Editor's Note: This article comes fromDeep tide TechFlow (ID: Tech-Flow), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Deep tide TechFlow (ID: Tech-Flow)
, reprinted by Odaily with authorization.
On December 23, the U.S. Securities and Exchange Commission (SEC) formally filed a lawsuit against Ripple, its CEO Brad Garlinghouse and co-founder Chris Larsen in Manhattan District Court, accusing the defendants of raising more than 100,000 dollars through unregistered digital asset securities offerings since 2013. $1.3 billion in funding.
secondary title"Universal Digital Assets"Used for bank transfers across borders, but that never really came to fruition.
XRP has no real use
The first potential use of XRP advertised by Ripple is as a
Universal Digital Assets
Used for bank transfers across borders, but that never really came to fruition.
Ripple only started seriously testing ODL for the first time in mid-2018. ODL is an enterprise-grade software product designed to manage the day-to-day and long-term financial operations of financial institutions, and so far, it is the only product that supports XRP for use.
In the process of using ODL, the currency sender converts the fiat currency into XRP, transfers the XRP to the receiver, and converts the XRP into the fiat currency of the region. Typically, currency traders do not hold XRP directly, but instead convert XRP into their local currency, with XRP in and out of trades in about 90 seconds.
On June 21, 2018, Ripple CEO Garlinghouse explained in a public speech that as of that day, no one used XRP to achieve cross-border transactions. It was not until October 2018 that Ripple officially launched ODL for commercialization."Since its launch, ODL has received very little attention, partly due to the relatively high cost of using the platform. From October 2018 to July 26, 2020, only 15 money transmission institutions (none of which were banks) signed up to potentially use ODL, and ODL transactions accounted for no more than 1.6% (often significantly lower than this)."In addition, most of the usage of ODL is not market-driven, but comes from official Ripple subsidies. While Ripple officially advertises ODL as a cheaper alternative to traditional payment methods, it actually costs a lot more, so institutions don't want to use the product without substantial compensation from Ripple.
Specifically, from 2019 to June 2020, Ripple paid 200 million XRP to currency payment institutions. On the day of receiving XRP, these institutions immediately sold XRP to the open market to monetize it. These money transmitters disclosed earning over $52 million in fees and incentives from Ripple in September 2020.
use
and transaction volume.
On the other hand, Ripple started selling xCurrent and xVia two software systems in 2016 as a gimmick to open up the financial market, and by 2019 it has earned a total of about 23 million US dollars in revenue. But neither software system uses XRP or blockchain technology.
In July 2019, a senior vice president of Ripple emailed the CEO of the US branch of a cryptocurrency exchange that Ripple wanted to work with the company to make XRP tradable. In the email, Ripple executives explained that “XRP’s main use case today is speculation, and exchanges are the main enablers of this use case.”
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Ripple's source of income: selling XRP
From the beginning of Ripple's operation, Ripple CEO Garlinghouse has made it clear publicly that Ripple will sell XRP to raise funds for a common cause.
Ripple makes a similar statement in the Ripple Wiki:
“Ripple Labs sells XRP to fund its operation and promotion of the network. This enables Ripple Labs to have a highly skilled team to develop and promote the Ripple protocol.
For now, Ripple continues to make it clear on its website that it holds at least 54 billion XRP, making it by far the largest single asset holder."In the seven years since 2013, Ripple has sold a total of 14.6 billion XRP and made a profit of 1.38 billion US dollars."。
Among them, about US$780 million was used for investment and business operations, but the reasons and payments were not disclosed. Even institutional investors in XRP can only obtain information selectively released by Ripple.
In the external sales of XRP, institutional sales are the main part.
Ripple sees institutional sales as a pillar of its strategy to generate speculative interest in XRP from public investors. As Ripple put it in a document posted on its website on January 24, 2017, "Ripple's Institutional Sales of XRP
Indicates the broader capital market potential of XRP
At the same time, through institutional sales, Ripple can also obtain credit endorsement from well-known institutions."Since 2013, Ripple has sold XRP to at least 26 institutional investors, and at least seven institutional investors have purchased XRP at a discount of 4% to 30% below the market price."。
Ripple's sales agreements for institutions generally do not limit a buyer's ability to resell XRP, only specifying short lock-up periods, usually three to twelve months, or limiting the amount of XRP a buyer can resell.
