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Ripple’s (XRP-USD) XRP token represents a classic opportunity to buy during the market headwinds from the SEC lawsuit and sell on news of a settlement or outright legal victory. Despite hyped claims about the coin’s future use for central banking, my research shows no reason to hold XRP for the long term.
Ripple and XRP Background
Ripple Labs is a U.S.-based technology company that develops the Ripple payment protocol and exchange network. About 10 years ago, it also created its own digital currency called XRP to enable money transfers over the internet. Then CEO Chris Larsen said at the time, “We think this is the first viable alternative to correspondent banking.”
According to the company:
Ripple provides one frictionless experience to send money globally using the power of blockchain technology. By joining Ripple’s growing, global network RippleNet, financial institutions can process their customers’ payments anywhere in the world instantly, reliably and cost-effectively. Banks and payment providers can use the digital asset XRP to further reduce their costs and access new markets.
Ripple is a privately funded company with many well-known angel investors, including Andreessen Horowitz, Lightspeed Venture Partners, Google Ventures, and IDG Capital Partners. It’s important to understand that these companies have invested in Ripple the company, not necessarily XRP the token.
Revenue comes from professional services provided to financial network operators, software built to integrate legacy financial systems with Ripple, and by regular sales of the XRP token. In December 2020, the SEC sued Ripple and executives Brad Garlinghouse (the CEO) and Chris Larsen (executive chairman of Ripple’s board of directors and former CEO and co-founder of Ripple) for alleged illegal sales of unregistered securities related to the XRP token. Ripple has an immense financial war chest to fund their legal defense and is giving the SEC all it can handle in the ongoing back and forth battle.
Of course, the SEC suit overhang has taken a toll on the price of the XRP token. But with any minor Ripple court victory, we see signs of relief.
Examining the case to hold XRP long term
Twitter is often not the place to find rational, evenhanded posts on any subject. But XRP Twitter inhabits a class of its own. The swarm of Ripple devotees is called the “#XRPArmy” and they are quick to defend the company and promote the token. Many claims are amazingly outlandish: “XRP All The Monye” makes the assumption that the token will become the standard for all finance in the future. But is there any supporting evidence for this?
At the time of writing, XRP’s price is around $0.77. One investment firm’s managing director has said (with a straight face) that $10,000 to $35,000 a coin is possible because all central banks will use XRP as a bridge currency. But will they?
There are four common misunderstandings about Ripple and XRP that cloud understanding of the token’s adoption in the real world. We need to carefully scrutinize any announcements of institutions or central banks employing these products. Can we really infer XRP use in these cases?
The first error is that RippleNet guarantees XRP use. Most announcements of Ripple deals are referring to the RippleNet global payment network. RippleNet is an established product that enables 200+ financial institutions worldwide to make faster, lower-cost payments across 40 countries. However, RippleNet does not automatically use XRP; that requires implementation of another dedicated product called ODL. As per Ripple:
Through the On-Demand Liquidity (ODL) service, RippleNet leverages the digital asset XRP as a bridge between two currencies, allowing you to eliminate pre-funding of destination accounts, reduce operational costs and unlock capital.
Ripple hopes that RippleNet will be a Trojan Horse for ODL and XRP adoption, but I’ve found little evidence of this happening. Conversely, there are strong reasons banks would not adopt XRP. First, utilizing an instrument in the U.S. government’s regulatory crosshairs would be an ill-advised strategy. Also, since XRP is a public and transparent blockchain, financial organizations would be sensitive about broadcasting their transactions. Finally, most institutions would avoid committing themselves to a public market asset with a history of wild price swings driven by retail investors.
The next fallacy is that any mention of R3 implies XRP usage. R3 Corda is perhaps the most popular tech partner for central bank digital currency (CBDC) trials, and has been tested by Riksbank (the central bank of Sweden), Banque de France, the Swiss National Bank, the BIS Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, the Monetary Authority of Singapore, and the South African Reserve Bank. Their Token SDK Toolkit, which allows free and private transactions with the ability to prevent fraud, is much better suited for banking projects. R3′s platform was also chosen by the SWIFT Network over Ripple for its new payments standards framework Global Payments Innovation.
R3 once had a partnership with Ripple, and integrated XRP into their Settler product, but had a major falling out over the terms of the agreement. Although the partnership has dissolved, many still conflate Corda implementations with XRP use, which is just not warranted.
