U.S. Attorney John Deaton has explained in-depth why the XRP cryptocurrency cannot be classified as a security even if blockchain payments company Ripple sold it to the public as an investment contract.



“XRP Remains A Digital Code”: John Deaton



The debate over whether XRP should be deemed a security rages, something that is the crux of the legal battle between Ripple and the U.S. Securities and Exchange Commission (SEC).



In a detailed Twitter thread on Friday, CryptoLaw founder John E Deaton asserted that XRP “remains a digital code” even if Ripple sold it as an investment contract (read: security) in the past or is still selling it now.



Deaton noted that just because someone used bitcoin (BTC) as a security, it didn’t turn it into a security. Similarly, in the LBRY Credits (LBC) case, the judge ruled that LBRY sold LBC as an investment contract when it made direct sales. In the lawyer’s view, LBC remains a software code and nothing else. The SEC even admitted on record that the sale of LBC tokens in the secondary market did not constitute a security. This means LBC itself does not qualify as a security. If it did, the court’s ruling would apply to all of its sales.



The same applies to Ripple’s XRP. However, Deaton notes that the commission has previously implied that the XRP token itself is a security. “This novel and dangerous embodiment theory is how the SEC is attempting to expand its jurisdictional reach into secondary market transactions. The theory stretches Howey beyond recognition,” he added.



Still, the underlying asset is never the security in an investment contract case, and the novel Howey test requires a Howey analysis at the time of each offer or sale. This is why Deaton is quite confident District Judge Analisa Torres will reject the SEC’s summary judgment motion in the XRP suit.



Bitcoin was Once Sold As A Security



Deaton also cited the crypto market lodestar, bitcoin, as he explored the XRP security issue. He notes that the digital asset was once “packaged, marketed, offered and sold” as an investment contract. This is the case for condos, chinchillas, and beavers. Even though they can be sold as investment contracts, that doesn’t mean they turn into securities.



The SEC took action against Ripple in December 2020, contending that it had sold an unregistered security since 2013. Two years later, the high-profile case grossly muddied Ripple’s reputation drags on. A ruling is expected in the first half of 2023 — barring an unlikely settlement. Most XRP loyalists believe Ripple has the upper hand in the case, and they are convinced the company will ultimately prevail.



That being said, the regulatory clarity the crypto industry has long clamoured for is most likely to come in the form of a decision in the SEC v. Ripple lawsuit.