Ripple Lawsuit

What is XRP? Will the Ripple Lawsuit Crush It?

Nicoleta Balan Avatar
Nov 14, 2022
9 min reading time

Ripple and XRP made a name for themselves in cryptocurrency in the last few years.  

They promised a highly usable cryptocurrency for international business payments, and the idea overjoyed the public. And this can be seen in the fact that XRP managed to keep a top position by Market Cap for a long time.  

But lately, the situation has turned around as the Ripple Lawsuit seems to overshadow XRP’s purpose.  

Since the U.S. Security and Exchange Commission (SEC) charged Ripple and two executives with conducting a $1.3 billion unregistered securities offering on December 22, 2020, XRP’s growth seems to have halted.  

Due to this, Ripple’s trust wavered to the point some crypto exchanges have already stopped XRP trading.   

The situation seems dire. However, Ripple and XRP do not plan on going gently into that good night.  

What is XRP, and what is Ripple? 

First things first, XRP is not interchangeable with Ripple.  

XRP is a digital currency issued and partly controlled by Ripple Inc. The currency runs on a digital payment platform called RippleNet, built on a distributed database called XRP Leger.  

It is essential to mention that while RippleNet is owned and run by the Ripple company, the XRP Ledger is an open-source protocol that isn’t really based on blockchain. It is a Distributed Ledger Technology in its own right.    

Companies that want to access the Ripple network can use gateways that act as entry points to Ripple for people outside the network.  

Ripple is a for-profit entity that offers companies and businesses an alternative to the banking system in the form of a fast payment and financial settlement system called RippleNet.  

As a for-profit company, Ripple’s target consists of financial institutions, payment providers, and corporations. 

The XRP ledger 

XRP Ledger is a distributed database, an open-source protocol supporting RippleNet and its solutions.   

The XRP Ledger follows the Federated Byzantine Consensus model. The network achieves consensus by having nodes vote on whether a transaction should or should not be included in the ledger. The validator nodes agree on the order and validity of XRP transactions. This agreement, called consensus, serves as a final and irreversible settlement.   

It takes 3-5 seconds for the ledger to reach a consensus. Once a transaction is broadcasted, anyone accessing the XRP ledger can view the network’s most recent state.  

The network is formed by computers holding the roles of validators. The validators are spread around the world and maintain a shared database of who owns what, just like in the case of Bitcoin. 

Trust-based validator nodes 

The trust-based validator nodes system receives its name because the validators are always honest. If a validator is caught trying to act sketchy, he will be immediately muted, and the other nodes won’t listen to it anymore.  

Anyone can be a validator, and active validators on the ledger today include universities, exchanges, and financial institutions.   

There are currently 150+ validators, and Ripple runs 6 of them.  

While theoretically, anyone can run a validator node to help maintain and expand the XRP Ledger, Ripple operates a default list of trusted validators.   

As mentioned before, the XRP Ledger is inspired by the Federated Byzantine Consensus model. Therefore, the nodes organize rounds of voting to agree on which transactions follow the rules.   

For a transaction to proceed, the validators consult each other and vote on the legitimacy. If the transaction obtains at least 80% positive feedback, it will be broadcasted on the network.  

David Schwartz (Ripple CTO) considers that the only disagreement can appear when two participants see transactions in a different order. One may see a transaction taking place before another or a transaction taking place before the round, while another validator may see it in the exact opposite.   

The system is meant to solve this issue automatically, deferring the complex transaction for the next round in which it will be executed if it is valid. 

The XRP crypto 

XRP is the native currency of the XRP Ledger. It runs on RippleNet but only as a settlement solution. Furthermore, Ripple Inc. affirms that the XRP is not imperative for RippleNet to use to work.  

Ripple issued the XRP cryptocurrency in 2012 to help transfer payments through RippleNet. Through it, banks and financial institutions can convert their money to XRP and transfer the amount to the recipient account (even another bank) without going through multiple intermediaries.  

XRP is characterized by having a 3-5 second transaction settlement speed with a capacity of 1,500 transactions per second. It was issued in a number of 100 billion units, and it cannot be mined.  

Regarding distribution, Ripple Inc. holds 5.6 billion, 44.3 billion XRP are placed in escrow, and 50.22 billion are circulating.   

Is XRP a currency or a security?

SEC has threatened Ripple to declare XRP unregistered security for a long time. And in December 2020, SEC finally took the initiative. Ripple is going through a severe lawsuit that seems to have halted the XRP’s growth.  

Even before the lawsuit, many considered XRP centralized rather than decentralized. But Ripple always argued that XRP is not a security but a bridge currency. Furthermore, the United States Department of Justice and the Financial Crimes Enforcement Network classified XRP as a virtual currency when they settled their suit against Ripple in 2015.   

