment contract” and 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 such as Telegram, Kik, LBRY and Ripple, the relevant term is “investment contract.”

Deaton says that under the Howey test, a digital asset or cryptocurrency (software code), in itself, is not a security. However, he acknowledges that it may be marketed, offered or sold as an investment contract, which may be considered a security. Deaton highlighted that the $GRAM token, $XRP and $ETH are not securities, although the $ETH ICO was an unregistered security offering and Ripple may have offered or sold $XRP as an unregistered security on specific occasions.

He stressed that the underlying asset – digital code – is not a security, and there has never been a case in US 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 without 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 security 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 can be considered a security when it is first distributed, whether through an ICO or not.

In closing, Deaton urged the industry not to let the SEC and Bitcoin supporters 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: