Lawyer Clarifies the Flaws in SEC’s Claim that XRP Is a Security

• John Deaton explains the weaknesses of the SEC’s claim that XRP was a security.
• The lawyer presented a 2019 provision that says crypto is not a security if used for payments.
• Previously, the SEC chairman said PoS blockchains tokens are security.

In a series of tweets today, famous blockchain lawyer John Deaton explains the shortcomings in the US Securities and Exchange Commission’s (SEC) claim that Ripple’s native blockchain token, XRP, constituted a security contract.

Deaton first quoted a 2018 provision of the US corporate finance regulation. The rule says:

The digital asset itself is simply code. But the way it is sold as part of an investment to non-users by promoters to develop the enterprise can be, in that context, a security.

Deaton said that since an asset can only be regarded as a security if promoters sold it as part of an investment to non-users, such a description does not match the case of Ripple’s token. 

The lawyer further argued that thousands of XRP holders acquired the token to establish a TrustLine with the XRP ledger to transfer value and receive salaries through BitPay and other vendors. He added that many utilize XRP as a substitute for fiat currencies since thousands of vendors accept payment.

Additionally, Deaton draws an reference from another provision of the law which states that a digital asset  is unlikely to satisfy the Howey Test if:

It can immediately be used to make payments in a wide variety of contexts or acts as a substitute for real (or fiat) currency.

Notably, the Howey test determines whether an asset qualifies as an investment contract, subjecting it to federal security laws. The SEC chairman previously argued that proof-of-stake blockchains, such as Ethereum(ETH), Cardano (ADA), and Solana (SOL), could pass the Howey test.