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And today, John is taking a little break from court filings to drop by Forkast.News. He is the managing partner of Deaton Law Firm and the representative of more than 10,000 XRP investors. John Deaton, a welcome to the show.
John Deaton: Thank you. Thank you for having me.
Lau: Why did you take this case?
Deaton: On Christmas Eve, I took the case after I heard about it. I decided to pull the complaint and read it. I got to the very first paragraph, and when I read that the SEC was charging that Ripple was engaging in selling unregistered security from 2013 to present day, I knew what was coming. I knew that the exchanges would delist [and] I knew that there would be halting and suspension of trading. I was taken aback by it because it was a departure from previous litigation. Normally, they’ll limit it to certain specific dates and specific transactions. But the way the complaint is written and alleged, it’s alleging that the token itself — XRP — is inherently a security. And so after that, I just decided that we had to fight back because I do not believe the Securities Exchange Commission was actually looking out for investors.
Lau: And therein lies really the crux of the matter: Is XRP a security or is it a currency? What was also interesting with the lawsuit is that for eight years, XRP had been circumventing the globe here in Asia, in Japan, very clear, recently reinforcing it is not a security. And so it is freely traded in Japan. Why is there such a divergence of opinion, even on a regulatory level?
Deaton: Well, personally, I think that what’s happening is you’re having this new asset class that went from a 200 billion collective asset class to nearly a two trillion. And obviously, the trend is upward. I believe you have regulatory agencies doing what we call the jurisdictional grab. They want to be a part of it. They want to extend their reach to this asset class. Even today, you have the Commodities Future Trade Commission going after individuals using Dogecoin and other cryptocurrencies. Yet, you also have them saying that Ether and Bitcoin are commodities. And then you have the Securities Exchange Commission claiming the XRP is a security. That kind of regulatory confusion or schizophrenia, if you will, is where we’re at today. Unfortunately, the United States is falling way behind other parts of the world.
Lau: But one thing is clear. The SEC is there to look out for the interests of investors [and] the interests of individuals. The rules are in place. You can’t just go out and say something and not reveal a whole host of information to prospective investors, take their money and then not have that fiduciary responsibility. The SEC in the law demands that you bear fiduciary responsibility. In this way, they have seen that XRP may or may not have done that.
They allege that XRP behaves very differently than even Ethereum or Bitcoin. Because on one hand, in Ethereum and Bitcoin, there are mining aspects that continue, there is a decentralized army of nodes and miners that mine, do the computational work to unleash what that cryptocurrency is.
XRP simply had a preset amount. There’s no mining and there are two or a handful of people at the very top who hold the majority of it and the rest go out to market. So that distinction has been reflected by the SEC. Can you help explain for people to understand why it behaves differently and does the SEC have a point?
Deaton: I don’t really think that the SEC has clearly distinguished between Ethereum, for example, and XRP. Now, you made a great point, which is the distinction that they made is not in the operation of the token or distributed ledger or the underlying technology. The distinction is that Ripple, the company, owns 45% of the outstanding circulating supply. That is a unique difference than maybe Bitcoin or Ethereum. But operationally, they have not made a distinction.
I’m not here to defend Ripple, I’m here as XRP investors. I also want to add that it’s not just investors that I represent it. I represent businesses that utilize the token itself in the operation of their business. They’re not holding XRP so that it appreciates in price and that they sell it. They’re using it operationally themselves. That is a class of individuals that the SEC has no duty to. I just want to make that distinction.
If you go back to the origination that Vitalik Buterin made of Ethereum, it was a security in the beginning. I’ve made the point that a lot of these cryptocurrencies in the originalization of the token. Because it’s more centralized — you only have a few people that are what we call sponsors — that it starts off as a security and then it becomes sufficiently decentralized as time goes by.
Here, I know Brad Garlinghouse makes the distinction or the analogy that XRP is akin to a commodity such as oil and that Exxon Mobil can own as many barrels of oil that it wants — it doesn’t change it into a security. And that Ripple, just because they own 50% of the supply, says that that doesn’t make it a security.
That’s for the government and Ripple to fight it out. But what I can tell you is that the XRP sitting in my account on Coinbase or Uphold or any other exchange and the XRP that is held in literally hundreds of thousands of accounts of your viewers, for example, there’s no way the SEC can claim in good faith that those are unregistered securities.
