The Ripple case ruling is “ripe for appeal” and subject to reversal, noted John Reed Stark, former chief internet enforcement officer at the SEC, in a LinkedIn post. job the 14th of July.
The court’s decision, which Cameron Winklevoss hailed as a watershed moment, “rests on shaky ground,” Stark wrote.
Ripple’s court ruling is ‘troubling on multiple fronts’
According to Stark, the court’s decision in the Ripple case is “troublesome on several fronts.” He wrote that the decision “seems anathema to the SEC’s mission” to protect investors.
The court ruled that XRP had been sold as a security to institutional investors. Therefore, the Ripple decision grants institutional investors the protections offered by the SEC. However, since the court ruled that XRP is not a security when sold on crypto exchanges, the ruling does not protect retail investors, Stark noted.
Therefore, the Ripple decision creates a “class of quasi-securities” that “discriminates and transforms” based on the degree of sophistication of investors. This discrimination is “counterintuitive, inconsistent with SEC case law, and unprecedented in this context,” Stark wrote.
Additionally, the court ruling stated that tokens sold through exchanges are not securities because the exchange’s customers are “presumed to know nothing about the crypto issuer,” Stark wrote, adding:
“But just because an investor is ignorant or unwilling to research, has never served as a viable defense to a securities violation.”
Stark further said the decision is “not only condescending but just plain insulting” because it assumes that “retail investors are generally stupid.”
Moreover, Stark thinks retail investors aren’t as ignorant as the court ruling suggests. Retail investors bought XRP because they thought the price of XRP would rise because of Ripple, even though they didn’t know they were providing capital to the company, he wrote.
According to the Ripple ruling, if retail investors don’t know the issuers of tokens and issuers don’t know who is buying their tokens, the token is not a security, Stark wrote. However, “the question is whether investors can expect benefits from the efforts of a third party, known or unknown,” he noted.
Stark further questioned:
“How can tokens that are securities when sold to institutional investors miraculously turn into ‘non-securities’ when those institutional investors or the issuer itself sells the tokens on Coinbase or Binance ?”
Reversal likely, says Stark
Ripple’s court decision is a partial summary judgment by a single district court judge. According to Stark, while the decision is “significant” and “worthy of study”, it “is not a binding precedent for other courts”.
He added that the Ripple decision would likely be appealed. Additionally, “given the unprecedented nature of the ruling,” the court will likely certify an immediate interlocutory appeal and the Second Circuit will likely hear the appeal, he wrote.
“The bottom line: stock is always stock – it can’t turn into ‘not stock’. So I think the SEC will appeal Ripple’s decision to the 2nd Circuit and the 2nd Circuit will reverse the court rulings in district regarding “programmatic” and “other sales”.
It should be noted, however, that Kayvan Sadeghi, a crypto lawyer and member of the Wall Street Blockchain Alliance, said Stark’s argument “misses or ignores” a key point.
Sadeghi said the court ruling does not designate XRP as a security and therefore the designation of XRP never changes. As Coinbase Chief Legal Officer Paul Grewal sharp out, the ruling said, “XRP, as a digital token, is not itself a ‘contract, a transaction’.
Sadeghi clarified that it is possible to structure investment contracts around any asset and include a token sale as part of an investment contract transaction. However, the token itself “does not embody the circumstances of these transactions and never itself becomes a security”, Sadeghi writing.
