Howey Doin?
We have been busy arguing that it is not what constitutes a common enterprise or whether a particular token is decentralized enough that determines whether or not a crypto token itself is a security when bought on the secondary market. Those are Howey prongs that become moot, because Howey’s best interpretation is that it applies to primary market transactions in cash-flow-generating assets.
The “expectation of profits” prong is where the answer lies. Many people speculate endlessly hoping to get rich and buy Lambos (many wrongly call this “investing” including ChatGPT) while other people work hard to deliver the goods using blockchain. This creates real tension, and if we want an effective solution we must fully grasp this tension; the tension that some cryptocurrencies may have real utility. Arguably, some cryptos have more than the others, and this is the point John Deaton is making with respect to XRP:
Fair enough. We are not claiming that cryptos will never have enough utility. Perhaps XRP provides some utility to a subset of its holders. At the same time, there are 4,666,023 of them as of June 26, 2023. Do all of them use XRP? We doubt it. Or, is there a rather significant population (presumably well above 50% but ultimately we don’t really know) who want Ripple to win in court, with the hope that the price of their holdings will skyrocket, allowing them to cash out, regardless of the token's utility? Remember, people respond to incentives.
There is also the problem of timing. It is conceivable that while some cryptos already have some utility today, others simply haven’t existed long enough, or haven’t been adopted enough to showcase their full potential. This group may have utility in the future, if there is a future.
In our opinion, this is the master question:
How do we balance innovation and investor protection?
One rather extreme solution is a blanket crypto trading ban. We are not necessarily in favor of that approach even though we realize people are speculating and not investing. To be clear, speculation is at its best when it becomes part of a larger ecosystem channeling the insatiable desire to speculate into the greater good for society. Prohibiting that desire is generally not practical; the real magic happens when that desire finds a home in a broader market design that produces something useful. What useful things are produced from other market designs? In the context of the stock market we get capital formation, price discovery and assets to invest in. In the context of derivatives markets, we get risk management.
What do we get with all this crypto trading? What are the benefits and costs, and when we weigh them against each other, where does the scale land? Having some use cases is not enough, there has to be enough of them to justify its existence.