The Ripple ruling is “up for appeal” and likely to be overturned, noted John Reed Stark, former head of internet compliance at the SEC, in a LinkedIn post on July 14.

The court decision, which Cameron Winklevoss hailed as a watershed moment, “resides on shaky ground,” Stark wrote.

Ripple court ruling is ‘troubling on multiple fronts’

According to Stark, the court ruling in the Ripple case is “troubling on multiple fronts.” He wrote that the ruling “seems anathema to the SEC’s mission” to protect investors.

The court ruled that XRP was sold as a security to institutional investors. Therefore, Ripple’s ruling 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.

Thus, Ripple’s decision creates a “quasi-securities class” that “discriminates and morphs” based on investor sophistication. This discrimination is “counter-intuitive, inconsistent with SEC case law, and unprecedented in this context,” Stark wrote.

Furthermore, the court decision stated that the tokens sold through the exchanges are not securities because it is “presumed that the clients of the exchange know nothing about the crypto issuer,” Stark wrote, adding:

“But simply because an investor is ignorant or unwilling to investigate, it has never served as a viable defense to a securities violation.”

Stark further stated that the ruling “is not only condescending but downright insulting”, because it assumes that “retail investors are often stupid”.

Furthermore, Stark believes that retail investors are not as ignorant as the court ruling implies. Retail investors bought XRP because they believed that the price of XRP would increase because of Ripple, even if they did not know that they were supplying the company with capital, he wrote.

Under Ripple’s decision, if retail investors do not know the token issuers and the issuers do not 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,” she noted.

Stark further questioned:

“How can it be that tokens that are securities when sold to institutional investors somehow miraculously transform into ‘non-securities’ when those institutional investors or the issuer itself sells the tokens on Coinbase or Binance?”

Possible tipping, says Stark

The Ripple court’s decision is a partial summary judgment by a single district court judge. According to Stark, while the ruling is “important” and “worth studying,” it “does not set a binding precedent for other courts.”

He added that Ripple’s ruling is likely to be appealed. In addition, “given the unprecedented nature of the decision,” the court will likely grant an immediate interlocutory appeal and the Second Circuit will likely hear the appeal, he wrote.

“The final result: stocks are always stocks, they cannot be transformed into “non-stocks”. So my view is that the SEC will appeal Ripple’s decision to the Second Circuit and the Second Circuit will vacate the District Court rulings related to “programmatic” and “other sales.”

However, it is worth noting that Kayvan Sadeghi, a crypto lawyer and member of the Wall Street Blockchain Alliance, said that Stark’s argument “misses or ignores” a key point.

Sadeghi said that the court ruling does not designate XRP as a security and therefore the XRP designation never changes. As Coinbase’s chief legal officer, Paul Grewal pointed Outside, the ruling read: “XRP, as a digital token, is not itself a ‘contract, transaction’.”

Sadeghi explained 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 those transactions and never becomes a security,” Sadeghi wrote.

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