Lau: You’re a holder of XRP.
Deaton: I own XRP, I own Bitcoin, I own Ethereum and a few other cryptocurrencies.
Lau: As a lawyer, were you aware that potentially, these regulatory handcuffs might come down one day?
Deaton: Now, I was shocked. I’m not shocked that the government now — as an asset class [XRP] becomes bigger and bigger and bigger — that they want to be involved in, that they’re going to seek jurisdiction, if you will, on the asset class. That doesn’t surprise me. But what surprised me is that a token that has been publicly traded for seven and a half years, that its price is correlated 100% to not what Ripple does, but to what Bitcoin does — let’s face it, Bitcoin drives the market and where Bitcoin goes, all other altcoins go. I was shocked that the fact that the SEC would claim that today’s XRP, the one held in all of our accounts, of people [that] have never heard of Ripple — there are people that simply saw a new asset class developing and they decided to diversify in that asset class and said, “You know what I’m going to do? I’m going to take a certain amount of money and I’m going to buy the top three or the top five market cap cryptocurrencies.” And they’ve never heard of Ripple. They’ve never heard of the CEO or the chairman, and that’s all they did. So I’m shocked that the government has not come out and declared affirmatively, “No, we’re not claiming that XRP is unregistered security, we’re only claiming the way that Ripple sells it, markets it, is a security.” If they would come out and classify that and make that distinction, me and my 11,000 people that I know I represent and I’m speaking for would go about our business and not try to be involved in this suit. But until the SEC makes that distinction, we’re going to fight.
Lau: How important did you feel that you needed to have a seat at the table on this lawsuit, what has been the reality for XRP holders? As we’ve seen the moment that that filing came down within weeks and even earlier than that, most exchanges banned XRP from the market. And so simply sucking the oxygen out for XRP holders to even have liquidity and to have a market.
Deaton: Oh, absolutely. Some of the stories are absolutely heartbreaking. The SEC — you have to realize they still have not been able to explain why file suit the second to last day that former chairman Jay Clayton was chairman when a new administration was coming in within 30 days. Why file the case, even though you were warned by former executives of the Securities Exchange Commission that you were going to cause — just by the mere filing of the case — multiple billions in losses of innocent investors?
The stories that I’ve read are heart-wrenching. People who inherited US$50,000 — their father’s life savings — and decided to do what I said earlier, where they just put it all in the top three, or maybe they listen to someone and made the mistake of putting it all in XRP and then to see the price depreciate by 75% and then be halted. As you said, the liquidity, you just look at your asset has been frozen and you have no optionality on how to use it and how to do anything with it. So the government has yet to explain that. I think it needs to be explained because I believe there are ulterior motives at play.
Lau: What are the next steps for you and your clients to get your day in court?
Deaton: As you said, I have to April 19th and what has happened is the judge has basically given me permission to make the argument formally and gave me until April 19th to file my formal motion to intervene, along with a memorandum of law, where I will try to persuade her that I meet the legal standard. When I say, I mean, all of the XRP holders and users, developers and businesses, and that we deserve that seat at the table because the SEC is making a claim that hurts us. And Ripple, in order to defend themselves, actually will prove that they don’t owe a duty to equity holders. We’re not securities holders. We’re not shareholders. So Ripple will, in order to defend themselves, will say, “We owe no obligation to these XRP holders.” And so Ripple’s, not going to make the argument for us, and the SEC’s not making the argument for us, so we have to make it for ourselves. I’m confident that I can make the argument. But you never know what a judge is going to do. All we can do is put our best foot forward.
Lau: Well, you got a chance. SEC had written a letter to U.S. District Judge Analisa Torres, arguing that XRP holders should not be permitted to intervene in the lawsuit, that the purposes of relisting appear so that XRP price could double. The allegation that this lawsuit is actually very much in the self interest of not only you — you are a self-admitted holder of XRP — obviously, all of the people that you represent are XRP holders. Could this legal move be simply a way to bump up the price?
