Ripple’s XPR is Different than Bitcoin and is Currently Facing SEC Charges – Analytics Insight


XRP is the native cryptocurrency for products developed by Ripple Labs. Its products are used for payment settlement, asset exchange, and remittance systems that work more like SWIFT, a service for international money and security transfers used by a network of banks and financial intermediaries. XRP is pre-mined and uses a less complicated method of mining as compared to Bitcoin. In news reports, XRP and Ripple are often used interchangeably. Both are actually different. Ripple is the name of the company and network behind the XRP cryptocurrency. The company was founded as a peer-to-peer trust network that leveraged social media. Users within a network could bypass banks and make loans and open credit lines with each other. But the network failed to take off.

In 2012, three years after Bitcoin ushered in the cryptocurrency era, Ripple changed tracks and became OpenCoin—a network for money transfers where large businesses and financial services firms acted as counterparties to transactions. XRP, its cryptocurrency, was launched in the same year with 80 billion tokens going to the company and 20 billion to its co-founders. The purpose of XRP was to serve as an intermediate mechanism of exchange between two currencies or networks. OpenCoin became Ripple Labs in September 2013. Ripple describes itself as a global payments network and counts major banks and financial services amongst its customers. XRP is used in its products to facilitate quick conversion between different currencies.

Since crashing from US$1.40 last week, XRP has established a range between US$1.05 and US$1.14 over the past week. The support at US$1.05 is provided by a .5 Fib and is now bolstered by the 50-day MA. The cryptocurrency has dropped numerous times beneath US$1.05 but has managed to close each daily candle above that line. On the other side, the resistance at US$1.14 provided support in August and will need to be overcome in order to end the current range.

A Comparison with Bitcoin

Instead of using the blockchain mining concept, the Ripple network uses a unique distributed consensus mechanism to validate transactions in which participating nodes verify the authenticity of a transaction by conducting a poll. This enables almost instant confirmations without a central authority. The result is that XRP remains decentralized and is faster and more reliable than many of its competitors. It also means that the XRP consensus system consumes negligible amounts of energy as compared to Bitcoin, which is considered an energy hog. Due to the complicated and intensive nature of mining used in the cryptocurrency, Bitcoin transaction confirmations may take many minutes and are associated with high transaction costs. XRP transactions are confirmed within seconds and generally occur at very low costs.

Similar to the bitcoin transaction processing fee, XRP transactions are charged. Each time a transaction is performed on the Ripple network, a small amount of XRP is charged to the user (individual or organization). About 1 billion XRP were pre-mined at launch and have been released gradually into the market by its main investors. In contrast, Bitcoin’s supply is capped at 21 million, meaning there will only ever be 21 million Bitcoin in existence. BTC’s artificial scarcity has helped generate investor interest in its potential as a store of value.

Unlike bitcoin, a smart contract controls the release of XRP. Ripple planned to release a maximum of 1 billion XRP tokens each month as governed by an in-built smart contract; the current circulation is over 50 billion. Any unused portion of the XRP in a particular month will be shifted back to an escrow account. This mechanism ensures that there will be no possibility of misuse due to an oversupply of XRP crypto coins, and it will take many years before all the crypto coins will be available.

Ripple’s controversial XRP token continues to trade above the psychological level of support of US$1.00 as investors anticipate a long-awaited conclusion to Ripple’s ongoing case with the Securities and Exchange Commission. It is, however, beginning to show signs of fragility on higher time frames having formed a lower high at US$1.41 from its all-time high of US$1.97. Relative Strength Index (RSI) is teetering around the 42.6 marks, significantly lower than when it initially broke above US$1.00 in August, which indicates weakness. Daily trade volume is at US$3.1 billion, a 6.17% decrease on yesterday’s total as momentum shifts slightly to the downside.

Charges against Ripple

In December 2020, The Securities and Exchange Commission announced that it has filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over US$1.3 billion through an unregistered, ongoing digital asset securities offering. According to the SEC’s complaint, Ripple; Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO, raised capital to finance the company’s business. The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in unregistered security offering to investors in the U.S. and worldwide. Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services.

According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totaling approximately US$600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy an exemption from registration, in violation of the registration provisions of the federal securities laws.

“Issuers seeking the benefits of a public offering, including access to retail investors, broad distribution and a secondary trading market, must comply with the federal securities laws that require registration of offerings unless an exemption from registration applies,” said Stephanie Avakian, Director of the SEC’s Enforcement Division. “We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business and other important long-standing protections that are fundamental to our robust public market system.”

“The registration requirements are designed to ensure that potential investors – including, importantly, retail investors – receive important information about an issuer’s business operations and financial condition,” said Marc P. Berger, Deputy Director of the SEC’s Enforcement Division. “Here, we allege that Ripple and its executives failed over a period of years to satisfy these core investor protection provisions, and as a result, investors lacked information to which they were entitled.”

The SEC’s complaint, filed in federal district court in Manhattan, charges defendants with violating the registration provisions of the Securities Act of 1933 and seeks injunctive relief, disgorgement with prejudgment interest, and civil penalties. The SEC’s investigation was conducted by Daphna A. Waxman, Jon A. Daniels, and John O. Enright of the SEC’s cyber unit. The case is being supervised by Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. The SEC’s litigation will be conducted by Jorge G. Tenreiro, Dugan Bliss, Ms. Waxman, and Mr. Daniels, and supervised by Preethi Krishnamurthy.

The Present Condition

Ripple and XRP supporters hope that the new SEC chairman, Gary Gensler, who taught crypto at the Massachusetts Institute of Technology (MIT), would throw out the XRP lawsuit. They believe that there was a conflict of interest with former SEC Chairman Jay Clayton. In August, a government watchdog began investigating circumstances surrounding the XRP lawsuit involving Clayton and senior SEC official William Hinman. Gensler has shown that he recognizes innovation. During a U.S. Senate Banking Committee hearing last week, the pro-bitcoin Senator Cynthia Lummis asked him: “Do you support responsible innovation?” Gensler immediately replied: “Oh my gosh, yes. I mean it’s brought us these lights in the room. It’s brought us this ability to have a hybrid hearing with your fellow members. I mean innovation is what supports access, economic activity, and give so much of us better opportunities in life.” The SEC chairman has also said that Satoshi Nakamoto’s innovation is real. “His innovation spurred the development of crypto-assets and the underlying blockchain technology,” Gensler described, adding that “it has been and could continue to be a catalyst for change in the fields of finance and money.”

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About the Author: Kate