Even though blockchain payments startup Ripple advertised the cryptocurrency to the general public as an investment contract, U.S. Attorney John Deaton has shown why the XRP coin cannot be categorized as a security.
The key issue in the legal dispute between Ripple and the U.S. Securities and Exchange Commission is whether XRP should be classified as a security (SEC).
John E. Deaton, the creator of CryptoLaw, claimed in a thorough Twitter thread on Friday that XRP “remains a digital code” regardless of whether Ripple has ever offered it as a security or is presently doing so.
Deaton pointed out that just because bitcoin (BTC) was utilized as a security didn’t make it one. Similar to this, the judge in the LBRY Credits (LBC) case determined that when LBRY made direct sales, it was selling LBC as an investment contract. LBC is still just a piece of software code, according to the lawyer. Even the SEC has acknowledged that the secondary market sale of LBC tokens did not amount to the sale of a security. Thus, LBC is not a security in and of itself. If so, the judgment of the court would be applicable to all of its sales.
The same holds true for XRP from Ripple. Deaton points out that, in the past, the commission appeared to be suggesting that the XRP coin itself is a security. “The SEC is aiming to extend its jurisdictional reach into secondary market transactions through this unique and risky embodiment theory. The theory goes much beyond Howey,” he continued.
However, in an investment contract situation, the underlying asset is never the security, and the unique Howey test necessitates a Howey analysis at the time of each offer or sale. Deaton is thus quite sure that District Judge Analisa Torres will deny the SEC’s request for summary judgment in the XRP lawsuit.
As he examined the XRP security problem, Deaton also referred to bitcoin as the crypto market’s guiding light. It was originally “packaged, advertised, presented, and sold” as an investment contract, he says of the digital asset. For condominiums, chinchillas, and beavers, this is true. Despite the fact that they can be sold as investment contracts, they do not thereafter become securities.
In December 2020, the SEC began action against Ripple, alleging that the company had been selling an unregistered securities since 2013. The high-profile lawsuit that severely damaged Ripple’s reputation is still ongoing two years later. Barring an unusual settlement, a decision is anticipated in the first half of 2023. The majority of XRP supporters think Ripple has the advantage in the situation and are certain the business will ultimately win.
Having said that, a ruling in the SEC v. Ripple litigation is most likely to provide the regulatory certainty that the cryptocurrency sector has long yearned for.