For example, on September 24, 2018, Ripple signed an agreement with a Japanese institution, C, which claims to be
Operate sales and exchange services of encrypted assets to provide safe and secure encrypted asset transactions to as many people as possible
From 2018 to the end of 2019, Ripple sold more than $170 million worth of XRP to institutional investor C, about 719 million XRP. By the end of September 2020, it had sold about 361 million XRP to institutional investor C. Around the 15th, there were at least 20 million XRP left.
From the beginning of its release, Garlinghouse publicly promised to make a significant and meaningful effort on XRP, which means that the value of XRP depends on the company Ripple.
secondary title"Ripple sits on XRP
After being sued by the SEC, Ripple CEO Garlinghouse publicly responded that XRP is not a security. One of the reasons is that the market value of XRP is not related to Ripple's activities, but to other cryptocurrency market conditions. However, in the SEC's indictment, it revealed in detail how Ripple sits on XRP.
From the beginning of its release, Garlinghouse publicly promised to make a significant and meaningful effort on XRP, which means that the value of XRP depends on the company Ripple.
In a 2014 promotional document, Ripple stated,
Ripple Labs' business model is based on the belief that "if the Ripple protocol becomes widely adopted, demand for XRP will increase, leading to price appreciation".
Since at least 2014, Ripple has promised to work hard to create and maintain a secondary market for XRP.
For example, Ripple states on its website that "we will engage in investment strategies that are expected to result in the stabilization or appreciation of XRP against other currencies."
Among them, the most important thing is to let XRP go online on more exchanges.
In 2017 and 2018, Ripple entered into agreements with at least 10 cryptocurrency exchanges, none of which were registered with the SEC in any capacity, and at least two of which had their principal place of business in the United States.
Ripple pays these exchanges fees in XRP to allow XRP to be traded, sometimes offering rewards for meeting volume metrics.
For example, in May 2017, Ripple paid 17 million XRP to a U.S.-based cryptocurrency exchange to pay listing fees and a maximum monthly transaction fee rebate of $60,000 within three months.
Between October 2016 and October 2017, Ripple distributed about 28 million XRP to these platforms, with a market cap of $6.8 million at the time.
In addition, Ripple intervenes in the XRP secondary market through various means."Throughout the offering, as indicated by Garlinghouse and Larsen at various times, Ripple conducted extensive efforts to monitor, manage, and influence the XRP trading market, including XRP's trading price and volume, including:"(1) Use an algorithm to determine the amount and price of XRP sold to the market;
(2) Pay rewards to certain market makers if sales reach a certain volume level of XRP."These strategies are described internally by Ripple as designed to maximize the amount of capital that Ripple can raise in an offering, or to achieve"more speculative buying
Externally, Ripple described its efforts to protect public investment in XRP.
In order for the price to rise smoothly, Ripple has a
XRP Market Team
, is responsible for monitoring the price and trading volume of XRP, and regularly communicates with Ripple’s XRP market maker about XRP sales strategies. between.
Starting in 2017 at the latest, Ripple co-founders Larsen and Garlinghouse began attending meetings of the XRP market team."In terms of market-making methods in the secondary market, one of Ripple's commonly used methods is to cooperate with good news and simultaneously pull the market."In September 2016, Ripple instructed market makers to start actively making markets around the time of Ripple’s announcement mentioning Ripple’s performance in the month. On September 20, the vice president of finance sent an email to the market maker, saying that they should start 24 days after the announcement. The entire $300,000 was used to purchase XRP within an hour."In an email to company executives dated August 12, 2017, Garlinghouse directed that certain Ripple employees should proactively try to add value to speculative transactions with positive XRP messages."In June 2020, Ripple employees provided Garlinghouse and Larsen with an internal report in which the employees highlighted that since early May 2020,
, in part because Ripple sells XRP. These employees presented
Strategies to limit supply
, such as Ripple buying back XRP. Subsequently, Garlinghouse approved the buyback proposal.
After Garlinghouse's decision, Ripple disclosed in its market report for the third quarter of 2020 on November 5 that Ripple purchased $45 million worth of XRP, and XRP also began to rise sharply.
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Two executives make $600 million profit
Ripple's two executives, CEO Garlinghouse and Executive Chairman Larsen, made a total of about $600 million in profits by selling XRP.
SEC report reveals XRP sell-off by two executives.
From April 2017 to December 2019, CEO Garlinghouse (Brad Garlinghouse) sold more than 321 million XRP obtained from Ripple to market investors, earning about $150 million in income.
On the other hand, from 2015 to March 2020, knowing that XRP may constitute a securities offering, Larsen and his wife sold at least 1.7 billion XRP to the market, netting more than $450 million.
