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Ripple got crippled - XRP in Free Fall: A Ripple Damage Record

Ripple got crippled - XRP in Free Fall: A Ripple Damage Record

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Since the US Securities and Exchange Commission accused Ripple of issuing unregistered securities a few weeks ago, the company has been fighting for damage control. Far more than just reputation is at stake.

60 percent discount in a little more than two weeks: This is the preliminary XRP balance sheet of a likely long-running dispute between Ripple and the Securities and Exchange Commission (SEC). Since the US Securities and Exchange Commission sued Ripple on December 21 for issuing unregistered securities, the bad news for the Californian FinTech - and ultimately for investors too.

The first strike

Almost two weeks ago, the Ripple boardroom received a letter from the SEC informing the company of an impending proceeding. After years of uncertainty, the SEC finally managed to make the decision to classify the Ripple currency XRP as a security, i.e. a security token, and not a utility token. The decision is based on the Howey test, which uses various criteria to draw a line between currency and security.

Which criterion ultimately made the difference is not entirely clear. According to the SEC, a key condition is "when money is invested in a joint venture with the reasonable expectation of profits from the efforts of others". This is the case, for example, "if a token gives the holder the right to participate in the company's earnings or profits or to realize profits from increasing the value of the digital asset". The not exactly selective integration of XRP and Ripple market capitalization should have strengthened the SEC in its view.

Savory entanglements in the Ripple family

In addition, considerable amounts of XRP are in the private hands of Ripple CEO Brad Garlinghouse and co-founder Chris Larsen. This means that there is also another SEC criterion: "The issuer owns or controls the ownership of the intellectual property rights of the network or digital asset - directly or indirectly". The fact that Ripple also regularly activates XRP contingents and transfers parts of them back to trust accounts raises the suspicion that “the publisher [creates] a market for his asset and [determines] the number of tokens created”.

Thus, in the opinion of the authority, XRP could ultimately be a security. In this case, Ripple did not provide potential investors with sufficient information (keyword: securities prospectus) to violate the applicable US federal securities laws - and, in the opinion of the SEC, was ultimately guilty of issuing unregistered securities.

Ripple meltdown

The allegation started an avalanche. The fact that the cryptocurrency has now overtaken Litecoin (LTC) and has slipped into fifth place among the largest cryptocurrencies by market capitalization is only the tip of the iceberg.

The beginning was made by the crypto exchange Coinbase, which announced a week after the allegations became known that it would remove all XRP trading pairs from the platform from January 19. A number of other trading venues followed, including BINANCE US, Bittrex, CeFi platform Crypto.com, the broker eToro and most recently Blockchain.com, all of which will also cease trading with XRP. For good reason, after all, US companies face legal consequences if they continue to trade XRP.

This has drawn the displeasure of some investors, who have now suffered heavy losses with XRP investments. A COINBASE customer now wants to clarify with a class action lawsuit against Coinbase whether the exchange has knowingly issued securities to small investors with the trading of XRP. In this case, Coinbase would have violated California competition law. On the other hand, Ripple supporters launched a petition in December calling for the US government to classify XRP as a currency. 35,000 signatures have already been collected.

Investors are brushing the sails

But that's not all. According to a Bloomberg article on January 5, the investment company Tetragon is said to have filed a lawsuit against Ripple. Tetragon invested $ 200 million in Ripple's Series C financing round in 2019, which was originally intended to lay the foundation for an IPO. Accordingly, Ripple should buy back the preference shares issued to Tetragon.

Ripple's answer was not long in coming:

There is a clause in Ripple's Series C investment agreement that states that Tetragon will have the option to have Ripple repurchase its Ripple shares if XRP is classified as a security on a go-forward basis. Since there was no such provision, this lawsuit has no value. We're disappointed that Tetragon is trying to unfairly exploit the lack of regulatory clarity here in the US. The courts will provide this clarity and we are very confident in our position.

In other words, as long as the SEC's ruling is not final, there will be no money from Ripple. After all, payment service provider MoneyGram (still) sticks to Ripple. However, a letter published on December 23 states:

As a reminder: MoneyGram neither uses the ODL platform nor RippleNet for direct transfers of customer funds - whether digital or not. In addition, MoneyGram is not a party to the SEC lawsuit.

They want to "continue to monitor the development of the lawsuit with regard to possible effects" and keep an eye on risks such as "litigation or investigations [...] that could lead to significant settlements, fines or fines, contract terminations, other administrative measures or processes and negative publicity" . An oath of loyalty sounds different.

Grayscale dissolves XRP funds

Another setback followed on January 5th. The world's largest digital asset manager, Grayscale, has announced that it is liquidating the XRP fund. In an official statement, Grayscale stated that it would "use the cash proceeds to purchase the remaining fund components: Bitcoin, Ethereum, Litecoin and Bitcoin Cash".

On December 30, 2020, Genesis Global Trading, Inc., as an authorized participant in the Fund, announced that it will temporarily suspend trading in XRP effective January 15, 2021 at 5 p.m. ET. According to the Fund's documentation, during the Fund's quarterly review, the Manager may decide to exclude a digital asset from the Fund's portfolio, even if it meets the Fund's inclusion criteria, particularly if the Eligible Participant is unable to dispose of that digital asset act or otherwise support.

As a result, “the XRP fund will be removed from the portfolio and the XRP holdings will be sold”.

Whale population is falling

As a result, it is hardly surprising that the number of major XRP investors has fallen dramatically. According to Coinmetrics, the number of addresses holding at least a million XRP has dropped from 1,721 on December 21st to 1,567 on January 3rd.

The most prominent among them is likely to be Jed McCaleb, formerly Ripple CTO and co-founder of Stellar. As a severance payment, McCaleb received 9.5 billion XRP in 2014, parts of which he sells at regular intervals. According to Whale Alert, McCaleb "sold another 1.2 billion XRP for a total of $ 411 million in 2020 alone, bringing the total value of his sales to $ 546 million." It seems as if the Ripple founder recognized the signs of the times early on. Most XRP investors, on the other hand, have miscalculated and can only look into the tube.

The Ripple drama is likely to remain one of the most exciting topics in the crypto space in the coming weeks and months. In Ripple's defense, it must be mentioned that the US Securities and Exchange Commission stance is not a judgment of law. The case has yet to be resolved by the relevant federal district court in Manhattan and could drag on for a few more years. Whether Ripple and XRP will still play an important role in the crypto ecosystem is questionable in view of the tumultuous events.

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