John Deaton Explains Why SEC Can’t Call Digital Assets Securities

• John Deaton revisited an old post of his on why digital assets cannot be regarded as securities. 
• The lawyer argued that secondary sales of digital assets cannot be securities, pointing to several U.S. court decisions. 
• His post comes in reaction to Cardano’s Charles Hoskinson complaint about the SEC’s application of the investment contract rule.

In a recent post on X, John Deaton revisited an old post of his on why digital assets cannot be regarded as securities. 

I’ve seen a few Maxis reply to Charles’ video with the same old arguments they made about XRP – the same arguments rejected by a federal judge sitting in the SDNY. Here’s a 🧵 of mine that people who love to call software code itself a security didn’t appreciate. 👇 https://t.co/3diT2oDf8H

— John E Deaton (@JohnEDeaton1) November 27, 2023

His post follows a video by Cardano founder Charles Hoskinson, expressing his frustration with the U.S. Securities and Exchange Commission’s application of the investment contract theory. 

Charles Hoskinson GOES OFF on SEC & Bitcoin getting a pass while Cardano $ADA & crypto has to suffer. 👇 pic.twitter.com/Vm1u9jGrIr

— Altcoin Daily (@AltcoinDailyio) November 27, 2023

In a thread posted in April, Deaton argued that “investment contract” is one of the most misunderstood legal terms. 

“INVESTMENT CONTRACT”

Is one of the most misunderstood legal terms in the law. The Howey Test must be the most misapplied legal test or doctrine on social media.

“Investment contract” is a legal term of art adopted from state law by Congress when it enacted the 1933 Act.

— John E Deaton (@JohnEDeaton1) April 2, 2023

Noting the definition included in the Securities Act of 1933, the crypto lawyer mentioned that digital assets or software codes were not listed as securities. 

He continued by listing cases where U.S. courts have ruled digital assets as not qualifying as securities, including Ripple’s recent victory and the SEC’s lawsuit against Telegram. He noted that the key term in those cases was “investment contract.”

Read Also: UK Chancellor Proposes A Legislative Proposal For A Digital Securities Sandbox (DSS)

Deaton argued further that even if ICOs of digital assets qualified as securities, secondary sales cannot be held in the same regard. 

He backed this up by referencing the Supreme Court’s decision in the case of Howey, which established a legal definition for securities in the United States. There, the court decided that the subsequent sale of an asset, with zero involvement or knowledge of the company who issued it, cannot be deemed a security.

Deaton continued, “Every Altcoin arguably starts out as a security when it’s first distributed, ICO or not. When Satoshi was the only miner of #Bitcoin (or one of a few) and had he offered 100K #BTC for sale for $100K USD, it would have been an unregistered securities offering.” 

Meanwhile, the crypto lawyer stated only Bitcoin maximalists would pick an issue with Hoskinson’s frustration with the SEC. “I’ve seen a few Maxis reply to Charles’ video with the same old arguments they made about XRP – the same arguments rejected by a federal judge sitting in the SDNY.”

According to Deaton, what is needed is more clarity and coherence in the application of U.S. securities laws. Indeed, the securities law application has been a point of frustration within the crypto community, with members accusing the SEC of overstretching its application.