• Former SEC official warns Ripple Labs’ legal situation may worsen due to Judge Jed Rakoff’s recent ruling. 

• Bill Morgan highlights the importance of Rakoff’s interpretation and his expertise in securities law.

A warning has been issued by a previous U.S. Securities and Exchange Commission (SEC) official, stating that Ripple Labs’ legal situation is set to worsen following a crucial court ruling. John Reed Stark pointed to the recent decision by Judge Jed Rakoff of the Southern District of New York, who rejected Terraform Labs’ attempt to dismiss a securities fraud lawsuit brought against them by the SEC.

XRP’s Classification at Stake

Judge Jed Rakoff’s recent ruling has raised doubts about the classification of Ripple’s XRP in the cryptocurrency market, questioning whether it is a crypto asset or a security token. The ruling allows the SEC to continue its legal action against Terraform Labs and its founder, Do Kwon, despite the defense’s claims that the SEC lacked jurisdiction and that Terraform’s TerraUSD, an algorithmic stablecoin, should not be considered an unregistered security. Importantly, Judge Rakoff declined to apply the reasoning from a previous court decision in July that favored Ripple to the current Terraform case.

In the Ripple legal case, Judge Analisa Torres concluded that the sales of Ripple’s XRP to retail investors did not violate federal securities laws because these buyers purchased on secondary markets. However, Judge Rakoff pointed out that the “distinction between purchasers” is irrelevant under the Howey test, which determines the classification of crypto assets as securities.

John Reed Stark, the former SEC Chair of the Office of Internet Enforcement, stated that Judge Rakoff’s ruling is a significant victory for the SEC and could have serious implications for the ongoing Ripple case. He believes that the SEC might use this precedent to appeal against the landmark ruling in favor of XRP, potentially affecting the outcome of the overall case.

Ripple’s Judgment Based on Extensive Factual Record

Ripple’s chief legal officer, Stuart Alderoty, quickly reassured the XRP community after the comments made by the former SEC official.

Alderoty made it clear that the recent decision in the Terraform Labs case does not impact Ripple’s ruling that XRP is not a security. He explained that the Terra case is just beginning, and the judge must accept everything the SEC claims as true at this stage. In contrast, Ripple’s judgment was based on a comprehensive factual record over two years presented to the court.

Ripple’s chief technology officer, David Schwartz, also shared his perspective, stating that the decision in the Terraform case was influenced by the “unusual properties” of that specific case and not a standard representation of how crypto assets typically operate.

Alderoty and Schwartz emphasized that Judge Rakoff’s rejection of the Ripple verdict should not be interpreted as a broad judgment on all crypto assets. Instead, it revolves around the unique circumstances of each lawsuit and the specific facts presented in each case.

Bill Morgan’s Response

Bill Morgan’s response to Schwartz’s perspective suggests that XRP holders may take comfort in his insights. If Judge Rakoff’s interpretation is accurate and the SEC does not appeal or fails to successfully appeal the Torres decision, the regulatory clarity that XRP currently enjoys might be more exceptional and challenging to achieve than initially anticipated after the ruling.

Adding to the complexity of this legal situation, it is essential to note that Judge Jed Rakoff is highly experienced in securities law. John Reed Stark describes him as the most respected and knowledgeable securities law judge in the U.S. federal court system. With an impressive track record of over 180 published articles, 835 speeches, and 1,800 judicial opinions, Rakoff’s dissenting stance carries significant weight and should not be disregarded.