Pro-XRP Lawyer Calls Out SEC: Are All Altcoins Truly Securities?

John Deaton, a pro-XRP lawyer, has raised critical questions about the nature of altcoins and their treatment under U.S. securities law. This follows the recent comments by Scott Melker, the host of The Wolf of All Streets Podcast, who suggested that most altcoins are likely securities, adding to the ongoing debate about the regulation of digital assets.

A Software Code or a Security?

Deaton took to Twitter to emphasize that all altcoins, including Bitcoin, are essentially digital code inside the software. This perspective, supported by Judge Castel’s ruling in the Telegram case, questions the SEC’s approach toward classifying digital assets as securities. So, if altcoins are just software code, why are they being treated as securities?

“All Altcoins, just like #Bitcoin, are simply digital code, existing inside software.” John Deaton

This debate brings us to a crucial question: what constitutes ‘security’? Melker suggests that the definition of securities should not be rooted in World War 2-era legislation. While making a plea for rational thinking, he criticizes the SEC’s alleged bad-faith actions. So, should the definition of ‘security’ be modernized, considering the rapidly evolving digital asset landscape?

The Howey Test and ‘Investment Contract’

John Deaton points out that while most altcoins might be initially sold as securities, each sale has to satisfy the Howey Test – a legal doctrine to determine if a transaction qualifies as an ‘investment contract.’ Deaton stresses the term ‘investment contract’ is often misunderstood and misapplied on social media.

The Securities Act of 1933 enumerates several financial instruments that qualify as securities but makes no mention of digital assets or software code. Deaton argues that in all SEC cases involving digital assets, like Telegram, Kik, LBRY, and Ripple, the only relevant term is ‘investment contract.’ But does the omission of ‘digital asset’ or ‘software code’ from the Securities Act of 1933 exempt cryptocurrencies from being classified as securities?

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Understanding the Case of Ethereum, Ripple, and Others

Deaton clarifies that a digital asset or cryptocurrency, when standing alone, is not a security, but it can be marketed, packaged, offered, and sold as an investment contract – a security. Cases in point: Ethereum’s Initial Coin Offering (ICO) constituted an unregistered securities offering, and Ripple may have offered or sold XRP as an unregistered security on specific occasions. However, these instances don’t make the underlying digital asset – the software code – security itself. Is it then the case that the method of offering or selling digital assets determines whether they are securities?

The Paradox of Secondary Sales

Another point Deaton raised is the issue of secondary sales of these assets. In the history of U.S. law, there hasn’t been a case where a secondary sale of an asset was found to be a security. For instance, if a buyer purchased an asset like an orange grove from a company like Howey and later sold it to a third party unaware of the initial company’s involvement, this subsequent sale wouldn’t be considered a sale of a security. This brings us to the question: are secondary sales of digital assets like Ethereum or Ripple also exempt from being considered securities transactions?

Is it time for the SEC to update its definitions and treatment of digital assets? Or should the industry develop new strategies to navigate existing regulations?