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” of protecting investors.
The court ruled that XRP was sold as a security to institutional investors. Therefore, the Ripple 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.
Therefore, the Ripple decision creates a “class of quasi-securities” that “discriminates and morphs” based on how sophisticated the investors are. This discrimination is “counter-intuitive, inconsistent with SEC case law, and unprecedented in this context,” Stark wrote.
Additionally, the court decision declared that tokens sold through exchanges are not securities because exchange customers are “presumed to not know anything about the crypto-issuer,” Stark wrote, adding:
“But merely because an investor is ignorant or unwilling to do research, has never served as a viable defense to a securities violation.”
Stark further stated that the ruling is “not only patronizing but just plain insulting,” because it presumes “retail investors are typically stupid.”
Moreover, Stark believes that retail investors are not as ignorant as the court ruling presumes. Retail investors bought XRP because they believed XRP price will increase because of Ripple, even if they did not know they were supplying capital to the firm, he wrote.
As per the Ripple decision, if retail investors do not know the token issuers and the issuers do not who is buying their tokens, the token is not a security, Stark wrote. However, “the issue is whether investors can expect profits from the efforts of a third party, known or unknown,” he noted.
Stark further questioned:
“How can it be that tokens that are securities when sold to institutional investors then somehow miraculously transform and become “not securities” when those institutional investors or the issuer itself, sell the tokens on Coinbase or Binance?”
Overturn likely, Stark says
The Ripple court decision is a partial summary judgment from a single district court judge. According to Stark, while the ruling is “important” and “worthy of study,” it is “not binding precedent on other courts.”
He added that the Ripple ruling is likely to be appealed. Furthermore, “given the unprecedented nature of the decision” the court will likely certify an immediate, interlocutory appeal and the Second Circuit would likely hear the appeal, he wrote.
“The bottom line: Stock is always stock – it can’t transmogrify into “not stock.” So my take is that the SEC will appeal the Ripple decision to the 2nd Circuit and the 2nd Circuit will overturn the District Court’s rulings related to “programmatic” and “other sales.”
It is worth noting, however, 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, XRP’s designation never changes. As Coinbase’s chief legal officer Paul Grewal pointed out, the ruling said, “XRP, as a digital token, is not in and of itself a ‘contract, transaction.”
Sadeghi elaborated 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 does not itself ever become a security,” Sadeghi wrote.