John Deaton, the founder of CryptoLaw and a lawyer representing Ripple, has accused the US Securities and Exchange Commission (SEC) of “exploiting legal uncertainty about crypto” to redefine what should be considered a security under the Howey test. Deaton argues that the regulator’s litigation against crypto companies is pushing the boundaries of what constitutes an investment contract and a common enterprise in the US, which are the foundation of what defines securities in the law. He warns that if the SEC’s actions continue unchecked, they could have “enormous” economic and legal repercussions.

Deaton explains that when the SEC originally 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. Instead, the SEC’s complaint claimed that every XRP sale ever conducted is a securities sale, based 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 disputes this, arguing that many retail investors purchased XRP with no information about Ripple Labs. In addition, he points out that the XRP token is a bridge asset that facilitates cross-border payments and cannot be considered an investment contract under the Howey test.

According to Deaton, 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 argues that 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. He also points out 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.

Deaton concludes that the SEC, under Chairman Gary Gensler, has its own idea of how cryptocurrencies should be regulated today, but it bears little resemblance to that decision. He warns that the regulator is straying into dangerous legal territory in court, and that its litigation against crypto companies is pushing the boundaries of what constitutes an investment contract and a common enterprise.


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