As per Todd McDonald, chief product officer and one of the R3 Founders:
Corda Settler does not require the use of XRP… XRP happened to be the first sample integration… The SWIFT work is not in any way associated with XRP.
Another misconception is that since Ripple is an ISO 20022 participant therefore every ISO 20022 project must use XRP. ISO 20022 is a multipart international standard prepared by ISO Technical Committee TC68 Financial Services. It describes a common platform for the development of messages. In essence, this is a standard way for disparate systems to integrate and produce more efficient financial transactions. Every major financial institution has adopted ISO 20022 in principle and is quickly moving toward implementation. The SWIFT Network itself is slated to switch to the protocol starting in November 2022.
ISO 20022 has many member entities, including RippleNet. But it makes no sense to assume RippleNet is involved with every ISO 20022 implementation, or to believe XRP usage must be implied.
Finally, there’s the erroneous notion that Interledger also implies XRP use. Interledger is not a blockchain, a token, or a central service. Interledger is a standard way of bridging financial systems. Interledger is a protocol for sending packets of money across different payment networks or ledgers. One of the stated design goals for the protocol is neutrality. Therefore, it is not tied to any company, currency, or network. XRP is supported – just like many other coins and currencies – but is not required by the protocol for operation.
Here are examples of supposed proof of real-world XRP use that fail under further scrutiny:
This World Economic Forum document mentions XRP on page 17. But this is simply a list of examples, not an endorsement. SWIFT GPI and JPM Coin are also cited in the same paragraph. Published long before the SEC suit, one wonders if XRP would have still been considered a credible example if the WEF wrote this today.
Banque de France did list both Ripple and Ethereum (along with other options) in their 2020 research paper, but later clarified the participants as Accenture (ACN), Euroclear, HSBC (HSBC), fund management platform Iznes, Liquidshare, ProsperUS, Seba Bank, and Société Générale (SocGen) (OTCPK:SCGLF) Forge.
This blockchain deal announcement with the Saudi Arabia Central Bank and Ripple initially looked promising, but was later revealed to be a “nothingburger.” For the subsequent Project Aber CBDC pilot, XRP was totally ruled out:
Note that public blockchain protocols such as Ripple and Stellar, which are often positioned for cross-border remittance use cases, were ruled out because of the obvious need for permissioning and privacy for an interbank payment use case (which these protocols didn’t support). Application of the qualification criteria resulted in shortlisting of the following three DLT platforms or protocols: R3 Corda, Hyperledger Fabric (HLF), JPMC Quorum.
This finding underscores how CBDC pilots have rejected public blockchains and instead substituted private tech like R3 Corda.
Did the Royal Bank of Canada (RY) consider Ripple’s tech for payment? Maybe, but there’s no evidence that Canada actually ever used Ripple or XRP. In their 2019 Project Jasper-Ubin, a cross-border (Canada and Singapore) and cross-currency (CAD and SGD) trial, Corda and Quorum were used for atomic transactions based on HTLC. This is another example of Corda’s popularity in the CBDC space.
Did the Bank of England use XRP in a proof of concept? The devil is in the details here. The BoE did do a proof of concept with Ripple in 2017. From the project summary document:
The Ripple solution utilized by the Bank was built around the open source Interledger Protocol that enables payments to be made across different ledgers and networks across the world. A ledger is essentially a file used to record transactions measured in terms of a monetary unit of account. The solution used Ripple Connect, which acted as the interface that enables an institution’s internal systems to integrate with the Ripple network.
Ripple Connect was the old name for a product that (as far as I can determine) did not use XRP. But either way, there’s no evidence of any current usage of XRP by the Bank of England since that proof of concept ended.
However, this Palau announcement is recent and real. From the Ripple press release:
The partnership will initially focus on developing strategies for cross-border payments and a USD-backed digital currency for Palau. This could see the implementation of the world’s first government-backed national stablecoin in the first half of 2022 for which Ripple would provide Palau with technical, business, design and policy support. Meanwhile, exploring a USD-backed stablecoin and associated use cases-such as a corporate registry-on the XRP Ledger could provide a viable alternative to central bank digital currencies (CBDCs) for countries like Palau.