Deaton: Well, let me address that. I really appreciate that you brought it up because I will tell you and I mean this not in a hyperbolic way. That letter by the Securities Exchange Commission is quite possibly the most misleading letter that I’ve ever seen submitted to a judge. For example, the comment that you stated. When I read that, where they claim they actually named me. “Movant Deaton’s motivation is to get the XRP unsuspended or relisted” and he said “so the price can double.” And I remember saying to myself, I’ve never talked about the price of XRP. I can disclose to you I’ve never lost money on XRP. So this isn’t about XRP that I own and the price appreciation. What I actually said that they intentionally misled the judge. What I said was that, as you may know, there was a movement in social media called #RelistXRP. It was trending on Twitter. Thousands of people were tagging the exchanges saying relist XRP. And I made a comment where I said, “Are you really confident that the Securities Exchange Commission is going to advise the exchanges that you can relist XRP? Because if they do, who knows? The price might double and then Ripple would have twice the amount of resources to fight the SEC.” That’s the direct quote.
And yet, the SEC absolutely intentionally, in my opinion, misled the court because they want to — I guess — take shots at me and try to come up with some ulterior motive. The other things that they misled the court by saying that there would be an avalanche potentially of XRP holders. There were five other plaintiffs and that’s it — five. Not an avalanche — five. And those individuals they simply claim, with the SEC claiming. They sued Ripple, claiming that Ripple sold an unregistered security. Well, that’s what the SEC is claiming. So they could never be successful in intervention because the SEC is making the same exact claim. I’m trying to seek intervention because the SEC is claiming, for example, on the record, they told the judge that they dispute whether XRP, the token itself, has any utility today. Well, that is absolutely factually not true, but it is in the opposite interest of XRP holders and XRP users and businesses that utilize the XRP technology.
Lau: Whether you think so or not, I actually think this moment is really good for the industry. Obviously, the lawsuit is quite painful for a lot of people, but it also reflects an evolution of the conversation where more people are starting to understand value and even from a regulatory point of view at the SEC, there is also recognition.
Even with the change of administration, the change of the chairman at SEC and there is going to be continued evolution. While this is painful, this moment, just like the Howie Test in 1949 could be that defining moment for crypto. In your view, how significant do you think this could be for the future of all cryptocurrencies, and potentially innovation not only from the United States but around the world?
Deaton: Well, I think that that’s a very astute analysis — what you just described is that we’re experiencing growing pains. Growing pains of a new asset class, needing regulatory clarity, being adopted that seeks to upend maybe legacy institutions and players. I understand what you’re saying and I think that history will probably prove you correct. I believe it is a critical moment because the SEC is not going to provide guidance. They’re using this case as a way to test their theory.
Since this case was filed, another case was filed by the SEC against LBRY. In the last few days where they’re alleging that that cryptocurrency is also a security. And so this case is going to provide clarity because I will tell you this, that if the SEC is successful in declaring and getting XRP deemed a security, then get in line. Whether it’s XLM or Cardano or Algo — I don’t mean to discriminate [against] any other cryptocurrency — including possibly Ether, get in line because the government’s going to come knocking on your door.
Lau: And that’s the concern even moving forward, also conscious of the fact that XRP is being used in business transactions, cross-border transactions and really around the world, akin to the same way that we value a country’s currency. Why is the U.S. dollar so strong? A lot of people are just making the bet [on] the U.S. economy that backs that up. That is reflected in the U.S. dollar in the same way that the Japanese yen, that economy and the way that it interacts in the global economy. In the same way that we talk about China, in the way that we talk about every nation’s sovereign currency. A cryptocurrency is different in a way that, yes, there’s a speculative nature when it comes to cryptocurrency. But there is also a business behind that protocol that implemented in business or in enterprise or even in government or DeFi or whatever it is that there is value there as well. To your point, is it a commodity rather than a security?
Deaton: Well, I look at it like this; XRP is a product. Now, what I mean by that is — let’s go back. You brought up Howie. The Supreme Court never said that the oranges were a security. What they said was that the tracts of land called orange groves, the way that it was sold along with a service contract, that the company Howie would purchase the land, they would purchase the trees, they would water it, they would do all those things, and then they would sell the oranges, and then all of the investors would get the prorated share of the profits. But they never came out and said the oranges themselves were securities. And so what we need to understand is that any asset, whether it’s Bitcoin, Ethereum, anything can be used as a security, by the way, that it’s being utilized by a business, but XRP is to me, the oranges of the Howie Test. In a matter of fact, the last case, a lot of people look at the Telegram case out of the Southern District of New York. The judge there actually, in his second opinion, stated that GRAM itself wasn’t the security, but the way that the business scheme was orchestrated, that that was the security.
