And today, John is taking a short break from the lawsuits to visit Forkast.News. He is the managing partner of Deaton Law Firm and representative of more than 10,000 XRP investors. John Deaton, welcome to the show.
John Deaton: Thanks. Thanks for receiving me.
Lau: Why did you accept this case?
Deaton: On Christmas Eve, I picked up the box after hearing about it. I decided to withdraw the complaint and read. I got to the first paragraph, and when I read that the SEC was accusing Ripple of selling unregistered securities from 2013 to the present day, I knew what was coming. I knew that the exchanges would be removed [and] I knew there would be a standstill and suspension of the negotiation. I was surprised by this, because it was a departure from the previous dispute. Typically, they will limit you to certain specific dates and transactions. But in the way the complaint is written and alleged, it is claiming that the token itself – XRP – is inherently a security. After that, I decided that we needed to fight back, because I don’t believe that the Securities and Exchange Commission is really looking for investors.
Lau: And therein lies the heart of the matter: is XRP a security or a currency? What was also interesting about the process is that eight years ago, the XRP had been circling the globe here in Asia, in Japan, very clear, reinforcing recently that it is not a title. And, therefore, it is freely traded in Japan. Why is there so much divergence of opinion, even at a regulatory level?
Deaton: Well, personally, I think what is happening is that you are having this new class of assets that has gone from a class of collective assets of 200 billion to almost two trillion. And, of course, the trend is upward. I believe that there are regulatory agencies doing what we call jurisdictional appropriation. They want to be a part of it. They want to extend their reach to that asset class. Even today, you have the Commodities Future Trade Commission going after individuals who use Dogecoin and other cryptocurrencies. However, you also made them say that Ether and Bitcoin are commodities. And then you have the Securities Exchange Commission claiming that XRP is a security. That kind of regulatory confusion or schizophrenia, if you like, is where we are today. Unfortunately, the United States is lagging behind in other parts of the world.
Lau: But one thing is certain. SEC is there to look after investors’ interests [and] the interests of individuals. The rules are in place. You can’t just go out and say something and not reveal a whole lot of information to potential investors, take their money and then not have that fiduciary responsibility. The SEC in the law requires you to assume fiduciary responsibility. In that way, they saw that XRP may or may not have done this.
They claim that XRP behaves very differently even from Ethereum or Bitcoin. Because on the 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 release what this cryptocurrency is.
The XRP simply had a predefined amount. There is no mining and there are two or a few people at the top who own most of it and the rest go to the market. Therefore, this distinction was reflected by the SEC. Can you help explain why people understand why it behaves differently and the SEC is right?
Deaton: I really don’t think the SEC has made a clear distinction between Ethereum, for example, and XRP. Now, you made a big observation, which is the distinction they made is not in the operation of the distributed token or ledger or the underlying technology. The difference is that Ripple, the company, holds 45% of the stock in circulation. This is a unique difference than perhaps Bitcoin or Ethereum. But, operationally, they made no distinction.
I am not here to defend Ripple, I am here as XRP investors. I also want to add that it is not just the investors that I represent. I represent companies that use their own token in the operation of their business. They are not holding XRP so that its price is valued and that they sell it. They are using it themselves operationally. This is a class of individuals that the SEC is under no obligation to. I just want to make that distinction.
If you go back to the origin that Vitalik Buterin made of Ethereum, it was a security in the beginning. I mentioned that many of these cryptocurrencies in the originalization of the token. Because it is more centralized – you only have a few people who are what we call sponsors – it starts as a security and then becomes sufficiently decentralized over time.
Here, I know that Brad Garlinghouse makes the distinction or analogy that XRP is similar to a commodity like oil and that Exxon Mobil can own as many barrels of oil as it wants – it doesn’t make it a title. And that Ripple, just because they own 50% of the stock, says that that doesn’t make it a security.
