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9.21.21   2:12 PM

It was never John Deaton’s plan to become one of the most irksome thorns in the side of the U.S. Securities and Exchange Commission, calling into question the agency’s whole enforcement approach to the roughly $2 trillion cryptocurrency market. But now, that’s exactly what he is doing — and the role appears to suit him.

A former Marine-turned-class-action lawyer, Deaton got interested in crypto in 2016, and eventually invested in Ripple coin XRP. In 2020, he was taken aback when the SEC sued Ripple over allegations that XRP was an unregistered security. He raised concerns about the agency’s case, which he didn’t think was warranted and threatened to wipe out the value of XRP, in a legal filing as a private citizen on his own behalf.

Over the ensuing months, his effort snowballed into a crusade on behalf of thousands of XRP holders. Currently, he represents 20,000 who are arguing that the agency is overstepping its authority. (He also provides regular updates about the litigation on his Twitter feed, blog and YouTube channel.)

The XRP holders' push creates a snag for the SEC in its ongoing attempt to rein in the crypto market, which has swelled massively from its beginnings as a fringe asset class worth just a few billion dollars in the early 2010s. It’s a bit awkward for the SEC to say it’s fighting to protect investors when the investors themselves are rejecting the agency’s protection.

Meanwhile, crypto has become a live wire in public policy discussions. Within the past month or so, a drumbeat of complaints about crypto — that it hogs electricity and is bad for the environment, that it’s a magnet for criminals, that it operates as the “Wild West" and is dangerously volatile — has grown louder.

Veteran financial journalists like Fox Business correspondent Charlie Gasparino and Diana Henriques, a former New York Times reporter who literally wrote the book on Ponzi schemer Bernie Madoff, have started to take stands on crypto. SEC Chairman Gary Gensler recently testified about crypto regulation before a Senate committee, and Coinbase CEO Brian Armstrong has come out swinging against the agency for threatening to sue over the exchange’s (now aborted) crypto product Lend.

The standoff comes down to one thing, in Deaton’s view: protecting the incumbent banking industry from a competitive threat. We caught up with Deaton, and he explained more to us about his thoughts on crypto and the Ripple case.

  • Why is a crypto crackdown happening now — it's all about the numbers


    Business of Business: So, what I wanted to ask you, first of all is, we've been observing what looks like this big drama between the regulators and crypto entrepreneurs, crypto investors. And you play a really interesting role in that ongoing drama, both in terms of your general sort of job and also with respect to the Ripple case. Can you talk a little bit about that?

    JD: What started off is with me, I got into Bitcoin and cryptocurrencies, just as an individual interested person. XRP, Bitcoin, Ethereum were primarily my investments. And then I learned of the Ripple case. I'm not a securities lawyer by training or education or practice. But when I read that complaint, I knew that it made absolutely no sense, legally speaking, the way the SEC was approaching it, the way it went down by being filed on the last day of former Chairman Jay Clayton's tenure at the SEC.

    Just there were too many questions. And so I realized that what was going to happen would be delistings and suspensions of XRP. And market cap was going to be wiped out. And I got upset that people's lives were being impacted because of politics. And, and so I filed a writ of mandamus, on behalf of myself, and several people I know, in Rhode Island federal court seeking to order the SEC to limit the charges to the only claims that it can actually prove. And so that's how this started.

    Then of course, what this turned out to be is it started as an individual person with a few friends who sort of wanted to take a stand, and then all of a sudden, there were thousands, tens of thousands, actually now up to 20,000 people now who have joined in our fight against the SEC. It's not about Ripple for us, you know, Ripple has an impressive legal team. They can defend their actions, I don't defend Ripple. I don't take a position on what their business model is or any transactions they made. The position I'm taking is that the SEC has made claims that it doesn't have a good faith basis to make, quite frankly, and it is inconsistent with 75 years of securities laws. And so that's how I got involved.

    Right, okay. So to recap real quickly, the SEC sued Ripple alleging that XRP was an unregistered security. And this is all in the guise of protecting investors. And you are representing something like 20,000 holders of XRP who are saying, "Hey, wait I'm not being defrauded. I want to have a say here." Is that about right? 

    That's right. See, because the SEC did something that they normally never do. Normally, when they sue a company, they'll say that the specific sells that you made at these particular occasions, that those were unregistered securities. In this case, the SEC said that all XRP, including today's XRP that is traded in the secondary market, and from people who have no connection to Ripple, that those are securities. And so that's the real, unique distinction that separates this case from other cases. 

