Ripple CTO States Why Court Rejected Judge Torres’ XRP Sales Distinction, Deaton Reacts

Ripple CTO comments on the recent Terra ruling, highlighting possible reasons why the court rejected Judge Torres’ distinction of Ripple’s XRP sales.

There has been a debate about a recent ruling on the TerraForm Labs’ case, where a federal judge rejected Judge Torres’ distinction regarding Ripple’s XRP sales.

It bears mentioning that Judge Torres ordered that Ripple’s sales to institutional investors were securities while finding those sold through digital exchanges as non-securities.

Interestingly, TerraForm Labs and its founder, Do Kwon, attempted to use Judge Torres’ decision as a legal precedent to dismiss the SEC’s lawsuit. In response, the SEC filed a countermotion to dismiss the move, stating that Judge Torres erred in the ruling.

Judge Jed Rakoff, who presided over the Terra case, rejected Judge Torres’ distinction, thus stirring a major debate on Twitter.

Commenting, a former securities lawyer, John Reed Stark, tweeted today that the Ripple decision is already in “big trouble.”

Ripple CTO Thinks Otherwise

However, Ripple CTO David Schwartz does not think so. He noted that the ruling is based on some unusual perspective of the scheme and nothing about how cryptocurrencies work.

Schwartz shared an excerpt from the ruling, saying that nothing the judge stated applies to typical crypto assets.

This ruling seems to be based no some very unsual properties of this particular scheme and not the way cryptocurrencies generally work. None of the below, the crux of the reasoning here, applies to typical cryptocurrencies as far as I can tell. pic.twitter.com/P41jiwlZaG

— David "JoelKatz" Schwartz (@JoelKatz) August 1, 2023

Additionally, Schwartz clarified that Judge Rakoff’s rejection of Judge Torres’ ruling was based on differences in facts, not his disagreement.

Terra Ruling Divided Into 2 Categories

According to the Ripple CTO, Judge Rakoff’s decision in the TerraForm Labs’ case can be divided into two possible interpretations for XRP enthusiasts: the worst and best-case scenarios.

For the worst-case scenario, Schwartz said the judge could imply that it will not follow Judge Torres’ decision because he applied additional tests not part of Howey.

For the best scenario, Ripple CTO noted that Judge Rakoff could have disagreed with the argument to follow Judge Torres’ decision because her reasoning indirectly implicated facts that do not apply to the Terraform Labs case.

Additionally, Schwartz said Judge Rakoff could be saying that the Howey test does not distinguish between secondary market sales and those sold to institutional investors. Hence, his decision not to follow his colleague’s decision.

“So if the court did so in Ripple, it was either wrong or did so because the facts in that particular case justified that distinction, and the court thinks the facts, in this case, don’t justify such a distinction,” Schwartz added.

The put two another way, the court might be saying that there's no rule that secondary sales need to be treated differently from institutional sales because nothing in the Howey test says so. So if the court did so in Ripple, it was either wrong or did so because the facts in…

— David "JoelKatz" Schwartz (@JoelKatz) August 1, 2023

Deaton Applauds Schwartz’s Review

Meanwhile, Schwartz’s analysis stirred reactions from crypto enthusiasts, including Crypto-Law.US founder John Deaton.

Attorney Deaton applauded Ripple’s CTO for providing an outstanding review of the ruling. Deaton asserted that some of the best legal analyses he has read usually comes from non-lawyers.

As I’ve said before, some of the best legal analysis I’ve read come from non-lawyers. Outstanding review. ? https://t.co/XJ9v1yoTIM

— John E Deaton (@JohnEDeaton1) August 1, 2023

Alderoty Says Terra Case Changes Nothing

Schwartz is not the only Ripple exec who reacted to the Terra case. As reported today, Ripple Chief Legal Officer Stuart Alderoty clarified TerraForm Labs’ recent ruling. 

According to Alderoty, Judge Rakoff’s decision does not change anything about the Ripple lawsuit, including that XRP is not a security.