John Reed Stark, a former attorney for the United States Securities Exchange Commission (SEC), has voiced his worries on the recent Ripple ruling and advised against hasty celebrations among the cryptocurrency community. The court’s ruling that XRP was not a security gave the blockchain company a partial success in the protracted legal battle.
Despite the fact that the SEC has generally been seen to have lost, Reed feels the judgment is on fragile basis and is likely to be challenged and maybe overturned, he said in a post on July 14.
“But IMHO, the decision resides on shaky ground, is likely (and ripe) for appeal, will likely result in reversal and is not necessarily a cause for celebration. (Please don’t kill the messenger.)”.
John Reed Stark
The former SEC official believes the district court’s decisions on programmatic and other sales will be overturned by the appeals court. He predicts the rise of a new sort of token, known as programmatic buyer tokens (PBTs), in the absence of such a reversal.
“Otherwise, get ready for a new crypto-iteration – PBTs – programmatic buyer tokens, available on your friendly neighborhood (and unregistered and unregulated) crypto-trading platform,” he said.
Challenging problems
According to Reed, the ruling raises grave questions on a number of fronts and appears to go beyond the SEC’s mandate and power. He drew attention to two main issues with the Ripple ruling. He attacked the difference between institutional and ordinary investors’ access to SEC protection in the first place.
The lawyer pointed out that whereas institutional investors receive complete SEC protection and remedies for breaches, individual investors are not afforded the same protections. The decision’s compliance with the SEC’s mandate to safeguard all investors is called into question by this unfair treatment.
Additionally, he questioned the argument made in the Ripple ruling that, if a cryptocurrency issuer sells its tokens through an exchange, securities laws do not apply since the exchange’s users are deemed to be uninformed of the issuer.
According to Reed, a lack of knowledge on the part of the investor or a lack of study has never been an acceptable excuse for securities crimes. Although they might not have been aware they were giving money to Ripple, Reed contends that retail investors had access to the same information as institutional investors on Ripple’s plans.
“Moreover, I don’t to buy into the idea that retail investors are so ignorant. The purchasers may not have known that they were supplying capital to Ripple, but they presumably knew the same information that the institutional investors knew about Ripple’s intentions” .
John Reed Stark
Knowledge cryptocurrency buyers have of a security
The Ripple Court’s assumption that buyers might not be aware of the identity of the issuer or the seller of the token was also questioned by him. It should be assumed that buyers are aware of these facts, he said.
A contract between the buyer and seller of a stock on an exchange is not required in order for the stock to be identified as a security. Regardless of who the counterparty is, Reed contends that the most important question is whether investors can anticipate making money from their efforts.
The « Greater Fool Theory » is a theory, as Reed noted, that buyers of tokens frequently engage in speculative investing in the hope that someone else would be prepared to pay more for the token. According to Reed, the investment should still be regarded as a security even if a retail investor purchases a token based only on this principle and is uninformed of the specific counterparty.
Last but not least, Reed questioned the idea that tokens that had previously been sold to institutional investors as securities might suddenly become « not securities » when traded on exchanges like Coinbase or Binance. He criticizes this shift for being incoherent and expresses concern about what it would mean for the cryptocurrency market.
The Ripple team thinks differently from Reed, who predicts the SEC will appeal the case. CEO Brad Garlinghouse stated that it could take some time for the regulator to appeal the verdict.
Notably Reed has consistently backed the SEC in its enforcement of cryptocurrency laws, while at the same time cautioning investors to exit the market. Finbold quoted Reed as saying that the SEC’s most recent move is proof that the regulatory purging has only just begun. At one point, he urged crypto aficionados to respect the law and refrain from disparaging the police agency personally.