    And it seems like after the Ripple case, now with the disclosure of the Coinbase investigation, and just in general, I've noticed a lot of chatter. There's more chatter that's kind of more confrontational about crypto, just kind of out on Twitter. I've noticed journalists who don't normally cover crypto suddenly like taking sides. What do you attribute this rise of interest in regulating crypto to? 

    This [makes gesture referring to money]. It comes to the money. Listen, today, I doin't know exactly the number, but you've got to understand — there is a big difference between a $200 billion total asset class, versus today, it's almost $2.5 trillion.  You have Bitcoin being projected to replace the market cap of gold, or equal the market cap of gold. That's a $10 trillion asset. You have El Salvador listing Bitcoin as legal tender in its country. And so, basically it has developed into what is projected to be $10s of trillions in market cap.

    “You've got this asset class that's not going away. It's not a fad. And it's ballooning and ballooning. It's gotten the attention of the regulators.”

    I think that's in essence one of the big reasons that it came down and you have what is called a jurisdictional grab, right? You have the SEC and Gary Gensler saying, "Hey, you know, these are securities," even though he's on record, when he was [a professor] at M.I.T., saying they were more like commodities. But he's now the chairman of the SEC and they want their regulatory hands right in the middle of all of that.

    That's what's going on. You've got this asset class that's not going away. It's not a fad. And it's ballooning and ballooning. It's gotten the attention of the regulators. And I think that's the common lay person's answer, if you will. 

    It's so big?  

    It's getting bigger. It's just getting bigger and bigger. I mean, you have some of the greatest investors in the world, like ARK's Cathie Wood, you know, just at the SALT conference, saying that a conservative projection of Bitcoin within the next four or five years is half a million dollars per Bitcoin [Editors note: current value is about $44,000.] Raoul Pal, you know, a former Goldman Sachs hedge fund manager, is predicting Ethereum is going to go to $20,000 or $30,000 per Ethereum. [Current price per Ether is about $3,000.] And so, if those things happen, [the market] goes from $2.3 trillion today to you know, $50 trillion, $40 trillion, $30 trillion, whatever it is going to be. You can't ignore it when it grows to this extent. 

  • It's the Wild West for crypto and a land grab for U.S. regulators


    Do you think that SEC Chairman Gensler has a point when he says that there needs to be a bigger regulatory framework, or some kind of regulatory framework, to put around this, because it's like the Wild West? 

    I think it's fair to say that we need regulations. That doesn't mean we need more regulations. it doesn't mean we need bigger regulations. What we need are the right regulations, and we need the right jurisdictional body. And so when you have the Wild West, I would agree with them. It's the Wild West, but from a different perspective.  It's where all of these agencies [are getting involved]. Is it the U.S. Treasury, the [Commodity Futures Trading Commission], the SEC, [the Financial Crimes Enforcement Network]? I mean, you have multiple government agencies that are getting involved here. Look at the Ripple case. In 2015, Ripple was fined $700,000 for violating banking laws, the banking secrecy laws, right? And so, they entered into a settlement agreement with FinCEN and the Department of Justice that they would register all future sales of XRP with FinCEN. But of courses, there's that one line in the agreement that says, "This does not mean that you don't have comply with other regulatory agencies or securities laws."  So now, you basically have a token that was deemed a convertible virtual currency in 2015, and in 2020 it's being called a security. That's the kind of clarity we need. 

    Obviously, it makes sense if you're trying to apply the famous test when it comes to what's an investment contract with the company, the Howey test. You know, it's probably never been talked about so much as it has in the last several years. It is difficult to take a case that came down from the U.S. Supreme Court in 1946 and apply it to modern-day blockchain technology. There's no doubt the right answer is Congress. Congress needs to step in and make clear which governmental agency is going to be the proper one to exercise oversight, and provide guidance to market participants.  Because we're at a crossroads. 

    Ethereum went overseas to develop their technology because they were worried about securities laws. They ended up getting a pass in 2018. But you have these technologies that are not setting up their headquarters in the United States because of this lack of clarity. I always hesitate when someone says, "Do we need more, bigger types of regulations?" No, we just need the right type of regulations.  There's always going to be bad players, right? I think the SEC does have a role when you have these pump and dump schemes, or you have a fraudulent actor out there. But right now, what they're doing...listen, we have Coinbase that the SEC is going after, and we have state agencies going after BlockFi. And we just learned yesterday that the state is going after Celsius. And why? How are they protecting investors? They're protecting me and you from getting 4% interesting on our assets, when they banks give us what at this point, .0005%? 

