Crypto Corner: Ripple Versus The SEC

You could be watching history, and not even know it. Ever heard of Ripple and the XRP cryptocurrency? If not, buckle up, and settle in while we fill you in on the details of a court case that could be a pivotal moment for the future of money.

Almost twenty years ago, a Canadian computer programmer named Ryan Fugger developed a global secure payment option named RipplePay… fast forward a few years and the fintech company Ripple is born, along with a blockchain-based payment system known as XRP. At the time, nobody could have predicted what a monster XRP would grow into, or that it would be at the center of a heated legal battle instigated by the SEC.

The XRP ledger is an open-source, public blockchain… and it solves a big problem, the inefficiencies of cross-border payments, payments facilitated by the traditional banking system. The ledger functions as the rails upon which the XRP cryptocurrency runs.

Ripple’s focus is on improving the existing banking system. It unifies banks and payment providers with a protocol to send cheap, instant payments across the world… and we do mean cheap and instant. The network can process 1,500 transactions per second at a fee of $0.0007 XRP, and this absolutely blows other networks right out of the water. Ethereum can complete about 10 transactions per second and Bitcoin about four or five.

This is important because traditional cross-border transactions can take up to five business days… this means that XRP can accomplish what usually takes days in a matter of seconds at a tiny fraction of the cost, or it can provide on-demand liquidity. Little bits of XRP (called drops, equal to about 0.00001 XRP each) are destroyed to cover the cost of transaction fees. Again, that’s hand over fist better than the fees charged by banks.

So, to recap, Ripple is a centralized fintech company. Ripple developed the XRP payment system, which Ripple says is decentralized. The XRP cryptocurrency is a digital asset which runs on the XRP blockchain payment system. The SEC has a problem with that.

The Controversy

It all started when the SEC put their bullseye on Ripple, accusing the company of selling XRP as an unregistered security…

At a core level, XRP is a tool that is about facilitating the flow of value back and forth on the network… but the SEC isn’t buying it. They disagree, accusing XRP of functioning as an investment. In 2020, they decided to go after Ripple, officially charging them with illegally raising $1.38 billion from investors. The SEC regarded this as an “unregistered securities offering.”

And there are some interesting nuances to Ripple’s story. As of right now, the payment system has over 100 financial institutions, including banks, on its network. Compared to other blockchains, it isn’t wholly decentralized, its products are geared toward large financial institutions, and because most XRP is held by Ripple, the price of the token is very easy to manipulate… for that, we have to know how XPR was issued.

The total supply of XRP tokens is 100 billion, there will never be more XRP created, and it can’t be mined. Upon launch, the founders continued to hold a large portion. Some tokens were released, and some tokens are held in escrow for distribution at a later date. As of March of this year, about 46.1 billion XRP tokens were held in escrow. So… no public entity or anyone outside Ripple can issue new coins.

Some in the crypto community are spitting mad over the case… accusing the SEC of using Ripple as a crack in the wall through which to insert themselves into crypto and put their iron grasp of regulation in the space. They argue that XRP is a threat, and that the only way old systems can combat the threat is to inject themselves and “get control”. If the SEC wins, it could totally change the way cryptocurrency companies operate and subject the crypto space to prying eyes and (possibly) antiquated, bias regulations.

A Quixotic Fight?

It’s a battle for the ages, and for the way digital assets exist… and Ripple has on their boxing gloves. Ripple has not been shy about calling out the SEC, saying they are bullying and attempting to shroud the space in uncertainty. This is especially so because large swathes of people have little idea how crypto or blockchain operate, so it’s easy for the SEC to sway public opinion. They say it’s a way of keeping people out of crypto and plenty of fear around the space.

Even more than that, some have accused the SEC of holding the United States back from the impending crypto flood. So… while they may be keeping investors away… they are also keeping investors away and hindering progress. Progress that some would say is inevitable. That, while other countries figure out how to incorporate, play nice with, and profit off crypto… the U.S. stalls and plays hardball.

Is it the ultimate example of cutting off your nose to spite your face, or is it the SEC saving the world and applying the proper regulations where regulation is due? Is the strongarm of the SEC the perfect way to silence a threat… regulate it into the ground and scare away anyone who wants to work with it? Ripple is so confident, there’s talk of an IPO once the company is freed from the case… time will tell, and so will we. Come back for other issues and we’ll see which dog wins this fight.