Ripple: a future more uncertain than ever

Ripple: a future more uncertain than ever

Embroiled for two years in a legal battle with the US Securities and Exchange Commission (SEC), the American company Ripple has become a shadow of its former self. Its supporters are hoping that the end of the legal proceedings, which could have a favourable outcome, will enable it to get back on its feet. But is this really possible? A look back at one of the most divisive projects in the crypto ecosystem.

Old-timers still remember the incredible rise of the XRP token during 2017 🚀

In the space of a year, the crypto developed by the US company Ripple had risen by 55.000% (yes yes) to reach $130 billion in capitalisation, just behind the king of the market, Bitcoin, which had come close to $300 billion for the first time!

At the time, Ripple was at the top. Several of the company's products began to be tested by major international banks such as UniCredit, UBS and Santander, which were looking to learn about blockchain technology.

In France, Crédit agricole even experimented with its services to transfer funds between France and Switzerland.

But this enchanted interlude has since closed...

Today, XRP has fallen back into line without ever regaining its 2018 level. Worse: it is currently trading well below its level at the time (20 billion in capitalisation), when the rest of the market has held up much better.

How can such a gap be explained? 🤔

For many, this sort of descent into hell for XRP is essentially explained by the legal offensive of the US financial regulator (SEC), which has been accusing Ripple of selling financial securities to Americans for the past two years. The outcome of this case is expected by the end of the first half of 2023.

The lawsuit is also targeting Chris Larsen and the current boss of the San Francisco-based company, Brad Garlinghouse. The SEC is accusing both men of selling the XRP token for personal gain, knowing that it would have very little real use.

The complaint states that "Ripple sold XRP on a large scale in the market, particularly to investors who could make no use of it."

To fully understand the case that now pits Ripple against the US regulator, we need to go back a few years. "Many market players don't seem to know much about the history of Ripple or the underlying technology," quips one expert.

👉 The Ripple project was born before Bitcoin and Ethereum

The history of Ripple began in 2004, the year Facebook (now Meta) was created.

At the time, the project was called "RipplePay" and its creator, Canadian Ryan Fugger, had the ambition of developing a peer-to-peer network to carry out international financial transactions.

The initial idea focused more on putting the individual user at the centre, before evolving into a proposal to replace the Swift interbank network used since the 1970s by financial institutions.

In its current form, Ripple provides exchange services on several traditional currency pairs and can store all participants' accounting information.

The big difference with Swift is that Ripple offers secure exchanges verified by network participants via a consensus mechanism, all in real time and with an open source solution.

"The proposal is interesting but does not offer a radical revolution compared with Swift", stresses a good connoisseur of the issue, who adds, "For the banking industry to switch to Ripple it would have to be 1,000 times more efficient and, above all, the banks would have to be more involved in the design".

The Crédit Agricole experiment is enlightening in this respect. "It was completely conclusive but, in the meantime, we found an equivalent alternative solution that saved us from investing in another processing chain", the French bank explained to us.

The development of the RipplePay solution remained rudimentary until 2011, when the Bitcoin protocol began to gain popularity among specialists. This moment also symbolises the arrival in the team of a historic figure in the bitcoin ecosystem, the American Jed McCaleb.

👉 A Bitcoin pioneer on the team

Jed McCaleb is known for having co-created the eDonkey file-sharing network in 2000, but also the MtGox bitcoin exchange platform in 2010, which he then sold to Frenchman Mark Karpelès in 2011 (the victim of a massive hack in 2014).

While we are now used to using Binance or Coinbase, there was virtually nothing back then. Jed McCaleb was a "star" in the sector and therefore a pretty incredible catch for Ripple.

But the American quickly took control of the RipplePay project, ousting Ryan Fugger and teaming up with American entrepreneur Chris Larsen in 2012. The start-up then changed its name several times, moving from RipplePay to OpenCoin, Ripple Labs and finally Ripple from 2015 onwards.

Ripple received funding in April 2013 from venture capital giants such as Google Ventures and Andreessen Horowitz.

Earlier, the project had also secured financial backing from Jesse Powell, the founder of the Kraken exchange platform (which is one of the largest today) and Roger Ver, one of the first major media figures calling for the democratisation of bitcoin. With these two personalities, the goal was obvious: Ripple needed to launch a cryptocurrency to integrate it into the money transfer system.

👉 XRP massively distributed to the two founders

XRP saw the light of day in January 2013 with a limited quantity of 100 billion tokens. Just over 80 billion were allocated to the company and... 18.5 billion were given to Chris Larsen and Jed McCaleb.

XRP tokens are at the heart of Ripple's business model. It is their sale that provides almost all of the company's revenue.

Today 50% of tokens are available, some of which have been purchased by individual investors. Between 2016 and 2019, Ripple is said to have earned $1.2 billion through this channel, according to the SEC.

The company's history is marred by numerous internal conflicts, which led to Jed McCaleb's departure around 2014 (he left to found Stellar, a rival protocol that shares many similarities with Ripple).

Jed McCaleb is said to have borne the brunt of Chris Larsen's gradual takeover, backed by the new shareholders. Nevertheless, he retained almost all of his tokens and contributed to the fall in the share price each time he liquidated a new part of his portfolio. Jed McCaleb reportedly got rid of his last XRP a few months ago.

Unlike bitcoin and ether, XRP is not generated by helping to secure the network. There is little financial incentive to participate in its operation and it cannot really be said to be properly decentralised, as validators have long been controlled by Ripple and are still largely funded by the organisation 😅

What is also disturbing is that the Ripple system can operate without XRP thanks to its "xCurrent" product. During its experiment conducted in 2018, Crédit Agricole did not use XRP.

👉 What is XRP really used for?

XRP can be used as an offset (for example, switching from euros to XRP to obtain dollars) as part of its other product, "xRapid". This is interesting because, for traditional inter-currency transactions, the process is costly and can take several days. Here, it is virtually instantaneous. Nevertheless, few financial institutions have adopted it...

One of the few exceptions is MoneyGram. The number two provider of international money transfers (behind Western Union) brought Ripple into its capital in 2019 (with a share buyback three times the market price) with the aim of testing all the company's products and encouraging their adoption.

This partnership proved fruitful for MoneyGram, which was receiving around $10 million a quarter from Ripple. But the partnership came to an abrupt halt in February 2021 after the US regulator filed a complaint...

Today, Ripple's fate is closely linked to the decision - expected shortly - of the US justice system. "It's unlikely that Ripple will agree to an out-of-court settlement because the company has shown a lot of fighting spirit since the start of the litigation," explains former lawyer Victor Charpiat, founder of crypto start-up Kolat. "In the event that XRP is recharacterised as a financial security, as the SEC is suggesting, Ripple would expose itself to heavy penalties," he stresses.

He points to the case of Telegram, which was forced to abandon its cryptocurrency project in early 2020 for the same reason. "This caused a lot of problems at the time, because some of the American investors who had helped finance the project had to be repaid," Victor Charpiat recalls. For Ripple, the risk is great: as soon as the complaint was announced, many crypto exchanges announced the delisting of XRP for their American customers, including Coinbase and Kraken.

His boss, Brad Garlinghouse, has already warned that Ripple would leave the United States in the event of an unfavourable decision.

The company could then turn to Singapore, the UK or Switzerland, "countries that are friendly to cryptos", he said last summer.

This would be a logical choice for a company that already does most of its business outside its native country. Nevertheless, XRP would run the risk of becoming "toxic" in the eyes of many investors, as it is hard to imagine the project succeeding in replacing the Swift system in the event of US sanctions...

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