    “[Crypto] is probably the most disruptive technology to ever hit any type of financial industry. And it threatens incumbent banks. I think we're seeing the exercise of their influence.”

    How is that I can put my money in a bank account, and the bank can pull all of the funds of its other customers and pay me a very slight little bit of interest and there's no issue. But if I purchase my Bitcoin, or my XRP, or my Ethereum, and I loan it to Coinbase, and then they lend it out, and give me 4% interest, how is that different? Why does that all of a sudden need to be shut down? And so my problem and my criticism is that I believe that regulators today are doing what they always do, and that is protect incumbents. You have this technology, decentralized finance, it is probably the most disruptive technology to ever hit any type of financial industry. And it threatens incumbent banks. I think we're seeing the exercise of their influence. I have no hesitation in saying that. I believe that firmly.

    What do you make of Gensler's testimony before the Senate banking committee? 

    I think we saw a staged performance between him and and Sen. Warren, and I'm just politically speaking, whoever the incumbent is, I vote out, whether they're Republican or Democrat. I vote not by party lines. 

    But that, to me, was a performance where Elizabeth Warren said, "I expect the SEC to take the lead," and she cited Coinbase. And I think that Gary Gensler, as everyone knows, taught at M.I.T., and he taught blockchain technology, and there was this hope because former chairman Clayton was more perceived to be anti-crypto. It's interesting that now he's involved heavily in crypto after he leaves. He took more of a hands off approach except for prosecuting the ICOs [initial coin offerings] and whatnot. And everyone thought that Gary Gensler would be more crypto-friendly, and it's the opposite, right? I think that when Gary Gensler becomes the chairman, he becomes a politician. What did he say to Congress, he actually said that there is clarity, and that the SEC has provided clarity to markets and that the Howey test is stood the test of time, and that it's fairly straightforward when it comes to these modern-day technologies. And he talks about all of this great clarity we have, but if we just back up to April 2018 — we'e discovered a video where Chairman Gensler says the crypto industry needs clarity, and he even states Ripple and Ethereum, the largest market cap players, need clarity. That's in April 2018, when he was not the chairman. Fast forward three years, and you have even more uncertainty because Ethereum gets a pass yet Ripple and XRP are being prosecuted in court. 

    There is no doubt that the crypto market has been put on notice. If you saw the tweet from Brian Armstrong, who is the CEO of Coinbase, and founder, he was trying to work with the SEC, and Chairman Gensler testified that they're open to that — come in, we'll talk it out. We have to assume that Brian Armstrong is telling the truth, when he says he was informed that the SEC wasn't taking any meetings with crypto companies. Then they got the Wells notice saying that they're going to be sued. So if the SEC is going after not just Ripple, but now they're going after the biggest publicly traded crypto company in the United States, I think the SEC and Chairman Gensler are sending the message that "we're coming for you, and we're coming for your crypto." 

  • What Deaton would say to crypto critics — no, it's not just for criminals


    There is still a lot of criticism surrounding crypto, things like that it's extremely risky, that you don't know what's going to happen, that you can lose all your money, that you can't spend it on anything. What do you say to these critics? 

    Well, first of all, I'd say that's not true. You have debit cards that tell you where you can use your crypto. Pay Pal is is allowing you to spend your crypto as a substitute for fiat. But I'd asked those critics and those people if you ever heard of a company called Amazon, if they ever heard of a company called Google. Those companies were extremely risky companies in their first 10 years. Bitcoin is, what 12, years old, and these other cryptos are a decade maybe. And so this industry, this asset class is literally in its first inning, if you will, if we're in a nine-inning baseball game. And so if you look at the volatility of Bitcoin, absolutely, it's a volatile asset. And people need to know that, and it has had literally 60%, 70%, 80% market cap declines in rapid moments. So yes, it's volatile. But so our equities equity market isn't volatile? Is GameStop, was that volatile when it was going up and down? I mean, we have AMC movie theaters, is that a volatile stock?

    “This asset class is literally in its first inning, if you will, if we're in a nine-inning baseball game.”

