XRP is the world’s fourth-largest cryptocurrency and a digital token created by Ripple Labs Inc. Ripple Labs is based in Silicon Valley in California, and its baby has had a checkered career since its launch in 2012.
XRP’s actual utility
Unlike Bitcoin, XRP was never intended to be a “currency” but a utility that could be used as a remittance network, a currency exchange, and a real-time gross settlement system. This “utility” made it useful anyway – but what attracted “investors” was its speed.
The average time to complete a BTC (Bitcoin) transaction is about four hours. In contrast, XRP is about four seconds.
XRP can be exchanged for most other currencies, with its unique selling proposition being the avoidance of fees and wait times often associated with banks. It isn’t made up of a blockchain but rather a Hash Tree, and its currency can’t be mined because there are a finite number of coins – 100 billion.
XRP is popular with banks and institutions though the XRP token isn’t necessarily required for each transaction.
Like many “coins,” XRP was jumped on by many people who didn’t fully understand it, its purpose, or its vulnerabilities. It was just seen as a “cash-cow,” like Bitcoin, Ethereum, and Litecoin.
Lack of traditional investment fundamentals
Like so many cryptocurrencies, XRP has none of the usual historical fundamentals associated with “traditional” investments or savings, and this is where its problems really began.
Unlike traditional companies, Ripple is not based on tangible assets like buildings and factories, sales and profits, and balance sheets.
In common with the majority of cryptocurrencies, it is hard to determine the “value” of XRP based on these principles – and because of this, the price moves through the unchecked markets.
The good side of this is that when Tesla says they have bought $1.5 million in Bitcoin, followed by MicroStrategy – and now Apple coming into the room to build an exchange – the prices rise, but there is no logic or method of valuing the rise. Mostly it climbs because of positive noise.
Security, not a commodity
The downside, of course, is the price falling on bad news – a class action was filed against Ripple in May 2018 “alleging that it led a scheme to raise hundreds of millions of dollars through unregistered sales of its XRP tokens.” According to the complaint, “the company created billions of coins ‘out of thin air’ and then profited by selling them to the public in ‘what is essentially a never-ending initial coin offering.”
The SEC became involved and initiated legal proceedings against Ripple Labs, CEO Brad Garlinghouse, and co-founder Chris Larsen on December 21, 2020, for allegedly selling unregistered securities.
In the lawsuit, the SEC claimed that XRP was a security instead of a commodity because it was generated and distributed by Ripple Labs in a centralized fashion and was not being adopted by financial institutions for its advertised use.
The SEC stated that Ripple executives sold 14.6 billion units of XRP for more than $1.38 billion to fund its operations and enrich themselves.
Because of the impending legal action, Coinbase, one of the most widely used and trusted digital currency exchanges, delisted XRP as a tradeable coin, causing near panic in crypto circles.
As a result, XRP’s market cap fell by 93%, from $137B to under $10B. That makes the value of the XRP collapse bigger than Enron and Worldcom. While not quite a bankruptcy, XRP is effectively the third-largest collapse of all-time behind Lehman Brothers and Washington Mutual.
As with any investment, the biggest issue is trust
In late December, crypto forums came alive with theories about why XRP was “targeted.” The consensus was that lots of “whales drive XRP” – these are investors who bought vast chunks of crypto when the price was low and had enough holdings to seriously affect the price through their trading behaviour.
As they always do, rumors exaggerated the real situation and compounded the downside, losing investors billions more dollars than they needed to.
This is the crux of the problem.
Crypto can make people seriously rich – but it also has the ability to leave them nothing – and it is this aspect of digital tokens and currencies that the regulatory authorities must grapple with.
When a figure as acting as Elon Musk sends a tweet about a crypto (Dogecoin), which was started as a joke back in 2013 – and it doubles in price overnight – we should all be concerned about the boundaries that separate a legitimate investment play from a “bet.”
There are many vested interests involved in the new “wild west” of cryptos, altcoins, and tokens.
Old-guard investment companies are worried that their traditional revenue streams will dry up as funds are diverted to riskier “investments.”
Governments are anxious that if it all goes horribly wrong for the people who buy into cryptocurrencies, they will be left to bail them out with social security payments and other help.
Like the SEC, regulatory authorities are concerned about policing these new, very complicated financial instruments that fall between their remit and that of the US State and Federal Gambling Commission.
There are so many gray areas involved with the oversight of digital currency. The legal framework varies from country to country – but they can be exchanged peer-to-peer – so one party might be using a perfectly acceptable means of exchange or contract in one country while the counterparty might be breaking the law in another.
Generally, Crypto has set itself up to be a self-enforcing system of property rights. The properties’ owners can exclude people from using the instrument by using encryption or cryptographic security.
This adds to the problem of enforcement and is a significant part of what governments, institutions, and businesses across the world are beginning to grapple with.
Electronic information’s nature and legal status, which is not accessible without the necessary codes, passwords, and authorities, are scrutinized. Virtual currencies are granted status as “property rights” and “obligations rights” and are contractually bound by blockchain entries.
There is no one center co-ordinating any of this even though the cryptocurrency community is international in nature. This is one of the pillars on which it stands – the ability to exchange with no borders.
There are around 90 active payment providers and banks using Ripples’ network. Ripple’s stated goal from the off was to “lower the marginal cost of international payments so money can move around much more easily without fees. Ripple plans to accomplish this by enabling a global network of financial institutions to use the Ripple software to create something Brad Garlinghouse (Ripple’s CEO) calls the ‘Internet of Value.’ “
Far from being a “witch hunt,” the closer scrutiny of a major crypto in its business practices and the way it conducts business is something to be welcomed, especially if it leads to a legally binding code of practice that can become a standard for all digital currency market makers and companies trading these instruments.
State regulation of crypto and progressive jurisdiction, done right, would protect all from the excesses and “dark” practices that plague the sector.
This technology is incredible. It could change the world in many ways – but it needs to be safe to use. It needs to be accountable – the question is – is a legitimate and safe cryptocurrency environment too much to ask?