This is for the government and Ripple to fight against. But what I can say is that the XRP in my account at Coinbase or Uphold or any other exchange and the XRP that is held in literally hundreds of thousands of accounts by its viewers, for example, there is no way the SEC can claim in good faith to which are unregistered securities.
Lau: You are an XRP holder.
Deaton: I own XRP, I own Bitcoin, I own Ethereum and some other cryptocurrencies.
Lau: As a lawyer, were you aware that, potentially, these regulatory handcuffs could fall off one day?
Deaton: Now, I was shocked. I am not shocked that the government now – as an asset class [XRP] it gets bigger and bigger – what they want to get involved in, who will seek jurisdiction, if you like, over the asset class. This does not surprise me. But what surprised me is that a token that has been publicly traded for seven and a half years, its price is 100% correlated not with what Ripple does, but with what Bitcoin does – let’s face it, Bitcoin drives the market and where Bitcoin goes, all other altcoins go. I was shocked that the SEC would claim that today’s XRP, the one held in all of our accounts, of people [that] never heard of Ripple – there are people who just saw a new asset class developing and decided to diversify into that asset class and said, “Do 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 three or the five major market value cryptocurrencies. ”And they’ve never heard of Ripple. They’ve never heard of the CEO or the chairman of the board, and that’s all they’ve done. : “No, we are not claiming that XRP is an unregistered title, we are just claiming that the way Ripple sells it, markets it and is a title.” If they came and rated it and made that distinction, me and my 11,000 people that I know I represent and who I’m talking to would take care of our business and wouldn’t try to be involved in this process.
Lau: How important did you think you needed to have a seat at the table in this process, what has been the reality for XRP holders? As we saw at the time that this order fell within weeks and even before that, most exchanges banned XRP from the market. And simply sucking oxygen to XRP holders to have liquidity and a market.
Deaton: Oh, absolutely. Some of the stories are absolutely moving. The SEC – you have to realize that they still haven’t been able to explain why to file a lawsuit on the penultimate day when former President Jay Clayton was president when a new government was coming in 30 days. Why open the case, even after being warned by former Securities and Exchange Commission executives that it would cause – just by simply filing the case – several billion in losses from innocent investors?
The stories I read are heartbreaking. People who inherited $ 50,000 – their dad’s life savings – and decided to do what I said before, where they just put everything in the top three, or maybe they heard someone and made the mistake of putting everything in XRP and then watch the price devalue by 75% and then be stopped. As you said, liquidity, you just see that your asset is frozen and you have no option of how to use it and how to do something with it. Therefore, the government has not yet explained this. I think it needs to be explained because I believe there are ulterior motives at stake.
Lau: What are the next steps for you and your clients to start the day in court?
Deaton: As you said, I have April 19 and what happened is that the judge basically gave me permission to present the argument formally and gave me until April 19 to present my formal motion of intervention, along with a memorandum of law, where I will go try to persuade her that I meet legal standards. When I say, I mean, all XRP holders and users, developers and companies, and that we deserve that seat at the table because the SEC is making a statement that harms us. And Ripple, to defend himself, is really going to prove that they don’t have a duty to shareholders. We are not title holders. We are not shareholders. Therefore, Ripple, to defend itself, will say, “We have no obligation to these XRP holders.” And so, Ripple is not going to make the argument for us, and the SEC is not going to make the argument for us, so we have to do it for ourselves. I am confident that I can argue. But you never know what a judge is going to do. All we can do is do our best.
Lau: Well, you have a chance. The SEC had written a letter to US District Judge Analisa Torres, arguing that XRP holders should not be allowed to intervene in the process, that the purposes of the new registration appear so that the price of XRP can double. The claim that this process is, in fact, very much in the self-interest not just of you – you are an admitted XRP holder – obviously, all the people you represent are XRP holders. Could this legal change simply be a way to increase the price?
