John Deaton, a prominent crypto lawyer and pro-Ripple attorney, has issued a challenge to the US Securities and Exchange Commission (SEC) regarding its regulation of crypto startups. Deaton’s challenge comes in response to a video message by Gary Gensler, Chairman of the SEC, in which he criticized startups for falsely categorizing their products as non-securities.
Deaton challenged the SEC to provide a single case in the 76 years since the Howey test was established that demonstrates that an underlying asset used in an investment contract is itself a security or that subsequent sales of an investment contract are securities because of the first sale.
The SEC and the Crypto Ecosystem
The issue of whether a crypto startup’s investment contract is a security has been a bone of contention between the SEC and the crypto ecosystem. The SEC has taken enforcement action against many crypto firms this year. For example, it fined Kraken exchange $32m for offering staking products, which it considered securities, and issued a Well Notice to Paxos Trust, the Binance USD (BUSD) stablecoin issuer, regarding the token. The SEC’s position is that intermediaries for investment contracts are required to comply with securities laws and register with the SEC. However, many crypto platforms contend that their investment contracts are something else.
John Deaton’s Challenge to the SEC
In his challenge to the SEC, Deaton argued that the law is concerned with what something actually is, not what it is called. He called out the SEC to cite a single case in U.S. history in XRP Holders’ Amicus Brief and noted that the SEC could not meet the challenge because there is not a single case. Deaton has gained popularity for filing Amicus Briefs on behalf of about 75,000 XRP holders in the ongoing lawsuit between the SEC and Ripple Labs Inc.
The Need for Clear Guidelines
The crypto industry has been advocating for dialogue with the SEC, and Coinbase has filed a lawsuit against the regulator for failing to provide clear guidelines for the emerging market. Many proponents of a new law believe that failure to narrow the definition of the guiding rules for the market could cause the US to lag behind other nations in terms of crypto and general financial innovation.
The lack of clear guidelines from the SEC has been a major issue for crypto startups. Without clear guidelines, startups are left to guess at the SEC’s interpretation of the law, which can lead to mistakes and potentially costly enforcement actions. The lack of regulatory clarity can also create uncertainty among investors, which can harm the growth and development of the crypto industry.
Coinbase’s lawsuit against the SEC is a notable example of the industry’s frustration with the lack of clear guidelines. The lawsuit alleges that the SEC has engaged in an “unprecedented and unlawful regulatory overreach” by failing to provide clear guidelines for the classification of cryptocurrencies. Coinbase argues that the lack of clarity has harmed its business and caused confusion among investors.
Conclusion
The challenge issued by John Deaton highlights the ongoing dispute between the SEC and the crypto ecosystem over the regulation of investment contracts. The lack of clarity from the SEC on this issue has caused confusion and uncertainty among crypto startups, which may ultimately harm the US’s position as a leader in financial innovation. It remains to be seen whether the SEC will respond to Deaton’s challenge and provide a case that supports its position on investment contracts.