    And so I think the volatility argument and the speculation argument, I think are the weakest of all arguments. The only other weaker argument that the critics have, would be where they claim that crypto currencies digital assets are used for nefarious reasons and for illegal activities. That was a that was a valid criticism in 2012, because it was in its infancy and you had Silk Road. But you'd have to be an idiot if you were actually going to try to do drug transactions or any other type of illegal actions on a public ledger. 

    It just doesn't say "John Deaton," right? It doesn't say my name, but it's a distributed public ledger technology where every single transaction can be seen. And so there if there is probable cause that there is at least illicit activity, and these transactions show it, you get a search warrant, and you learn the identity of that person. And you have the absolute most clear cut evidence, absent DNA evidence in, in criminal jurisprudence, you know what I mean? So, I think those are just arguments of people who want to protect the incumbent system.

    Well, we have these ransomware attacks, and people still use crypto as payment for that. But didn't the FBI get it back? At one point?

    Yeah, they did. But what are we going to do? You know, most drug deals are done with cash, right? Are we going to stop ATM deposits or withdrawals? I just think those are ignorant type of criticisms. As far as all we can't, you know, move forward, or it has to be stopped. I mean, you literally have people who have claimed that Bitcoin and all cryptocurrencies should be outlawed. And that just makes no sense to me.

  • It's not about what happens if the SEC wins; it's what happens if the SEC loses


    Back to the Ripple case for a second, what happens if the SEC wins? We're not saying that it will. But what what happens to Ripple? What happens to XRP?

    Well, I guess the question is, what is a win. If they win outright, of what they've alleged in the complaint, then that means that all XRP would be deemed a security. And in essence, Ripple would only be able to sell it with after registering it and sell it to accredited investors where they have certain more specific requirements. They're [also] seeking $1.3 billion. And so if they received some type of verdict, there probably be would be a fund and XRP holders could get reimbursed to a certain extent. That doesn't mean Ripple's out of business. It would certainly transform their business and limit them in many ways. 

    Would that set a bad precedent, I take it? 

    Oh, great question. Absolutely, it would be extremely bad. Because the SEC, everyone needs to understand this isn't like a new cryptocurrency where they've offered a fundraising event, and they're going to develop the blockchain technology.  That's an ICO, and that [case law] is well-settled. This is the SEC going back seven and a half years retroactivel. It's insane that from 2013 until the present day, all the sales of XRP were unregistered securities.  [That precedent could have] impact on literally 10,000 cryptos. I'd say that there's a couple hundred of them that are interesting, and the rest of them are garbage, but it would have an absolute detrimental impact. I could name you 10 cryptocurrencies off top my head that would then be like, potentially out of business as well.

    What's interesting is that since this Coinbase news and the attacks on decentralized finance, and on BlockFi and Celsius, some of Ripple's biggest criticse actually have acknowledged that they're rooting for Ripple because of that precedent that could be established. I don't see that happening. I think that the case is ripe for a settlement where Ripple agrees that early transactions in 2013 to 2017 [were securities offerings], when there weren't hundreds of thousands of XRP holders and there was a much, much smaller ecosystem. That's where the SEC has potentially legitimate claims against Ripple. You would imagine that that's where a deal would be struck where the ongoing future and present day sells are not deemed securities. But those earlier transactions were and Ripple pays a fine and the market gets some clarity. Unfortunately, whoever the SEC goes after next will have to fight that same fight.

    “The more interesting question is what happens if the SEC outright loses...I personally think that they'd be out of business, as far as going after existing [crypto] ecosystems.”

    I think the more interesting question is what happens if the SEC outright loses, right? And if that happens, if Ripple was successful, for example, in their fair notice defense, and the SEC has an outright loss, that has the hugest of implications. You know, if you look at Gary Gensler, going back to your question about his testimony, both in his testimony and in his letter to Elizabeth Warren, he actually says that the SEC has never lost a case, right? Like he's almost boasting that, "Hey, we know what we're doing. And we never lose." And so the loss that that the SEC would have, and the implication on the industry is huge. I personally think that they'd be out of business, as far as going after existing [crypto] ecosystems. If there is a new coin and it's not developed yet, they'll still have their jurisdiction. But if you're talking about all of the other cryptocurrencies that have been existing for the last 4,5,6,7,8 years, I think the SEC would basically be out of business trying to regulate them.

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