2021 was the year when Ethereum consolidated its position as altcoin king but what happened to its once-biggest-competitor, XRP? Well, if you listen to its supporters and many retail investors, the token’s woes are all the fault of the Securities and Exchange Commission (SEC).
In December 2020, the SEC charged Ripple, along with executive chairman Christian Larsen and CEO Bradley Garlinghouse, with issuing an unregistered $1.3 billion securities offering. The XRP community is claiming injustice and victimization and John Deaton, a lawyer who represents nearly 70,000 investors, claims that the SEC’s lawsuit has potentially helped other crypto tokens get ahead of the XRP.
Deaton is even accusing the SEC of an outright conflict of interest with Ethereum, alleging that Jay Clayton, the SEC’s previous chairman (who was in favor of suing Ripple), currently provides legal services to Joseph Lubin’s company, ConsenSyns via his firm Sullivan and Cromwell.
Before the SEC’s lawsuit was announced, Ether (ETH) had already outgrown XRP’s market cap by nearly as three times. However, the lawsuit does seem to have had an immediate impact on XRP’s price as it fell by nearly 50% following the SEC’s announcement.
This has led to a strong feeling among XRP’s most fervent supporters that Ethereum has an unfair advantage. SEC Chairman Gary Gensler recently reiterated that only Bitcoin is a commodity while most crypto tokens are in breach of regulations. In another interview, Gensler also stated that crypto tokens issued to the public to raise funds for an enterprise with the aim that they will eventually go up in value passes the Howey test for securities.
Gensler’s consistent issue with crypto has been the lack of official disclosures, and the SEC argues that from 2013 Ripple raised a total of $1.3 billion by selling XRP tokens “without providing the type of financial and managerial information typically provided in registration statements and subsequent periodic and current filings.”
Larson is being accused of making up to $600 million selling XRP tokens while Ripple used the money from its XRP sales to fund its enterprise – a practice that the SEC says fits the definition of a security.
Neither Ripple nor Larsen denies they profited from the sale of the tokens. Ripple is instead focusing its legal defense on arguing that XRP is not a security, that it didn’t receive a notice in advance of the lawsuit on its irregularities, and that the sale of XRP tokens made up only a small portion of the overall trading volume.
Ripple also filed a Freedom of Information Request asking the SEC to explain how it came to the conclusion that Ether was not a security.
It might be reasonable to agree with XRP investors that the SEC has selected a single specific target to make an example of rather than tackling the wider industry. After all, Gensler himself has admitted that issuers of crypto-tokens are not in line with regulations and the connection between the previous SEC chairman and Joseph Lubin also raises many questions.
On the other hand, the SEC’s case against XRP can also be seen on its own merits. What got XRP a lot of regulatory attention was its massive imbalance in its distribution combined with its lack of transparency. Apparently, Ripple’s founders minted themselves as multi-millionaires from the very start of the token’s history.
XRP supply and distribution
Ripple, previously known as Opencoin, was founded in 2012 and uses blockchain and digital-ledger technology to create products for its cross-border payment systems. Its only token and most-promoted product is XRP, launched to the public in January 2013 at just $0.005874 per coin.
The main aim of XRP was for it to be used as a liquidity bridge between currencies and payment transfers, or simply as a token used to transfer money instantaneously. Back when it was launched, it distinguished itself from Bitcoin due to its transaction speed and much lower transfer fees. XRP also enriched the founders considerably.
Ripple’s distribution of the XRP token is opaque, to say the least. A study by Messari once claimed that Ripple gave incorrect figures of XRP’s market cap and trading volume mainly due to the illiquid status of most of the tokens. Initially, Ripple issued 100 billion XRP tokens of which 20 billion were allocated to the founders, namely Arthur Britto, Jed McCaleb, and Chris Larsen. Garlinghouse is also estimated to own a significant portion of XRP tokens.
In December 2017, Ripple placed as many as 55 billion tokens in escrow. However, Messari also estimated that another 25% of the total supply was owned by accounts that had selling restrictions on them, leaving only around 21% of the total supply available for sale to the secondary market.
Considering potential wash trading by exchanges outside the US, and that a large number of XRP tokens owned by Ripple and its founders were locked, Messari calculated that its market cap and trading volumes were actually as much as 50% less than was officially reported.
Today, Ripple is claiming that XRP’s use in international transfers, mainly from the Asia Pacific region, is increasing exponentially. This increase is due to Ripple’s partnerships with various financial institutions and money payment companies that are opting to use its services.
The total number of XRP’s transactions does seem to have increased, yet in the projection of its large market cap and trading volume, Ripple may have gotten ahead of itself. Recently, it’s apparently found the need to start buying back tokens from the secondary market.
David Schwartz, Ripple’s Chief Technology Officer once said that the XRP payments system nets itself with market makers and market participants. This basically means that according to Schwartz, the XRP market is liquid enough to fulfill buying and selling orders. Therefore there’s no risk of lag when transferring money through its network since behind the bridge, there will always be enough orders to fill trades.
The reality is, however, that XRP’s liquidity is being supported by Ripple’s purchases. In last year’s Q4 report, the company distinguished market making from its purchases of XRP and declares that Ripple sold a net $717 million in XRP tokens during the quarter. This is a substantial increase from its previous quarter of $491 million.
The report does not list how many XRP tokens Ripple purchased during the quarter, however, this is a clear admission that the trading volume of XRP is not exclusively made of organic activity.
What’s obvious at face value is that XRP investors are at the whims of Ripple and its founders. In fact, XRP doesn’t need to go up in price, and Ripple’s payment network will function irrespective of what XRP’s price is.
Having made a lot of money already from XRP, Ripple has less of an incentive to ensure that the value of XRP goes up. Which, considering the huge supply it owns and the potential selling pressure, looks like a herculean task.
Why use XRP?
A lot has changed since XRP was first launched and although it initially appeared innovative with instant and cheap payments, this function is matched by today’s stablecoins.
The whole existence of stablecoins and their popularity, including their compatibility with ERC-20 wallets, makes the use of XRP rather redundant. But there’s also another major existential problem for XRP. Initially, Ripple dreamed that banks would jump on the XRP bandwagon and make it the ultimate banking and payment token of the world. Banks have different ideas.
Ripple’s biggest client is Banco Santander which invested in Ripple as early as 2014 with a view to building its own blockchain payment system. Santander developed an international payment transfer app called One Pay FX which uses the xCurrent network developed by Ripple.
The xCurrent ledger doesn’t use XRP for transactions as the bank uses its own liquidity for payment transfers. This begs the question why would banks use XRP if they have their own liquidity? Ana Botin, head of Santander, argues that although she doesn’t believe in Bitcoin or crypto in general, she finds the technology behind them useful for the banking world. Indeed, Pago Next FX has been a great success for the bank. In the first half of this year, Banco Santander netted a total of €398 million in revenues from Pago Next FX, although the bank is not disclosing volumes transferred.
Meanwhile, central banks are busy focusing on their plans to roll out CBDCs. Yet, during discussions between the International Bank of Settlements and the European Central Bank, there has been little or no mention of blockchain technology.
The idea that Ripple would sell its XRP payment network to banks seems far-fetched at best and the use and utility of XRP are also questionable given that stablecoins can achieve the same results with less risk.