Is XRP a security? That question has been tormenting the XRP community for years. Now, statements made by Ripple’s executive team seem to echo the idea that XRP is a security.
The issue was recently tackled by Larry Cermak at The Block. Obviously, the issue is a contentious one: the future of Ripple (the company) could be in jeopardy if XRP is declared a security. XRP holders could be left underwater with a suddenly problematic token.
Statements from Ripple’s executives, meanwhile, haven’t exactly calmed the nerves of the XRP community.
“For every penny the price of XRP goes up, the notional value of Ripple’s XRP goes up by six hundred million dollars,”
explained one executive in a worrying interview last year.
Technically, XRP and Ripple are separate entities, although the history of the two entities is closely intertwined. The same management team behind Ripple seems to have also launched XRP, although the launch dates for both projects are somewhat disputed. Today, Ripple continues to be the largest token holder in the XRP ecosystem, holding as much as 60% of the total supply of XRP tokens. Additionally, Ripple earns revenue by continuously selling XRP. This revenue funds operations for the company.
Could The SEC Crack Down On XRP In The Future?
The SEC is increasingly cracking down on token projects that have sold security-like tokens in the past. As SEC attention in the crypto space heats up, some believe Ripple and XRP will be the center of attention. Ripple could be accused of running an illegal, unregistered token sale when it sold XRP tokens, for example, and XRP could be declared an unregistered security.
Despite the controversy, however, XRP remains one of the most promising tokens in the digital currency ecosystem. It’s firmly holding the number two position in the crypto space by market cap, trailing only bitcoin. XRP recently passed Ethereum to take that position.
Meanwhile, on the institutional side of things, investors can take a stake in XRP by buying a share of funds like the XRP Investment Trust from Grayscale.
Today, XRP has a market cap of $13.7 billion, yet huge questions remain about how XRP should be classified. Let’s take a closer look at Ripple’s statements to determine if there are any clues to how the SEC might regulate XRP in the future.
What Does The SEC Say About XRP?
As reported by The Block, the SEC has made several statements about XRP, although they have not formally classified XRP into any categories nor have they made clear statements about the future of the digital currency.
William Hinman, Director of the SEC’s Division of Corporation Finance, said in a speech this past June that Ethereum was a sufficiently decentralized network, suggesting that ETH would not be declared a security in the near future. After that statement was made, there was confusion in the crypto community about what the term “sufficiently decentralized” meant according to the SEC. Was XRP sufficiently decentralized?
The SEC later clarified what it meant when saying “sufficiently decentralized”. At Consensus Invest last week, SEC Chairman Jay Clayton said the following:
“When a store of value becomes truly decentralized – not one person or group of people control its supply or control trading or they have access to asymmetric information – we have said that that’s distributed and therefore you don’t have to re-register those transactions,”
said SEC Chairman Jay Clayton at Consensus Invest in late November.”
Clayton also explained that tokens and token networks can evolve to a different status over time. A network may become more or less decentralized over the years, for example. A token sale may be declared a securities offering at the time of the initial sale before transforming into a commodity, for example, after becoming sufficiently decentralized.
Clayton was directly asked whether XRP was a security. However, he did not respond directly. Instead, he talked about how the SEC is open to projects of all types, and that more information was required before making a specific decision about any token.
What Do Ripple Executives Say About XRP?
Part of the problem with XRP and Ripple is that members of the Ripple executive team have made a number of problematic statements about the digital token in the past. These statements seem to suggest that XRP and Ripple are intricately connected in a way similar to a traditional security.
One of the most infamous statements was made by Ripple’s CTO, David Schwartz, on December 27, 2017:
“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.”
Later, Schwartz was asked how OpenCoin operated. OpenCoin was the predecessor to Ripple. Schwartz directly stated that the source of revenue for OpenCoin was the sale of XRP:
“We promote and develop Ripple into a massive and successful open source, decentralized payment system. Our source of revenue is the sale of XRP.”
It’s not just the CTO of Ripple making problematic statements. Ripple’s co-founder and former CEO, for example, said the following in 2013:
“Ripple is being created by a for-profit company called OpenCoin, and that’s the company I work for. We’re sort of software producers; we’re making the protocol. Our business model is we’re keeping 25% of the XRP that exists and we’ll use that to fund operations, repay investors, pay employees; that’s our business model.”
Larsen added the following in an interview in 2014, clarifying the relationship between the Ripple protocol, XRP, and OpenCoin:
“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.”
Ripple’s Value Goes Up $600 Million For Every Penny That XRP Increases
One of the most worrying statements about the relationship between XRP and Ripple, however, was made by Schwartz in 2017 when he stated the following:
“Ripple holds over 60 billion XRP. Given the way that’s being escrowed, Ripple will almost certainly be the largest holder of XRP for the foreseeable future. For every penny the price of XRP goes up, the notional value of Ripple’s XRP goes up by six hundred million dollars. Ripple can only materialize that value for its shareholders if that value and liquidity are preserved over the next several years. Sure, Ripple makes money by selling software to banks. But how many banks do you think Ripple would have to close to make six hundred million dollars in license/support fees? That would equal the value of a sustained one cent increase in the price of XRP”
That statement clarifies how much XRP is held by Ripple (60 billion). It also clarifies how much stake Ripple has in the value of XRP. As the value of XRP increases, so too does the value of Ripple.
Schwartz complicated things ever further when he said the following later in 2017:
“After all, the reason we’re doing this is to increase demand for XRP to increase the value we can extract from our stash of XRP.”
XRP isn’t technically a security or stock. However, it appears that XRP could be functioning like one. The value of XRP appears to be intricately connected to the value of Ripple. While Ripple continues to try to distance itself from XRP, it’s clear there are question marks hanging over the world’s second largest cryptocurrency by market cap.
You can read the full article from Larry Cermak explaining the connection between XRP and Ripple at theblockcrypto.com.