Ripple's proposed $2 billion fine would close ugly chapter

A final ruling expected in the Securities and Exchange Commission's lawsuit against Ripple this spring could provide some clarity to the murky underworld of altcoins.

The SEC in late March asked the U.S. District Court for the Southern District Court of New York to order Ripple to comply with federal securities laws and pay a $1.9 billion fine to the SEC. According to the court, Ripple is expected to file an opposition brief on April 22 and the SEC would reply on May 6. The court says it will issue a final ruling on remedies sometime after that. 

Ripple declined a request for comment, but pointed to a recent tweet posted by CEO Brad Garlinghouse: "Gensler's SEC has repeatedly acted outside the law — not going unnoticed by Judges admonishing the agency for a 'gross abuse of the power entrusted to it by Congress' (DEBT Box case) and for acting without 'faithful allegiance to the law' (Ripple case). Let's not also forget Gensler's lack of attention to SBFraud."

The final judgment could help define a product that initially piqued the interest of many in the U.S. financial services industry but later raised alarms.

For more than a decade, Ripple has used proceeds from the sales of more than 14.6 billion XRP tokens worth more than $1.38 billion dollars, "to fund Ripple's operations and enrich [original founder Chris] Larsen and Garlinghouse," in an unregistered securities offering, the SEC said in its complaint. Larsen and Garlinghouse "personally profited by approximately $600 million from their unregistered sales of XRP." 

When I met several years ago with Ripple leaders, and then spoke with a London bank executive who was planning to start using XRP in international payments, I was taken with Ripple's vision for making cross-border payments more efficient. At that time, most international payments moved through the Swift network. If a U.S. bank wanted to send a payment to another country, it had to keep money in the form of local currency on deposit in a nostro account at a Swift member correspondent bank in that country. The funds in that account were used to settle the payment at the direction of a message sent over the Swift network. When a bank did not have a direct relationship with a bank in another country, it used correspondent banks as intermediaries. Payments sometimes took months to get to their destination and were expensive and hard to track. (Since then, Swift has implemented technology that speeds up and tracks payments.)

Using Ripple's technology, theoretically, banks could send payments by exchanging XRP on a ledger. The payments would be instant and low-cost and eliminate the need for nostro accounts.

Some banks embraced this vision. The capital markets division of Royal Bank of Canada, a former Ripple partner, enthusiastically endorsed Ripple and XRP in a 2018 report called "Imagine 2025." ATB Financial in Edmonton started piloting Ripple software for cross-border payments in 2016. PNC agreed to use Ripple's RippleNet distributed ledger to process international payments in 2018. In recent years, these banks have refused to comment on Ripple or on XRP.

The more I looked into what XRP was, and understood its origins, the more I saw XRP as a scheme that enriched a few Ripple founders and leaders — and the company itself — at the expense of all who had bought the token. 

These XRP holders, by the way, call themselves the XRP Army. They are fiercely loyal to Ripple and XRP and are still hoping to reap a windfall from their XRP investments. One XRP investor posted this tweet April 8: "RIPPLE XRP CEO PREDICTS CRYPTO TO $5 TRILLION IN 2024 !! MASSIVE OPPORTUNITY & COINBASE GETS BIG WIN!!" When I have written articles that included criticism of Ripple or of XRP, I have received threatening direct messages from XRP Army members.

Blockchain

Could Ripple's XRP replace correspondent banks? This bank says yes

Despite controversy surrounding Ripple’s digital token, one bank is pushing forward to use it in cross-border payments.

By Penny Crosman

January 8

I started reading class-action lawsuits filed against Ripple by XRP holders who felt they had been duped. For instance, in 2018, XRP investor Ryan Coffey said Ripple had been "selling XRP to the general public and wholesale to larger investors in a 'never ending ICO' — initial coin offering." Around the same time, Ripple representatives started saying their company had nothing to do with XRP, that XRP was an independent digital asset living on an open source distributed ledger. Having met with Ripple leaders only a couple of years earlier who had proudly described the XRP tokens they had created, which at the time were called "Ripples," I knew this wasn't true.

Ripple was originally incorporated as "Newcoin, Inc." in California in 2012, and renamed OpenCoin a month later. Its three founders — Chris Larsen, Jed McCaleb and Arthur Britto — signed an agreement saying that they had set up a ledger that would record 100 billion Ripple credits, 80% of which would go to the company. A year later, the company was renamed "Ripple Labs, Inc." (Today it is simply called Ripple, though the SEC's complaint refers to the company as Ripple Labs.)

In 2013, the company founders created 100 billion XRP. They gave 80% to the company and the rest to themselves: Larsen and McCaleb each got 9% and Britto got 2%. Ripple periodically releases XRP for sale in batches of 100 million.

Some experts believe XRP itself is not a problem, but the way Ripple has improperly marketed and accounted for it is.

"Seven years ago, when people had even less understanding of crypto and blockchain than they do now, there were retail investors who were buying XRP and they somehow thought that they had a private equity stake in Ripple as a result of buying XRP," said Seoyoung Kim, associate professor of finance and business analytics at Santa Clara University. However, she noted, it's not a crime to sell something that people mistake for something else. 

Kim sees XRP as a utility token that could be used to transact on the Ripple blockchain, though no U.S. companies use it this way.

"Just because you don't find utility in a utility token doesn't make it not a utility token," Kim said. "If I hand you a bunch of arcade tokens, just because you don't feel like playing at the arcade doesn't negate the fact that I gave you arcade tokens." 

However, Ripple's upper management, including Garlinghouse, publicly touted XRP, Kim said. This meets the Howey test for a security because there's an exchange of money for an expectation of profit due to the concerted efforts of an identifiable group, she said. 

The company disputes that its leaders publicly promoted XRP.

Recently, Ripple has said it plans to issue a stablecoin, a digital token that will always be worth the equivalent of a U.S. dollar.

"A lot of people are trying to hop onto the stablecoin bandwagon," Kim said. "We don't need that many different stablecoins." 

On the other hand, the Ripple network already powers a significant amount of cross-border payments activity, according to Adam Shapiro, partner at Klaros Group. 

"A lot of remittance companies use the Ripple network for back-end settlement because for many corridors it is both cheaper and more efficient than use of correspondent banks," he said. "If Ripple introduces a credible stablecoin, it can expand its reach to include use cases that involve a need for parties to hold funds on the network while making money on the stablecoin float."