XRP and Ripple
The SEC Lawsuit Explained
As the world of cryptocurrency broke out of its incipient stages, a name showed promise: XRP. Now, it’s making news for all the wrong reasons. Prominent asset managers in cryptocurrency have severed ties with XRP, and its value has plummeted. Also, Ripple, a company frequently associated with XRP, faces a lawsuit that could seal its future. Authorities have placed the magnifying glass on Ripple and XRP, and the world has noticed.
While some people might say it’s just another example of the unstable world of cryptocurrencies, this story goes further. So, in this episode of Company Forensics, we’ll dive into XRP, Ripple, and how one of the promises for the future went on a downward spiral. Though it’s common to think that XRP and Ripple are the same things, it’s not entirely true. First, let’s talk about Ripple. Originally called OpenCoin, Ripple Labs came up with Ripple in 2013.
It was a financial service that provided secure payment options for members of a global, online community. Every user would extend credit to members of their social network.
In short, imagine each individual becoming a bank. This decentralization set it apart from its biggest competitor, Bitcoin. At the time, Bitcoin’s biggest threat was that it still relied on centralized exchanges and didn’t have the safety for expansion globally.
Large Bitcoin exchanges like Mt. Gox suffered hackings that revealed these weaknesses. So, by 2014, many saw Ripple’s idea as a game changer. Experts even speculated that Ripple would either help Bitcoin or destroy it.
If you have noticed, we haven’t spoken about XRP, which is where it comes in.
Since Ripple showed such promise, it made sense to create a currency to go along with it. So, Ripple Labs helped develop the new cryptocurrency XRP. With a reliable platform like Ripple and a digital currency designed specifically for it, the combination was promising. But, first, let me show you some differences. First, Ripple Labs is a private company.
XRP, on the other hand, is an independent cryptocurrency; nobody owns it, even if Ripple helped create it, and anyone can buy it. Ripple is a platform for cheaper and faster solutions, such as sending money worldwide, which, in traditional currency, is still very expensive and slow.
It can use XRP as a currency to do so, but Ripple doesn’t control XRP, in theory. And, this is where the waters get a little muddy. Cryptocurrencies have struggled continuously to change the perspective on traditional banking.
Given the instability in cryptocurrencies, plus the control traditional banks still have, the transition towards mainstream crypto use is slow. So, as a platform, Ripple appealed to making things easier. Anyone and everyone would love the idea of moving money around the world, cheaper and faster. By the beginning of 2020, the company seemed to make progress towards that goal. In February 2020, Ripple announced that it had partnered with Azimo, a renowned European money transfer company.
It also had moved $24 million between the US and Mexico in a week. Azimo’s CEO at the time, Richard Ambrose, had said that Ripple’s product had saved anything between 30% to 50% in transfers between the Philippines and Europe. Ripple, it seemed, was having a good run. But let’s not forget about XRP, which was also doing great. At the time, it was the third-largest cryptocurrency in the world.
And, though it had heavy ups and downs, XRP had seen considerable growth. It traded at its highest value of $3.84 in January 2018, a massive improvement from its original value of $0.002. So, it seemed that both products had a bright future until they hit a roadblock, a massive one.
In the past, the SEC had ruled that Bitcoin and Ethereum, two of the biggest cryptocurrencies globally, were, in fact, cryptocurrencies. In 2015, the Justice Department treated XRP as a currency instead of a security. So, the SEC had no jurisdiction. Just as a reminder, securities can be equities or debts, and they can take the form of stocks, bonds, certificates, etc. Remember this.
The SEC starts to look your way if your securities are behaving irregularly.
Think of Jordan Belfort and Dan Bilzerian, and if you haven’t, check out our video on them. So, the SEC had said that Bitcoin and Ethereum were cryptos, so XRP was also a cryptocurrency, right? Not quite. There’s one main difference between XRP and the rest of the cryptocurrencies.
