Is XRP a security? Ripple’s management of UNLs may hold the answer

Ripple’s ongoing case against the Securities and Exchange Commission (SEC), to determine if its native token XRP is a security, might not be as strong as it believes — due to its management of popular Unique Node Lists (UNLs).

UNLs act as gatekeepers on who can participate in XRP’s consensus mechanisms. Users can modify their UNL to prefer certain nodes, and almost every user opts into a UNL that the Ripple-backed XRP Foundation maintains.

The XRP network can also eject a user if the user’s UNL doesn’t have enough overlap with other UNLs. Again, because Ripple operates UNLs with commanding popularity, it controls the cooperation rates of other UNLs.

The XRP Foundation operates its own UNLs, maintaining ‘master lists’ of trusted third parties that it allows to contribute to the consensus mechanism.

  • The XRP Foundation controls a default UNL — which is opted into by default, as the name suggests — known as dUNL.
  • It also maintains a second UNL called XRPLF.
  • Coil had maintained a third UNL for the XRP Foundation but the firm went bankrupt, leaving just those two.

The XRP Foundation can modify these UNLs at any time, kicking off nodes that don’t follow its rules — and can potentially penalize users who connect to them for circumstances outside their control.

SEC cites UNLs in XRP security complaint

The SEC cites the centralized nature of UNLs in its argument that XRP is a security. “During the process to achieve consensus with respect to a new proposed state of the XRP Ledger, each server on the network evaluates proposed transactions from a subset of servers it trusts not to defraud it, also known as the server’s UNL,” reads page eight of the SEC’s complaint.

“While each server defines its own trusted servers, the XRP Ledger requires a high degree of overlap between the trusted nodes chosen by each server. Ripple thus publishes its own proposed UNL. Approximately 40% of the nodes validating transactions on the XRP Ledger are operated by organizations or entities based in the United States, including Ripple itself.”

Naturally, Ripple denies that XRP is centralized. It claims that it can democratize its transaction validation process by removing incentives to accumulate hashrate in a mining pool to find a block the fastest.

Read more: SEC vs Ripple: Two-year crypto beef could soon be settled

The crypto firm claims that UNLs merely give users a way to avoid a situation in which they’re forced to use a validator with enough nodes to exert too much influence over the network. It did acknowledge running its own validators, but claims it only operates 10 of them.

However, it rarely addresses the existence of dUNL and XRPLF, specifically. These two master UNLs could damage its defense against the SEC’s allegations that Ripple and its co-founders conducted an unregistered securities sale when they sold XRP. UNLs are critical to understanding why XRP might pass the “through the efforts of others” prong of the Howey Test.

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