Despite that, SEC is accusing Ripple, Brad Garlinghouse, and Chris Larsen of selling XRP as unregistered security between 2013 and 2020.   

However, even though the XRP goes further with the case, both sides, Ripple and SEC, have agreed that the length of the motion should be filed by December 20, 2022. Also, it is expected to drag on in 2023 as the case enters another phase.  

No matter how much Ripple dismisses the allegation, according to the SEC vs. Ripple lawsuit analysis published by Cointelegraph, SEC has built quite a strong case for passing XRP through the Howey Test. 

The Howey test 

The Howey investment contract test defines an asset to be a security if it meets the following criteria:  

A beneficiary buys the asset to (1) make an investment (2) of money or something else of value, (3) in a common enterprise, (4) with the expectation of profits, (5) from the essential managerial efforts of others.  

The fourth and fifth criteria go hand in hand, and tokens usually meet the first three criteria except for these ones in the cryptocurrency space. That’s due to sufficient decentralization.  

However, in Ripple’s case, XRP is the native currency of a network maintained by 35+ nodes, of which Ripple Inc. holds 6.   

The lawsuit also revealed that Ripple raised more than $1.38 billion from the sale of XRP. Furthermore, Ripple seems to have taken various actions to promote profitability, including statements suggesting potential appreciation for XRP as a purchase reason.  

There is also the matter of the huge amount of XRP held by the company, which can be translated into a strong case to be made that the profitability of XRP is highly dependent on the efforts of Ripple.  

The odds seem to favor the SEC, but that doesn’t mean Ripple’s law team is giving up. And neither is the XRP community.   

XRP being declared security doesn’t affect the company only but holders as well. Therefore, XRP holders are asking to join the SEC lawsuit as third parties in Ripple’s defense.  

Besides, several organizations and crypto firms, counting the largest crypto trading platform in the U.S. by trading volume, Coinbase, recently sought permission from the court to file an amicus brief to support Ripple. 

The Hinman documents 

Apart from The Howey investment, in the SEC vs. Ripple legal battle, “The Hinman documents.” became a buzzword.  

These documents are related to a 2018 speech by former SEC division director William Hinman regarding the status of Ether. At the time, he stated that Ether was not a security. Ripple considers this a key argument in its case against the regulator, which has accused it of conducting an unregistered securities sale of its native token, XRP.  

Moreover, it is hoped that these documents will represent a smoking gun, a juicy quote that four years ago, the SEC said Ethereum wasn’t a security, which may demonstrate that XRP isn’t a security either. 

Regarding “The Hinman documents,” Ripple Inc. scored a victory with the United States Securities and Exchange Commission (SEC) on September 29, when the judge ruled to release the documents written by former SEC Corporation Finance Division Director William Hinman. 

On October 20, Ripple’s legal team received the documents. 

The latest updates in the XRP vs. SEC trial will most likely lead to prolonging the trial, but even so, they would like to complete the lawsuit in the first part of 2023. 

Key takeaways 

  • XRP is a digital currency native to the XRP Ledger that runs on RippleNet. The cryptocurrency was issued and is partially controlled by Ripple Inc.  
  • Ripple is a for-profit entity that offers companies and businesses an alternative to the banking system in the form of a fast payment and financial settlement system called RippleNet.  
  • XRP Ledger is a distributed database, an open-source protocol supporting RippleNet and its solution. The XRP Ledger follows the Federated Byzantine Consensus model, and it takes 3-5 seconds to reach a consensus.  
  • The trust-based validator nodes system receives its name because the validators are always honest. There are currently 150+ validators, and Ripple runs 6 of them.  
  • The XRP cryptocurrency was issued by Ripple back in 2012 with a number of 100 billion units, and it can provide 1,500 transactions per second.  
  • The SEC lawsuit against Ripple is not yet settled. However, SEC makes a strong case that XRP can be registered as a security according to the Howey Test.  
  • Ripple scored a victory on September 29 when the judge ruled to release the documents written by former SEC division director William Hinman about a 2018 speech when Hinman said that Ethereum wasn’t a security, which may demonstrate that XRP isn’t a security either.  
  • Ripple is arguing against the allegations as XRP holders, organizations, and crypto firms request to join the lawsuit in the company’s defense. 
Advertisement
* The information in this article and the links provided are for general information purposes only and should not constitute any financial or investment advice. We advise you to do your own research or consult a professional before making financial decisions. Please acknowledge that we are not responsible for any loss caused by any information present on this website.
Press Releases