And that’s a very important distinction. Chris Giancarlo who is in charge of the Digital Dollar Project for the United States government and a former chairman of the CFTC, stated that XRP was and is a commodity. And even as early as or late, I should say, as January 2020, 11 months before the SEC filed the case against Ripple and XRP, another CFTC chairman came out and said, “well, we don’t know if it’s a piece of commodity or security, we’re working with the Securities Exchange Commission to determine.” Eleven months later, the SEC comes out and says, “Oh, it’s been a security since 2013.” And so I think that that kind of confusion in the market is what is what is driving what’s going on. I think that the SEC is engaging in regulation by enforcement. They really are basically, “Let’s file the case, let’s see if we can get it deemed as a security. If we do, then look at all these other projects that are developing that will be able to participate.”
Lau: I spoke to SEC Commissioner Hester Peirce shortly after the Ripple lawsuit and asked her exactly that question. And I think one of the most notable things that she said was — this is somebody who’s been given the loving moniker by the industry as ‘Crypto Mom,’ because she seems to be realizing that innovation also needs to be supported by regulatory support. And what she said was, in her view and of course, it was a personal view, but generally speaking, she did not believe that regulatory clarity should be coming from enforcement, that there are other avenues for clarity. But at the end of the day, what better to yell out and make a clear message by holding one example case to hold towards everybody else who might even be thinking about violating the Bank Secrecy Act, by violating KYC/AML that the government is going to come down hard? In terms of whatever happens from this case, do you think that will also dictate and perhaps influence what we’re going to see from an agency-level in the United States?
Deaton: Absolutely. But I have to say that I think the regulation by enforcement, I understand the concept of, “Okay, we’re going to send a message that you need to comply with the laws, you need to know your customers, and you need to make sure you’re making the appropriate disclosures. That’s great.” But why not bring the case when you brought the 2017 ICOs cases, there were several of them. Why not then? Why wait until seven and a half years later when your own former CFTC chairmen are declaring that there’s no distinction today between Ethereum and XRP? There’s no doubt that the rest of the industry is watching.
I’m actually disappointed in the industry because there’s too much tribalism. In this case, you are 100% correct. This case is going to dictate the policy going forward with cryptocurrencies in the United States and the other projects are sitting back and waiting with bated breath on the outcome. But there’s no unity amongst the projects. It’s the Bitcoin maximalists believe Bitcoin is the chosen one and anything else is just not a good token and a waste of time. Or they even call it scams and things of that nature. I think that if we don’t have guidance and we’re not going to get it, then we’re going to get it from this case.
Lau: Do you think there will be a moment where or have we already reached this, that the concept of ‘too big to fail’ has become too big to shut down, that the horse is out of the barn? And for regulators, increasingly, what is the challenge here to affect change and to create clear legal rails without having a detrimental financial impact on millions of people, because this actually affects real lives and real businesses, as you’ve said.
Deaton: You brought up Hester Peirce and Crypto mom, and she had a great idea, and that was the safe harbor idea where she basically said that we’re going to give guidance, the SEC should give guidance, and you have three to five years. If your token or digital asset is not sufficiently decentralized within that three to five-year period, then the SEC will come knocking. And if it is, then you were given that sort of safe harbor period of time where you’re not worried about violating regulations or having to spend millions of dollars in legal fees to fight it out in court. And you can actually focus on innovation. I think that’s an amazing idea. Unfortunately, she hasn’t been able to convince her fellow commissioners or the previous chairman to come out and do that. And so until we have that, our only hope in the United States, and it saddens me to say that, is the Congress.
