Yesterday, Judge Torres ruled in court for the Southern District of New York that some sales of the XRP crypto token by Ripple were classified as securities and some sales were not. The judge’s arguments seem reasonable, but after reading the ruling for the first time, I intuitively found it inconsistent.

I want to explore why it’s problematic from a logical rather than a legal (I’m not a lawyer) perspective. Most legal findings start with a rationale and provide case law to support your arguments.

XRP sold to institutions is fungible with, just like, XRP sold to retail investors. So while Torres’ logic is sound, shouldn’t the ruling find that XRP is or isn’t a security, universally?

If the same instrument is sometimes a security and sometimes not, the laws are potentially a disaster.

A Summary of the XRP Statement

There were three scenarios that the judge explored:

• sales to institutional investors
• sales to retail investors who bought them through exchanges and did not know if they were primary or secondary sales
• other distributions were free gifts, so non-payment does not pass the Howey test.

Judge Torres found that the institutional sales involved securities. She wrote, “the nature of the Institutional Sales also supports the conclusion that Ripple sold XRP as an investment rather than for consumptive use.” Because the institutes bought directly from Ripple they had an investment contract.

The key question mark is about the retail investors who bought XRP from Ripple. Because they bought through programmatic sales through an exchange, buyers did not know if they were buying on the secondary market or directly from Ripple. Therefore, the judge argued that they did not know that the money was going to Ripple, so they did not invest expecting Ripple to promote XRP. She did not make an explicit decision on secondary sales.

By the way, Ripple has 2.6 million followers on Twitter. Another enterprise-oriented blockchain company, R3 (doesn’t have a token) has 56,600 followers. The Hyperledger association that supports open source software, including for the public blockchain (Ethereum Besu), has 79,400 supporters. So why does Ripple have such a huge following? Why don’t they expect Ripple to promote XRP?

Apply XRP logic to other ‘instruments’

Let’s explore an imperfect analogy.

Someone starts a company and turns it into a unicorn by starting it. Okay, not likely. Along the way, quite a few staff members received shares and own a large part of the company. Many employees are eager to sell and the volumes are quite large. So the company does a direct listing and the staff sells some of their shares as secondary market sales. Investors believe they are buying from staff or ex-staff, not the company. There are similarities with the Torres scenario.

In the absence of specific legislation that prevents itThere are shares that are publicly traded, but the company would not need to file a prospectus, which helps protect investors.

That’s the other weird thing about the XRP ruling. The protections go to those who need them least: institutions, not retail investors. That seems counterintuitive.

The goal here was to give a brief rational analysis rather than take sides. The SEC did not need to risk going to trial. The regulator had options such as providing a list of criteria for when a token qualifies as a security or introducing safe harbor provisions. He rolled the dice, and here we are.

Since this is a District Court ruling that has no legal precedent, the situation doesn’t seem much clearer.