Deaton: Well, let me address that. I really appreciate that you brought it up, because I’m going to tell you and I don’t want to say it in a hyperbolic way. This letter from the Securities and Exchange Commission is possibly the most misleading letter I have ever seen sent to a judge. For example, the comment you declared. When I read this, they claim that they actually named me. “Movant Deaton’s motivation is to have the XRP removed from suspension or re-listed” and he said “so that the price can double”. And I remember telling myself, I never talked about the price of XRP. I can reveal to you that I never lost money on XRP. Therefore, it is not about the XRP I have and the price appreciation. What I really said was that they intentionally deceived the judge. What I said is that, as you may know, there was a movement on social media called #RelistXRP. It was a trend on Twitter. Thousands of people were checking the bags saying XRP relist. And I made a comment where I said, “Are you really confident that the Securities and Exchange Commission will inform the exchanges that you can re-list the XRP? Because if they do, who knows? The price could double and then Ripple would have twice the amount of resources to fight the SEC. ”This is the direct quote.
And yet, the SEC absolutely intentionally, in my opinion, deceived the court because they want – I think – to shoot me and try to invent some hidden reason. The other things that they deceived the court, saying that there would be an avalanche potentially of XRP holders. There were five other claimants and that’s it – five. It is not an avalanche – five. And these individuals they simply claim, with the SEC’s claim. They sued Ripple, claiming that Ripple sold an unregistered security. Well, that is what the SEC is saying. Therefore, they could never succeed in the intervention because the SEC is making exactly the same statement. I am trying to request intervention because the SEC is officially claiming, for example, that the judge has been told that they contest whether the XRP, the token itself, is of any use today. Well, this is not absolutely true, but it is in the opposite interest of XRP holders and XRP users and companies using XRP technology.
Lau: Whether you think so or not, I really think this is a very good time for the industry. Obviously, the process is quite painful for many people, but it also reflects an evolution in the conversation where more people are beginning to understand the value and even from the regulatory point of view at the SEC, there is also recognition.
Even with the change of management, the change of the SEC chairman and there will be continuous evolution. While painful, this moment, like the Howie Test in 1949, can be that turning point for cryptography. In your opinion, how significant do you think this can be for the future of all cryptocurrencies and, potentially, for innovation not only in the United States, but around the world?
Deaton: Well, I think it is a very astute analysis – what you just described is that we are experiencing growing pains. Growing pains of a new class of assets, needing regulatory clarity, being adopted that aims to bring down institutions and perhaps legacy players. I understand what you are saying and I think the story will probably prove you are correct. I believe it is a critical moment because the SEC is not going to provide guidance. They are using this case as a way to test their theory.
Since this case was closed, another case has been filed by the SEC against LBRY. In the past few days, where they are claiming that that cryptocurrency is also a title. And therefore, this case will clarify why I will tell you this, that if the SEC is successful in declaring and making the XRP a title, then get in line. Be it XLM or Cardano or Something – I don’t want to discriminate [against] any other cryptocurrency – possibly including Ether, get in line because the government is going to knock on your door.
Lau: And that is the concern even in the future, also aware of the fact that XRP is being used in commercial transactions, international transactions and really all over the world, in the same way that we value a country’s currency. Why is the US dollar so strong? Many people are just making the bet [on] the US economy that supports this. This is reflected in the US dollar in the same way as the Japanese yen, this economy and the way it interacts with the global economy. In the same way that we speak of China, in the same way that we speak of the sovereign currency of each nation. A cryptocurrency is different in a way that, yes, there is a speculative nature when it comes to cryptocurrency. But there is also a business behind this protocol that is implemented in business or in the company or even in the government or DeFi or whatever it is that also has value. Is it more of a commodity to you than a title?
