Is Ripple (XRP) A Security?

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Although Ripple (XRP) has not been officially recognized as a security, many experts and crypto experts believe it is based on the way the token is governed, marketed and sold.

Ripple is currently undergoing a class action lawsuit and only time will tell if regulators believe it is or isn’t a security.

2019 is here, and a lot more is expected within the crypto industry, especially with regard to an uptick in crypto adoption and regulatory clarity.

However, even after several pronouncements here and there, one of the questions that still linger in opacity and confusion regards XRP. Is it or is it not a security?

Ripple (XRP) had a whole mix of it in 2018- from the class action lawsuits facing Ripple Labs and its executives to a host of positive pilot projects involving various solutions tailored to help banks facilitate cross-border payments.

Grayscale, a U.S.-based investment firm, has even gone ahead to offer its customers the chance to get crypto exposure tracking the asset’s price movement via its XRP Investment Trust.

Ripple and R3 settled a longstanding dispute over the sale of XRP, with the latter going on to launch Corda Settler, a universal payment application that uses XRP as its first payment rail.

And XRP managed to upstage Ethereum into the second spot as the largest cryptocurrency by market capitalization for much of November and December 2018.

Despite everything else, one fundamental question would be whether XRP should be deemed a security token using statements by Ripple executives.

First, what the SEC Said

In June, the U.S. Securities and Exchanges Commission’s Director of Corporation Finance William Hinman said that Ethereum wasn’t a security for the simple reason that it is “sufficiently decentralized.” He added that together, Ethereum and Bitcoin were not securities.

And as recently as November 2018, the SEC chairman Jay Clayton said gave a few indicators as to what excluded an asset from being registered as security.

Speaking at Consensus Invest, Clayton said you’d have to look at “when a store of value becomes truly decentralized,” such that “not one person or group of people control its supply or control trading or they have access to asymmetric information.”

But a question on what the SEC thought of XRP drew no specific answer from the securities boss.

He did, however, say that issues regarding a specific token and whether the SEC deemed it a security or not weren’t easy and that the agency would need to have a lot of information to definitively declare its position on the matter.

Hinman also gave what we can consider as a more precise pointer to whether a coin is a security- he said we look at the token’s functional network and how it has grown.

He raised a few questions, part of the Howey Test, including if the coin’s promoter “raised an amount of funds in excess of what may be needed to establish a functional network.”

Another question would be if the promoter did raise excess funds, have they “indicated how those funds may be used to support the value of the tokens or to increase the value of the enterprise?”

And lastly, “does the promoter continue to expend funds from proceeds or operations to enhance the functionality and/or value of the system within which the tokens operate?”

These are pertinent questions and which could apply to statements made by Ripple execs.

What did Ripple Execs say about XRP?

According to theblockcrypto.com, Hinman’s sentiments should be read with XRP token historical background and the words of Ripple Lab’s chiefs in mind.

Ostensibly, Ripple Labs’ sale of XRP is a continuous process that won’t stop anytime soon. Nevertheless, the Ripple team has on numerous occasions declared that the XRP Ledger is ‘functional and decentralized.’

Several voices have disputed the above assertion, even as it occurred that Ripple sold XRP worth $163 million in Q3 2018. All along, it has been clear that uses the revenue gained through the sale of the token to develop and grow Ripple Labs.

That view goes way back to a statement made by Ripple’s chief technical officer (CTO) David Schwartz in December 2917. At the time, Schwartz said:

“The higher the price of XRP, the more money Ripple makes by selling XRP, the more money Ripple is worth, the more power Ripple has to incentivize partners, and so on.”

Various chiefs at Ripple have often maintained that XRP isn’t a security and shouldn’t be seen as one. They have also pointed out that XRP and Ripple Labs are distinct entities.

These are all however highlighted when the same leaders make certain statements, especially before 2018.

One of the pronouncements is that selling XRP is one of the company’s most important strategies for growth.

Co-founder and the firm’s former CEO Chris Larsen at one time said that Ripple’s business model consisted of having 25 percent “of the XRP that exists” and “use that to fund operations, repay investors, and pay employees.”

The other pointer to whether an asset qualifies as a security is when an individual buys a token expecting to get profits at some point in the future.

What did former CEO Larsen mean when he said this in 2014?

“Therefore as the protocol grows, since there’s a limited amount of XRP, the value of XRP should go up, because it’s in demand by market makers.”

CTO Schwartz basically repeats the same statement in a Quora post in 2017, which came after Ripple, placed into escrow 55 billion XRP. And Ripple has sold XRP worth more than $617 since 2017.

So, if the Ripple Ledger is a functional network, why doe its creators continue the massive sales, more than what is sufficient to set up a functional system?

It appears Ripple Labs will for the foreseeable future sell XRP to fund operations that would aid in the increase in investment of holders.

Therefore, the sale of XRP does come out as the company’s primary source of income.

The SEC will have its input when it does decide to, but what could be challenging for Ripple is to disapprove statements from some executives concerning XRP in court when arguing its position regarding the class action lawsuit against it.


Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

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