Ripple Decision is ‘Troublesome on Multiple Fronts,’ Says Former SEC Official

Former Securities and Exchange Commission (SEC) official John Reed Stark has raised concerns over the recent ruling on Ripple Lab’s case, describing it as “troublesome on multiple fronts” in a detailed analysis shared on LinkedIn.

Stark examined the basis of Judge Analisa Torres’ decision, which favored Ripple in a lawsuit filed by the SEC in 2020. The SEC alleged that Ripple’s XRP token, valued at $0.74, constituted security.

According to Judge Torres’ verdict, the XRP token was deemed a security when sold to institutional investors. However, the judge stated it did not qualify as a security in “programmatic sales” and other sales forms, including employee token distribution. Ripple now faces penalties for the alleged violation and rescission for institutional investors involved, with sales amounting to approximately $720 million.

Judge Torres argued that institutional investors reasonably expected Ripple to utilize the capital from sales to enhance the XRP ecosystem and increase the token’s price. Conversely, investors who purchased XRP through exchanges were considered to have different expectations.

For Stark, this decision establishes a “class of quasi-securities” that discriminates based on the investor’s sophistication. He expressed concern that the same token can sometimes be secure but not others. Stark argued that the decision contradicts investor protection principles, which aim to safeguard investors regardless of their level of knowledge or access to information.

Stark, who served as an attorney in the SEC’s Enforcement Division for over 18 years, believes the ruling is vulnerable and likely to be appealed, possibly resulting in a reversal. He emphasized that stocks cannot magically transform into something other than stocks, reinforcing the need for consistency in regulatory decisions.

The crypto community and Ripple celebrated Judge Torres’ ruling as a victory. Ripple’s CEO, Brad Garlinghouse, expressed confidence in the prolonged appeal process that the SEC would have to endure. He dismissed the institutional sale decision as a minor aspect of the lawsuit, stating that an appeal against the retail sale ruling would only strengthen Torres’ verdict.

In conclusion, the Ripple case has garnered significant attention, with Stark criticizing the ruling and predicting an appeal and subsequent reversal. The future of XRP and its classification as a security or not will likely be decided in higher courts, potentially setting a crucial precedent for the crypto industry.