‘As part of our commitment to lead in financial innovation and technologies, we are delighted to partner with Ripple,’ said President Surangel Whipps Jr. ‘The first phase of the partnership will focus on a cross-border payments strategy and exploring options to create a national digital currency, providing the citizens of Palau with greater financial access.’
I’ll be tracking any the next phases of this project closely. Will Palau actually deploy the XRP Ledger?
The second verified project and the only one I’ve found that plans the use of Ripple’s CBDC Private Ledger is with the Royal Monetary Authority of Bhutan. From the announcement:
Ripple, the leading provider of enterprise blockchain and crypto solutions for cross-border payments, today announced a collaboration with Bhutan’s central bank, the Royal Monetary Authority, to pilot a central bank digital currency CBDC using Ripple’s CBDC Private Ledger.
‘Our collaboration with Ripple is testament to the potential of CBDCs to provide an alternative and sustainable digital payment instrument in Bhutan,’ said Yangchen Tshogyel, deputy governor of the Royal Monetary Authority of Bhutan. ‘Ripple’s groundbreaking technology will allow for the experimentation of a CBDC with our existing payments infrastructure-while ensuring efficient and cost-effective cross-border transfers.’
Ripple developed the Private Ledger product after it became obvious that public blockchains were totally unsuitable for CBDCs. The product intends to allow the creation of private ledger instances but retain links to the public XRP Ledger. There are open questions about how this linkage will be accomplished and what that means for the circulating supply of XRP.
Bhutan is a small nation tucked between China and India that has about 750,000 citizens. I’ll be tracking their CBDC progress especially in light of China pushing its own digital currency initiative.
The three most influential players are China, the U.S., and Europe. China is far down the path to launch its digital yuan. The Federal Reserve Bank of Boston and the Digital Currency Initiative at MIT recently released their initial technological research for a U.S. CBDC, with XRP nowhere to be found. Europe’s efforts are fractured but zero documented CBDC pilots use XRP.
Additionally, I attended (virtually) the BIS Innovation Summit in 2021 and am registered for the 2022 venue. As per BIS, the “Innovation Summit brings together global policymakers, senior executives from the financial and technology industries, and academics to discuss technology and innovation.” Just like the 2021 summit, there are no presenters or speakers from Ripple in any sessions. The 2021 BIS Hackathon competition yielded three winning companies who presented solutions for synchronizing foreign exchange payments, bridging the last mile of cross-border payments, and resolving data correction and validation difficulties, all without using XRP.
This summit represents the leading edge of Fintech activity for the established financial community – those who should be Ripple’s target audience. Ripple’s complete absence speaks volumes.
In summary, despite the small trials with Palau and Bhutan, there’s just not enough real-world verification of XRP adoption. CBDC trial projects are typically very well documented, along with specific technologies employed and participating partners. If XRP was being considered for any other trials, we’d know about it.
Buy during uncertainty, sell on lawsuit resolution news
Do I see benefits from holding this token long term? No. But in the short to medium term, there is an opportunity. If the SEC suit is resolved either by a settlement or outright victory, there will likely be intense retail action. History shows a distinct and repeated pattern of price increases with any glimmer of good news in the SEC case.
For example, in April 2021, Ripple won a legal battle for access to SEC discussions on defining crypto assets as securities. That news coincided with an explosive 75% rally in 30 hours. Then, XRP jumped 13% on May 30, 2021, when Ripple stopped the SEC from accessing certain legal records. In October 2021, Judge Sarah Netburn issued a ruling in favor of Ripple Labs, which triggered a 17% rally in XRP’s price.
Again, we saw XRP quickly gain 30% in early February this year after Ripple got permission to explain the fair notice defense versus the SEC. And, most recently, the price increased 8% on March 11 when the SEC’s motion to strike Ripple’s fair notice affirmative defense was denied by Judge Analisa Torres.
Of course, past performance is no guarantee for the future. But if winning minor legal battles against the SEC can spark significant increases, XRP investors could benefit immensely if Ripple is victorious in the war. Holders must watch for the news and be prepared; based on the examples from the past year, we can probably expect the gains to rapidly peak and then decline.
Risks and Logistics
Garlinghouse says Ripple is confident the SEC’s case will ultimately be dismissed, and Joseph Hall – a former managing executive for policy at the SEC – believes the regulator has a good chance of losing the lawsuit on the merits of the case. But it’s still possible the SEC prevails.
