Ripple is considered not only one of the leading crypto companies, but also a potential leader in the decentralized financial technology market. At the heart of the ecosystem is the XRP token, whose “official” status still raises questions from regulators and users. In early July in the United States should begin a major hearing on the claim from the SEC for its similarity to the security. How the litigation can turn out for the platform.
At the end of 2020, the Securities and Exchange Commission (SEC) accused the Californian company Ripple Labs of an unregistered sale of securities in the amount of $ 1.3 billion. Ripple chairman of the board of directors Chris Larsen and CEO of the company Brad Garlinghouse were also defendants in the lawsuit.
The SEC lawsuit collapsed the value of XRP tokens. In just a week, she fell by half. The regulator’s claims led several major cryptocurrency exchanges and platforms to stop trading XRP at once, including Binance, Coinbase, OKCoin, Galaxy Digital, Bitstamp, B2C2, eToro, and Kraken.
However, not everyone did this – many sites, for example, Huobi, OKEx and Poloniex continued to trade the token. At the end of March, it turned out that there was nothing illegal in their actions – the SEC itself provided an explanation. A regulator spokesman said that investors and exchanges are not breaking the law by trading XRP.
According to the SEC, Ripple organized the distribution of tokens in two ways. The first one is sales on open trading floors according to a pre-agreed algorithm. This method is described in the company documentation as “algorithmic selling”. They were most actively carried out on exchanges with the help of intermediaries and without direct control from the issuer. According to the regulator, in the period from 2013 to the end of 2020, XRP was sold in this way for a total of $ 763.37 million. However, Ripple stopped algorithmic sales back in 2019 due to their negative impact on the XRP rate.
In addition, the SEC lawsuit says that since 2013, Ripple has sold XRP tokens to institutional investors at a discount of 4% to 30% of the market price. The regulator notes that according to the terms of the agreements, the buyer had no right to resell these tokens for a period of 3 to 12 months. After the expiration of this period, the holder was able to freely trade XRP in the retail market.
According to the SEC, these institutional investors included at least 26 companies. One of them – Tetragon Financial Group – after the SEC lawsuit even tried to get the right to return most of the $ 200 million invested in Ripple. However, in this dispute, the court sided with the defendant.
In the period from 2013 to 2020, which covers the SEC’s claim, the volume of such sales of Ripple amounted to $ 624.85 million. Thus, the total amount of funds earned by the company through “algorithmic sales” and sales to institutions amounted to $ 1.39 billion – this amount is stated in the claim SEC requirement.
The peculiarity of the SEC lawsuit is that back in 2015, another American regulator, the Financial Crime Agency (FinCEN), admitted that XRP is not a security, but a “virtual currency”.
In FinCEN terminology, “virtual currency” is a medium of exchange that functions within some ecosystems, but does not possess all the attributes of a real currency; in particular, it does not have legal tender status in any jurisdiction. Virtual currency, according to the department, can be “convertible”. It then either has an equivalent value in real currency or serves as its substitute.
This definition of “virtual currency” differs from many others, adopted by the regulators of a number of countries. In particular, it is beginning to be widely used to define CBDC along with “digital currency”.
The Japanese regulator also considers the token to be a virtual asset. The project is supported by large companies, for example, SBI Holding. Ripple itself calls XRP “a digital asset designed to service payments within the XRP Ledger blockchain environment.” The latter is an open blockchain platform for cross-border transfers.
However, this does not stop the SEC. Previously, her lawsuits have already led to the failures of launches of other digital platforms – TON, Libra, and Kik.
The company insists that XRP, and bitcoin with ETH, are not securities, but cryptocurrencies. Moreover, Ripple’s lawyers have already managed to achieve their first small victory – they managed to obtain court permission to access internal SEC documents, which explains why the regulator refused to recognize bitcoin and ETH as securities.
The position of the Commission on this issue was explained back in 2018 by the head of the SEC’s corporate finance department, William Hinman. According to him, if the network is sufficiently decentralized, as is the case with bitcoin and Ethereum, then it is no longer an investment asset, and that is why there are no claims from the regulator against them. On the other hand, Ripple found defenders among former SEC executives – ex-chairman of the Commission Mary Jo White said that the regulator took a completely wrong position in the dispute with Ripple.
Despite the company’s position, it should be said that the decentralization of both the Ripple project and Ethereum itself is also often questioned. For example, according to the Blockchair portal, 72 thousand ETH were sent along with block zero to almost nine thousand addresses. Interestingly, during the entire period of the network’s existence (since July 2015), miners earned 60% less, 44 thousand ETH, according to coinmetrics. The sum of these two values gives the circulating supply. Soon, the Ethereum team plans to switch from PoW to PoS. This means that those network participants who store more tokens will receive more control.