Deaton: Well, I see it like that; XRP is a product. Now, what I mean by that is – let’s go back. You mentioned Howie. The Supreme Court never said that oranges were a guarantee. What they said was that the land called orangery, the way it was sold along with a service contract, that the Howie company would buy the land, they would buy the trees, they would irrigate, they would do all these things, and then they would sell the oranges , and then all investors would receive the prorated share of the profits. But they never came and said that the oranges themselves were titles. And so what we need to understand is that any asset, be it Bitcoin, Ethereum, anything can be used as security, in fact, that is being used by a company, but XRP is, for me, the orange of the Howie Test. In fact, the latter case, many people look at the Telegram case of the Southern District of New York. The judge there, in fact, in his second opinion, said that GRAM itself was not security, but the way the business scheme was orchestrated, that this was security.
And this is a very important distinction. Chris Giancarlo who is in charge of Digital Dollar Project to the United States government and former president of the CFTC, he stated that XRP was and is a commodity. And even sooner or later, I must say, in January 2020, 11 months before the SEC opened the case against Ripple and XRP, another CFTC president came out and said, “well, we don’t know if it’s a piece of commodity or security , we are 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 kind of confusion in the market is what is driving what is happening. I think the SEC is engaging in enforcement regulation. They really are basically, “Let’s file the case, let’s see if we can take it as a guarantee. If we do, look at all of these other projects in development that may participate. “
Lau: I spoke to the SEC commissioner Hester Peirce right after the Ripple process and asked exactly that question. And I think one of the most notable things she said was – this is someone who has been given the industry’s loving nickname of ‘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 opinion and of course, a personal view, but in general, she does not believe that regulatory clarity should come from application, that there are other paths to clarity. But at the end of the day, it would be better to shout and leave a clear message, holding an exemplary case for everyone else who might be thinking of violating the Banking Secrecy Act, violating KYC / AML that the government is going to come down with force ? In terms of whatever happens in this case, do you think it will also dictate and perhaps influence what we will see at the agency level in the United States?
Deaton: Absolutely. But I must say that I think the regulation by imposition, I understand the concept of, “Okay, let’s send a message that you need to comply with the laws, you need to know your customers, and you need to make sure you make the disclosures appropriate. That’s great.” But why not present the case when you brought the 2017 ICO cases, there were several of them. Why not then? Why wait until seven and a half years later, when your own former CFTC presidents are declaring that there is no distinction today between Ethereum and XRP? There is no doubt that the rest of the industry is watching.
In fact, I am disappointed in the industry because there is a lot of tribalism. In that case, you are 100% correct. This case will dictate the future policy with cryptocurrencies in the United States and the other projects are at a standstill and waiting anxiously for the result. But there is no unity between the projects. It is Bitcoin maximalists who believe that Bitcoin is the chosen one and anything else is 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 have no guidance and we are not going to make it, then we will make it from this case.
Lau: Do you think there will come a time when or we have already achieved this, that the concept of “too big to fail” has become too big to be turned off, that the horse is out of the barn? And for regulators, more and more, what is the challenge here to affect change and create clear legal trails without having a detrimental financial impact on millions of people, because it really affects real lives and real business, as you said.
Deaton: You mentioned Hester Peirce and the mother of Crypto, and she had a great idea, and that was the idea of a safe haven, where she basically said that we are going to give guidance, the SEC should give guidance and you are three to five years old. If your token or digital asset is not sufficiently decentralized within that three to five year period, the SEC will take action. And if it is, then you have had that kind of safe harbor period where you are not concerned with violating regulations or having to spend millions of dollars in attorney fees to fight in court. And you can really focus on innovation. I think it’s an incredible idea. Unfortunately, she was unable to convince her fellow commissioners or the previous president to come and do that. And until we have that, our only hope in the United States, and it saddens me to say that, is Congress.