But the actual duty of RippleWorks is to represent market makers and help Ripple sell XRP to the open market. Since mid-2015, RippleWorks has sold about 693 million XRP to the public, amounting to about $176 million.
Larsen, the co-founder of Ripple, has also faced prosecution by the SEC before.
Ripple co-founder and current chairman of the board Larsen (Chris Larsen) co-founded a company in 2005 and served as the company's CEO until 2011. The company was sued by the SEC in November 2008 for violating Section 5(a) and (c) of the Securities Act.
According to public information, the company founded in 2005 is Prosper Marketplace, the first P2P lending company in the United States. PROSPER was sued by a large number of investors to the court for "substandard securities". In order to settle the matter, it finally reached a settlement of 10 million US dollars with the client."secondary title"is defined as a security
The SEC defines XRP as an "investment contract" and a type of security. Ripple only has a virtual currency business license and no securities license. This is one of the biggest allegations against Ripple by the SEC.
Ripple conducts institutional sales through a wholly owned subsidiary, XRP II. XRP II has applied for a license from NYDFS (New York State Department of Financial Services) to engage in
Virtual Currency Business Activities
, which sells XRP to “institutional and other accredited investors” who “purchase XRP for speculative purposes.”
Section 5 of the Securities Act of the U.S. Congress prohibits any unregistered offering of securities. If the issuer's securities are not sold to the public, it can be exempted from registration, while in other cases registration is required, and the issuer is required to disclose financial reports and major events on a regular basis, so that investors in the issue and buyers in the secondary market can obtain the right to know .
However, Ripple never filed a registration statement, did not provide investors with annual sales data, and did not regularly disclose financial and management information.
Ripple monetized XRP without obtaining a valid registration statement, and at the same time used the information asymmetry they created in the market for their own benefit, bringing huge risks to investors.
Defendant Ripple engaged in the above acts, which violated the provisions of the Securities Act on illegal securities offers and sales, and Larsen and Garlinghouse also aided and abetted Ripple in violating these provisions.
secondary title"Ripple knew the risks 8 years ago"Back in 2012, Ripple received legal advice that under certain circumstances XRP could be considered an "investment contract," a security under the federal securities laws. However, Ripple did not stop this "illegal securities issuance activity", did not register the sale of XRP with the US SEC, and did not apply for an exemption.
The memo states that under federal securities laws, XRP is considered a"currency"investment contract"Risks (and thus being a security) exist and depend on various factors. If an individual purchases XRP to "engage in speculative investment transactions," or if a Ripple employee advertises that XRP may increase in price, Ripple faces a greater risk that XRP units will be considered an investment contract (and thus a security)."XRP is unlikely to be considered under the Foreign Exchange Act
currency
, because with
traditional currency
Unlike, XRP is not backed by a central government and is not a legal tender.
Both memos recommend that Ripple and Larsen contact the SEC to determine whether XRP is a security under the federal securities laws.
But Ripple and Larsen did not heed the counsel's advice.
Larsen explained in a 2014 email that the XRP received at Ripple’s founding was used to compensate individuals for taking the risk of “being deemed an issuer of securities.”
In other words, Larsen dumped a large amount of XRP knowing that there was a risk (XRP is defined as a security).
Garlinghouse has been warned and understood on multiple public and private occasions that XRP has "security-like" characteristics."In an interview with Yahoo Finance in February 2018, Garlinghouse admitted: "If there is no real application, then it (XRP) is a securities offering. And if it is a securities offering, there is no regulatory uncertainty. It should be treated as a security." Issuance is regulated."
The legal memo also states that, unlike Bitcoin, there is a specific entity, Ripple, that is responsible for the sale of XRP and the promotion and marketing functions of the Ripple network.
In an internal email on April 26, 2018, an equity investor A wondered whether XRP Ledger would be subject to a "51% attack" like the Bitcoin blockchain, and he concluded that,
Given current stakeholder incentives, this is more of a long-term issue, meaning Ripple has incentives to secure the XRP Ledger. Another employee agreed: “This has always been the crux of the matter. Ripple is controlled by 1 entity, not through a distributed entity like Bitcoin.”
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SEC's claim
The indictment states that unless the defendants (Ripple Corporation, Larsen, Garlinghouse) are permanently restrained and prohibited, they will continue to engage in the acts, practices and businesses described above.
In accordance with the United States Code and the Securities Act, the SEC would like to ask the court to make a final judgment:
Defendants, their agents, and related persons are permanently barred from directly or indirectly violating the Securities Act, including delivering XRP to any person or taking any other steps to effectuate any unregistered offer or sale of XRP.