It is believed that Ripple has a better chance of winning in court than TON and its predecessors.
However, there is speculation that even a defeat in court will not cause significant damage to Ripple.
In addition to the SEC, investors are also trying to sue Ripple. The latest class-action lawsuit against the company was filed in January when Florida investor Tyler Toomey went to court. He fully supports the regulator, believing that Ripple and Garlinghouse knew that the XRP token was a security, but ignored the mandatory registration procedure and misled clients with false statements. Toomey demands not only to fine the company and reimburses investors for losses, but also to impose an injunction against its operating activities.
This position of the SEC can be clearly seen in the text of the SEC’s statement of claim – the regulator unequivocally hints that the actions of the Ripple leaders are pulling at least deliberately misleading investors with the aim of personal enrichment. Garlinghouse’s behavior is highlighted in a separate chapter in the text of the claim. In five pages, the SEC details how the Ripple CEO promoted XRP as a reliable investment vehicle and at the same time actively sold it off.
Separate claims have been made against Larsen. The Commission gives an example of a case where it approved the restriction of XRP sales by one of the market makers to “stabilize or increase the value of an asset.” In general, according to the regulator, the organization of schemes for the illegal sale of tokens brought Larsen and Garlinghouse about $ 600 million.
Ripple’s theoretical defeat in court will have implications for the XRP token, but is unlikely to lead to the death of the company itself. She has long been trying to shift the focus of development to expanding the ecosystem and the range of various financial products: from payment infrastructure to credit and even logistics services.
At the moment, the main risks of Ripple are associated precisely with XRP – the rest of the ecosystem tools are “taken out” from under the blow. Nevertheless, the SEC statement contains information that casts a shadow, for example, on ODL (On-Demand Liquidity), a service of the RippleNet payment system that allows you to make cheap cross-border transfers via XRP with instant crediting of funds to a counterparty without prior depositing.
Thanks to the SEC’s lawsuit, it turned out that by mid-2020, only 15 companies were using its services.
The regulator believes that the only incentive for these companies to use ODL is “rewards” from Ripple.
However, this practice was known earlier – back in March 2020, The Block reported that Ripple paid $ 11.3 million for the use of ODL to MoneyGram on a quarterly basis. The exact list of projects that use the payment infrastructure is unknown. However, at the end of 2019, it was reported that these included funds transfer services Viamericas and FlashFX, goLance freelance platform, and financial services provider Interbank Peru.
However, ODL is only one of Ripple’s products, and even if only 15 providers use it, this does not prove the inability of the developers of this company to create popular products.
At the moment, more than 300 companies from 55 countries, including American Express, are already connected to RippleNet – a system of decentralized b2b payment solutions for making cheap cross-border transfers. It is considered not only as a competitor, but also as a full-fledged replacement for the system for transferring interbank information and making payments (SWIFT). The company itself neatly declares that both products can perfectly complement each other.
Another area in which Ripple is trying to develop is participation in projects to create national digital currencies (CBDC). Already at the end of 2020, the company was negotiating this matter with several central banks, and later it became known that the XRP Ledger infrastructure could form the basis of the digital euro. At least, this is the option that Banque de France, one of the most influential financial institutions in the European Union, is leaning towards.
Interestingly, the main reasons why the French central bank is leaning towards partnering with Ripple are the same factors for which it is most often criticized by both the regulator and users. This is a high level of network centralization and pre-selection of nodes that are allowed to confirm transactions.
Whether the company will have to introduce new utility tools into its ecosystem and whether it will eventually be able to “outgrow” the cryptocurrency market and become one of the largest players in the global financial services market will also depend on the outcome of the confrontation with the SEC.
So far, the Ripple token occupies one of the leading positions in the market: its capitalization by the end of May 2021 is approaching the $ 50 billion mark – the sixth position in the coinmarketcap rating. For comparison, the pharmaceutical company BioNTech, on the basis of which Pfizer’s COVID-19 vaccine is produced, costs about the same.
Too big to fall status is one of the factors that increase the likelihood of a positive outcome of the trial for the defendant.
Large financial institutions, including banks and payment systems that have become Ripple’s partners in recent years, are also interested in settling disputes with the SEC.
However, there is no need to wait for quick decisions. Practice shows that such court cases in the United States can be considered for years. Still, the fact that Ripple has a wide partner network around the world should play into the hands of the company. There is no reason to believe that XRP will become a thing of the past after the end of the lawsuit – no.
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