Former United States Securities Exchanges Commission (SEC) attorney John Reed Stark has expressed concerns over the recent Ripple decision, cautioning against premature celebration within the crypto community. In the long-standing case, the blockchain firm earned partial victory after the court declared XRP was not a security.
While the decision has been widely regarded as a loss for the SEC, Reed believes it rests on shaky ground and is likely to be appealed and potentially reversed, 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.),” Reed said.
The former SEC official expects the court to overturn the district court’s rulings on programmatic and other sales. Without such a reversal, he foresees the emergence of a new type of token, programmatic buyer tokens (PBTs).
“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.
Troubling issues
Reed argued that the decision raises troubling issues on multiple fronts and appears to contradict the SEC’s mission and authority. He highlighted two major points of contention with the Ripple decision. Firstly, he criticized the discrepancy in SEC protection between institutional and retail investors.
The attorney noted that while institutional investors are granted full SEC protection and remedies for violations, retail investors are left without similar safeguards. This inequitable treatment raises concerns about the decision’s alignment with the SEC’s mission to protect all investors.
He also questioned the notion put forth in the Ripple decision that if a crypto-issuer sells their tokens through an exchange, securities regulations do not apply because exchange customers are presumed to be unaware of the issuer.
Reed argues that investor ignorance or a lack of research has never been a valid defense for securities violations. Reed suggests that retail investors, although they may not have known they were supplying capital to Ripple, likely had access to the same information as institutional investors regarding Ripple’s intentions.
“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,” he said.
Crypto purchasers’ knowledge of a security
He also raised questions about the Ripple Court’s presumption that purchasers may not know who the issuer is or who is selling the token. He stated that it should be presumed that purchasers know these details.
Furthermore, the absence of a contract between the buyer and seller of a stock on an exchange does not negate the identification of the stock as a security. The key issue, according to Reed, should be whether investors can expect profits from the efforts of a third party, regardless of the counterparty’s identity.
Reed pointed out that token buyers often engage in speculative investment based on the expectation that someone else will be willing to pay more for the token—a concept known as “The Greater Fool Theory.” Even if a retail investor buys a token solely based on this theory and is unaware of the precise counterparty, the investment should still be considered a security, argues Reed.
Finally, Reed questioned the notion that tokens sold to institutional investors as securities can suddenly transform into “not securities” when those same tokens are sold on platforms like Coinbase or Binance. He finds this transformation inconsistent and raises concerns about the implications for the crypto industry.
While Reed is projecting the SEC to appeal the case, the Ripple team has a contrary opinion. According to CEO Brad Garlinghouse, appealing the case by the regulator might take some time.
Notably Reed has for long backed the SEC in its crypto enforcement at some point warning that investors should get out of the sector. As reported by Finbold, Reed stated that the latest action by the SEC is an indication that regulatory purge has just begun. At some point he called on crypto enthusiasts to face the law and avoid personal attacks on the enforcement body.