To understand this, we need to talk about cryptocurrency mining, a process by which third parties verify transactions between users. Once these are confirmed, miners add them to public ledgers. This process is also responsible for introducing new coins to the circulating supply. So, Bitcoin and Ethereum use public ledgers, but XRP has its ledger. Additionally, when XRP was born, Ripple created all the finite supply, all 100 billion units, at once.
In simple words, this means that third parties can’t generate more XRP.
You can’t introduce new XRP to the circulating supply because all of it is already circulating. But that’s not all. Out of those 100 billion units, Ripple holds about 48 billion in escrow to regulate and release as the market demands. Add to this the fact that Ripple Labs owns 6.
4 billion XRP units, and you start to see why it might not be a currency after all, and this is where the shit hits the fan. Once the SEC made a case that XRP wasn’t currency but rather security, mainly due to Ripple’s handling of it, legal action followed. In December of 2020, the authority charged Ripple and two of its two executives with offering unregistered securities for $1.3 BN. The SEC stated that Ripple, co-founder Christian Larsen, and CEO Bradley Garlinghouse raised capital to finance the company’s business and exchange XRP for non-cash considerations like labor and market-making services.
While doing so, Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result, investors lacked information to which they were entitled. And these severe accusations sparked a debate because the SEC claims that some cryptocurrencies are investment contracts and that XRP fell into this category.
But, in its complicated and, honestly, abstract language, the SEC could not provide conclusive statements. While the SEC, and probably many people around the world, struggled to define the world of cryptocurrencies, experts disagreed. The XRP didn’t need to be regulated, like stocks.
But, this debate is intense. Reading the SEC statements makes me wonder if anyone even understands what’s going on. And Ripple Labs took advantage of this chaos. They wasted no time in replying. Garlinghouse insisted that SEC had no reason to sue Ripple and that XRP was a currency.
He then said that this suit was a parting shot to all cryptocurrencies. According to him, the battle wasn’t over. Ripple has repeatedly stated that it doesn’t tap into those 48 billion XRPs at free will. But, let’s not forget, they own 6.4 billion XRPs.
So, even if the debate rages on, the damage was done, and the world had taken notice.
While the lawsuit targets Ripple, it affects both Ripple and XRP. Take, for example, asset managers like Grayscale Digital, one of the world’s largest. Grayscale liquidated all of its XRP funds when news broke out and bought more Bitcoin and other cryptocurrencies. After this big blow, other oversized wallets began plunging.
Wallets with more than 1 million XRPs were at their lowest since October 2019. The former third-largest cryptocurrency has seen its value drop 75% since the lawsuit, and some experts predict that XRP will be worthless. Digital banking service Revolut has warned its customers that, in all likelihood, they would delist XRP if their exchanging partners did so.
The statement read: “This would mean you might not be able to sell your XRP balance and could be stuck with a holding for which the price could drop to zero, in a worst-case scenario.” But, what does this all mean for Ripple?
Well, it could mean a lot. First of all, Ripple might have to separate itself from XRP, to satisfy authorities. Also, such control contradicts cryptocurrency’s philosophy of decentralization. Ripple could try to sell off all its XRP, but the value keeps plummeting, and many partners have delisted it. But XRP will continue to exist, even if Ripple becomes insolvent.
However, this case is a clear reminder that we are in the earliest stages of cryptocurrency. In five years, we might be talking about how Ripple once showed promise and then disappeared over a cup of coffee that we just bought with our Bitcoins.
The debate around cryptocurrencies will get more intense, and, sometimes, it might be hard to understand. So, it’s always motivating to have sources like Skillshare that help you learn about complicated topics with fun, thorough courses. I’m particularly fond of Meltem Demiror’s cryptocurrency course called Demystifying Cryptocurrency: Understanding Bitcoin and beyond.
In it, she breaks down this world into simple terms, with a step-by-step journey from the basics to advanced concepts like trading and the future of finance..
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