If that happens, any premium built into the price from the expectation of victory will immediately be lost. The amount of price decrease could depend on the specific outcome details and whether there’s any path for further legal action by Ripple. However, it’s doubtful the token would ever go to zero for several reasons.
Since the SEC suit was announced, most U.S.-based exchanges have halted XRP trading for fear of selling an unregistered security if the government’s position is upheld. But Asian exchanges are minimally influenced by SEC actions, and investors there are less sensitive to U.S. regulatory news. After U.S. exchanges had delisted XRP in early January 2021, data indicates the markets in Asia were the main driver of the price rally that powered a 50% gain. I would expect the Asian base of investors to remain relatively unaffected by a negative court outcome.
Moreover, Japan-based financial services company SBI Holdings released a statement shortly after the suit was announced claiming XRP was a cryptocurrency asset under Japanese law, not a security. Disclosure: SBI is by no means a neutral party. They have financial relationships with Ripple, including investments and a joint venture blockchain payments firm called MoneyTap.
In preceding crypto cases, the SEC focused on punishing the companies, not individual investors. It’s true that Telegram canceled their Telegram Open Network project due to the company’s ongoing legal fight with the SEC, but that token had not yet launched.
In October 2020, Kik and the SEC settled their year-long legal battle with an agreement that levied a $5 million fine but preserved the token. Block.One paid $24 million after settling charges that it operated an unregistered securities sale with its $4.1 billion EOS raise. Interestingly, the settlement only applied to the original ERC-20 tokens that were swapped by holders for the current EOS token. Thus, that coin was not required to be registered as a security with the SEC and is still trading unrestricted today.
Ripple does not have that same token swap option, so what would happen if XRP is deemed a security? Rather than continuing to suffer in the U.S. regulatory environment, Garlinghouse has publicly discussed the possibility of moving the company to a friendlier jurisdiction:
The reality is what we’d probably do is just say, ‘OK, in order to provide certainty and clarity on a going-forward basis we would want to look at other markets and other jurisdictions where there is that clarity.’ Earlier in this conversation, I highlighted the UK. I highlighted Japan. I highlighted Singapore.
Any remaining U.S.-based exchanges offering XRP at that point might simply delist it rather than jump through the regulatory hoops required to offer a security. Large institutions with broker-dealer licenses might end up being the off-ramp for individual U.S. investors divesting themselves of XRP. However, this is speculation on my part as the process is yet undefined. The bottom line is that even in the scenario of an SEC victory, Ripple has options and the token will still have value outside the U.S.
The SEC case has already been active for over a year; is a conclusion in sight? Jeremy Hogan as well as James Filan are good follows on Twitter for news about the proceedings. Hogan recently posted the following:
When will Ripple vs. SEC case end? Ripple thinks it will end sometime between Aug. 26 and Nov. 18. In its pending class action, Ripple agreed to move the case start back to Nov. 18 in belief that the SEC case will be finished before then. Of course, it can settle anytime.
Ripple court documents reveal their expected timeline for resolution – a window between Aug. 26 and Nov. 18, 2022. He also notes that a settlement could end the case at any time, but from Ripple’s perspective, regulatory clarity for the token is essential:
Garlinghouse has revealed that a settlement is likely to occur on one condition, that the regulator is expected to clearly define the regulatory status of XRP.Garlinghouse states, ‘To the extent we can find a constructive path forward with the SEC, we, of course, want to find that. There’s no scenario, though, that we’re going to settle unless there’s absolute certainty about what XRP is on a go-forward basis.’
Where should you buy XRP? If Ripple prevails, U.S. investors using major exchanges like Coinbase, Binance, and Kraken may be caught flat footed in the middle of a rally waiting while these exchanges scramble to relist XRP.
One of the few that still offer XRP right now is Uphold, and I have successfully transacted on the platform. Their daily maximum ACH bank transfer is limited to $2,500 per day, but crypto transfer amounts are much higher. So one strategy is to transfer the value you want to trade in ETH and exchange that directly for XRP. Other exchanges that say they serve U.S. customers and offer XRP are Gate.io, Kucoin, and BitYard. (Note that I have not used these services and make no claims about them.)
As always, think for yourself and only invest what you can afford to lose. Especially in the wild world of crypto, there are no guarantees. We may not see “XRP All The Money,” but savvy investors can position themselves to profit from upcoming events.