We need the United States Congress to speak up and dictate which government agency will be responsible for regulating this class of developing assets. Because I agree with you that the genius is out of the bottle and that if you were to suppress this class of assets, it would be when it was at 60 billion, 100 billion, 200 billion. It reaches two trillion any day now, and you now have some of the most legendary investors showing up and putting millions and millions of dollars into a few billion in Bitcoin or another cryptocurrency. So, when you have Teslas and MicroStrategies really making Bitcoin your main currency reserve asset on your balance sheet, I just don’t think the government will be able to come in and write it off. And then what we need is, is it the Treasury? Is it the commodities agency? Is it the Securities and Exchange Commission? Is the Department of Justice and FinCEN? When you have multiple agencies, there is what I call jurisdictional capture, to try to put your hooks in the asset class, you will get this mess on the market. And, unfortunately, this will lead to the suppression of innovation. That is what is at stake.
Lau: You mentioned a big point. What we are seeing outside the USA is obviously the rest of the world and the rest of the world is quite large. And there is a moment of arbitration in which in the early days, I think in the chapter of the first round of cryptography, we saw a regulatory arbitration in which people went to Seychelles, Gibraltar or Malta to enter some kind of regulatory environment. So far, what we are seeing across Asia is for a global consumer class, consumer, retail and traditional institutional investor class, you are seeing cryptocurrency and this market is being supported by some regulatory guidance. And what we are seeing is that moment of arbitrage, where there is a danger, in which the United States, by restricting the ability of its own citizens to engage for various reasons, is increasingly disconnected from the movements and innovations of cryptocurrency in the rest of the world. Is there a fork coming?
Deaton: Well, I think we’re very close to that, and I’ll tell you now, many people believe that, for example, China wants to remove the US dollar from being the world’s reserve currency. And I believe that what is at stake with digital currencies and if the United States doesn’t update, that and a lot of the central bank, digital currencies, the digital dollar, it will really help the rest of the nations to be more comfortable leaving the dollar American currency as the world’s reserve currency. Maybe we are going to a basket of coins or digital coins. And so I believe that the US government is at a very critical moment. I hope that Gary Gensler he realizes the moment he enters and is confirmed as the new chairman of the Securities and Exchange Commission. But, unfortunately, we are losing tribalism in the cryptocurrency world, but tribalism seems to be everywhere. Depending on who you voted for president, you don’t talk to them anymore because they voted for each other. It is 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 led all revolutions, does not appear to be taking the lead.
Lau: Well, you are certainly taking the lead, representing more than 10,000, 11,000, as you said, and representing some real people and some real companies and giving them a voice at the table in this process. We continue to watch what you are doing. Thanks so much, John, for taking the time out of such a busy season for you, especially with this suit. Is there anything you want to share with XRP owners? You’re a class-action guy, you’re a defense attorney, a formidable lawyer for the past decade and a half. What do you want to share with your customers and XRP holders?
Deaton: Well, first I want to thank you because, I believe that what you put in life sometimes works, and you have a lot of people who are shocked that I would spend so much time giving up my time to fight for this cause. But when you have the kind of reception that I had, when you see these stories and listen to these people, it motivates you more the way I was. I was prepared for a lot of criticism, to be honest with you, because no good deed goes unpunished at times and the opposite happens. I kind of found myself at a crossroads in my own legal career where, although I love my clients, I was getting a little tired from the business side fighting lawyers all the time. The reception of these XRP voters and these companies, small companies, kind of lifted my spirits. And I know it sounds corny, but it almost revived my belief in the human spirit and humanity. And so if they are out there, I know they are discouraged that we are going to fight until we have no more fighting. This is, I think, the only message I can give and say thanks, and say thanks for you for giving us the opportunity to be heard.
Lau: And I was just going to say thank you. And then we will all mutually agree to say that this was a very refreshing conversation where we really dug below the rhetoric and really got to the heart of the matter. There is much to discuss clearly. Clearly, there are points to be highlighted, but we will be watching closely to see if you can pull that chair off the table. John Deaton, managing partner of Deaton Law Firm, joins us in this latest episode of Word on the Block. And everyone, I want to thank you for joining us here. There is more to come. I’m Angie Lau, Forkast.News boss Editor. Until next time.