XRP is a Security, but Ripple Doesn’t Want You to Know

December 8, 2018 / by Ronald Tichenor

With the recent SEC announcement, fear has spread through an already weak market, fear that many ICO’s of the last few years will meet an end at the hands of the SEC as each is deemed an unregistered security.

Ripple Labs, the creators of XRP, has been staving off that accusation for some time, swatting it away like an annoying bug. But alas, the SEC has cast its encircling net, and XRP lies somewhere within it awaiting agency scrutiny. How Ripple is handling that reality leaves something to be desired.

In 2018, Ripple Labs started trying to co-opt the narrative around the creation of XRP and the relationship between Ripple and XRP to defuse the idea that XRP is a security. Investors ought to be concerned about this because Ripple Labs’ attempts sound less like cooperation with the SEC and more like misdirection and denial.

In June, CEO Brad Garlinghouse specifically made these arguments regarding whether XRP is a security:

  1. “If Ripple the company shuts down tomorrow, the XRP ledger would continue to operate. It’s open-source, decentralized technology that exists independent of Ripple.”

Yes, if Ripple shut down, XRP would still exist. But the same could be said of any coin or token with even a single motivated proponent with a computer. Decentralized? The fact that Ripple still owns 60 percent of all the XRP it created disputes that claim.

  1. “The people buying XRP, they don’t think they’re buying shares of Ripple. There’s a company called Ripple. We are a private company. We have investors, … but buying XRP doesn’t give you ownership of Ripple. It doesn’t give you access to dividends or profits that come from Ripple.”

I’m pretty sure that making a blanket statement about what people “think they’re buying” isn’t going to convince the SEC of anything. More importantly, he’s also making a fundamental mistake in thinking that how the coin functions (whether investors retain rights of ownership, dividends, or profits) is the only thing that may make it a security. Nobody has made this case against XRP. In fact, the SEC has specifically stated that it is more concerned with how money is raised.

  1. “XRP is solving a problem. There’s no utility in a security.”

Is his argument that securities don’t solve problems? That if a coin has utility it can’t then be a security? That’s not how this works. He should have consulted a securities lawyer before talking.

There is a very large and very vocal Ripple community who will come out en masse to defend it. They will repeat these arguments and more, but their repetitive arguments always leave questions unanswered.  

“Ripple Labs didn’t create XRP. It was gifted to them.”

Sure, it was gifted to them by themselves. The founders of XRP created it then gifted it to themselves as Ripple Labs. Back in the day, Ripple’s founders proudly claimed they created XRP. Then, years later, they disavowed it after realizing they’d put themselves in jeopardy. The distinction between the creation and “gifting” of billions of dollars of XRP will be lost on the SEC.

“Ripple Labs and XRP are not the same thing.” Yes, but then why has Ripple Labs continuously promoted XRP since the beginning? Because they have something to gain from its rise in value. But that would make it a security, so they won’t say it that way. If they have to be careful how they answer that question, it’s because they have a problem.

“XRP didn’t have an ICO.” Perhaps. But the SEC doesn’t have any language in its regulations about the term ICO. It doesn’t care what you want to call a coin. The SEC only cares about what investment you’re selling and how.

There are other arguments, but they are all either incomplete or irrelevant. What it comes down to is the Howey Test.

Is it an investment of money? Yes.

Is there an expectation of profit? Duh.

Is it a common enterprise? Yes.

Does the investment rely on the efforts of a promoter or third party? Yes — Ripple Labs.

They’ve developed it, and they’re promoting it. The XRP defenders will repeat ad nauseum how many banks are trying out Ripple’s protocol and why that will make the price of XRP moon. Doesn’t that sound like the investment depends on the efforts of Ripple Labs?

How about Ripple’s own words on this:

“Ripple Labs is the creator of Ripple. We developed the protocol and its distributed payment network, and we now work to support and promote its growth.”

“The company will retain a portion with the hope of creating a robust and liquid marketplace in order to monetize its only asset sometime in the future.”

Ripple created the coin and then sold it to build its platform and fund its operations. That’s a security by the SEC’s definition. It’s a security according to the Howey Test. Ripple’s attempts to distort or otherwise obfuscate this truth betrays the fact that they know it should be a security.

If the bulk of these transgressions ended back in 2014 or 2015 then it might be a moot point and not a security anymore, like Ethereum. But the fact that they currently own the majority of XRP, and they continue to promote it, and they still sell it to fund their operations (to the tune of $163M last quarter), is a big problem.

If the SEC does determine XRP is a security, it will require compliance, including registering with the agency as a security and paying a fine. Ripple should be able to do all that without too much difficulty. However, the SEC is also requiring issuers to pay back investors. Ripple may have a much harder time with that, depending on how the SEC wants to handle it.

And the optics of this process would be bad for the price of XRP.

For its own sake, Ripple Labs better be in close contact with the SEC about this. If they are waiting for the SEC to make the first move, it might end up far more costly for them.

For investors in XRP, be prepared for a price shock if the SEC issues an enforcement ruling against Ripple. The market is shaky and is likely to over react to anything negative right now.

Investors should also be concerned with how Ripple is handling this publicly. There is an ongoing class action lawsuit by XRP investors against Ripple Labs over whether XRP is a security.

Ripple should be openly acknowledging the perception of a problem rather than being dismissive of it. Ripple should be proactively engaged with the SEC, and the public needs to see that. There are too many ways Ripple could lose right now. This is the narrative it needs to control. It could lose in court or lose to the SEC, and XRP could still survive. If Ripple loses public opinion, instead of the moon, Ripple Labs’ “only asset,” XRP, goes to the abyss.