We need the United States Congress to come out and dictate which government agency is going to be in charge of regulating this developing asset class. Because I agree with you that the genie is out of the bottle and that if you were going to suppress this asset class, it was when it’s at 60 billion, 100 billion, 200 billion. It hits two trillion any day now, and you have now some of the most legendary investors coming out and putting millions and millions of dollars in some billions into Bitcoin or other cryptocurrency. So when you have the Teslas and the MicroStrategies actually making Bitcoin its primary monetary reserve asset on its balance sheet, I just don’t think the government’s going to be able to come in and quash that. And so what we need is, is it the Treasury? Is it the commodities agency? Is it the Securities Exchange Commission? Is it the Department of Justice and FinCEN? When you have multiple agencies all going for there’s what I call the jurisdictional grab, to try to get their hooks into the asset class, you’re going to get this confusion in the market. And unfortunately, it’s going to lead to suppression of innovation. That’s what’s at stake.
Lau: You bring up a great point. What we’re seeing outside of the U.S. is obviously the rest of the world and the rest of the world is fairly big. And there is an arbitrage moment where in the early days, I think in chapter in the first inning of crypto, we saw regulatory arbitrage where people went to either Seychelles or Gibraltar or Malta to route into some sort of regulatory environment. To now, what we’re seeing across Asia is for a global consumer class, consumer, retail, and institutional traditional investor class, you’re seeing cryptocurrency and this market being supported by some regulatory guidance. And what we’re seeing is that arbitrage moment, where there is a danger, where the United States, by restricting the ability of its own citizens to either engage for various reasons, that it becomes increasingly disconnected from the moves and the innovations of cryptocurrency in the rest of the world. Is there a bifurcation coming?
Deaton: Well, I think we’re very close to it, and I’ll tell you right now, a lot of people believe that, for example, China wants to get the U.S. dollar off of being the world’s reserve currency. And I believe that what’s at stake with digital currencies and if the United States does not get up to speed, that and a lot of the central bank, digital currencies, the digital dollar, that it actually will help the rest of the nations be more comfortable going away from the U.S. dollar as the world’s reserve currency. Maybe we go to a basket of currencies or digital currencies. And so I believe that the U.S. government is at a very critical moment. I hope that Gary Gensler realizes the moment when he comes in and gets confirmed as the new chairman of the Securities Exchange Commission. But unfortunately we’re missing tribalism in the cryptocurrency world, but tribalism seems to be everywhere. Depending on who you voted for president, you don’t speak to them anymore because they voted for one over the other. It’s a very dangerous time. We are in a very, very critical moment. This asset class, some have described it as the fourth industrial revolution and the United States, which has led every revolution, doesn’t seem to be taking the lead.
Lau: Well, you’re certainly taking the lead, representing more than 10,000, 11,000, as you said, and representing some real people and some real businesses and giving them a voice at the table in this lawsuit. We continue to watch what you’re doing. We thank you so much, John, for taking time out of a very busy season for you, especially with this suit. Is there something that you want to share with XRP holders? You’re a class action guy, you’re a trial attorney, a formidable one over the past decade and a half. What is it that you want to share with your clients and XRP holders?
Deaton: Well, I want to first thank them because, I believe that what you put in sometimes in life, it works out and you get a lot of people who are shocked that I would spend this much time giving up my time to fight this cause. But when you get the kind of reception that I’ve got, when you see these stories and you hear these people and it just motivates you more of the way I went. I was prepared for a lot of criticism, to be honest with you, because no good deed goes unpunished sometimes and the opposite has happened. I sort of found myself at a crossroads in my own legal career where although I love my clients, I was a little getting a little jaded because of the business side fighting lawyers all the time. The reception of these XRP voters and these businesses, small businesses, has sort of lifted my spirits. And I know it sounds corny, but it’s almost revived my belief in the human spirit and humanity. And so if they’re out there, I know that they’re discouraged we’re going to fight until we have no fight left. That’s, I guess, the only message that I can give and to say thank you, and say thank you for you for giving us the opportunity to be heard.
Lau: And I was just going to say thank you. And so let’s all just mutually agreed to say that this was a very refreshing conversation where we really dug below the rhetoric and really got to the crux of the matter. There’s a lot to discuss clearly. Clearly, there are points to be made, but we will be watching closely to see if you do get to pull up that chair at the table. John Deaton, managing partner of the Deaton Law Firm, joining us on this latest episode of Word on the Block. And everyone, I want to thank you for joining us here. There’s more to come. I’m Angie Lau, Forkast.News editor-in-chief. Until the next time.
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