Overview

It is important to state that XRP and Ripple (AKA Ripple Labs, Inc.) are not the same things, although they are consistently and erroneously used interchangeably. The Ripple network is a protocol to provide liquidity to global markets for fast, cross-border payments with minimal fees. XRP tokens are the accounting units used within the XRP Ledger open-source database and serve as a bridge currency between banks. The ledger stores and preserves XRP transactions and account balances.

Alternatively, Ripple Labs, Inc. is a private, for-profit company that sells the closed-source banking software RippleNet which was previously split into three separate products called xCurrent, xRapid, and xVia. It is important to note that only the xRapid product utilizes actual XRP. The other products can be used independently of XRP or any cryptocurrency. This optionality or lack of necessity for banks to transact in XRP within the Ripple network is the main point of contention when it comes to ascertaining XRP’s underlying value.

XRP Strengths

• Extremely well-funded
• Impressive team with close ties to U.S. regulators and powerful financial institutions
• Name-brand recognition and often discussed in media behind Bitcoin and Ethereum
• Large and passionate following on social media
• A cheap ticker price that, while fundamentally meaningless, does attract new buyers who believe other assets like bitcoin are “too expensive”

XRP Weaknesses

• Ripple Labs is currently being sued by the US Securities and Exchange Commission (SEC) for not registering XRP with the agency and illegally selling a security. The case is ongoing.
• XRP is not required (and scarcely adopted) by banks to settle transactions within the Ripple protocol. Banks, in many cases, can settle cross border payments simpler and with less volatility using traditional currencies (USD, Euro, etc.).
• XRP suffers from points of centralization. Roughly  60% of XRP are controlled by the private, for-profit company Ripple forcing users to trust a large entity (like a bank) with the fate of their money.
• Not censorship-resistant - Ripple has an out-sized influence over the Ripple network and can indirectly have funds frozen.
• Lacks the proper “tokenomics” for price appreciation. Value accrual for pure mediums of exchange (i.e. bridge currencies) remains unclear. Banks do not need to hold onto large amounts of XRP to successfully use the protocol, suggesting low demand-side price pressure.
• Increased competition from private companies like Facebook, central bank digital currencies (CBDCs), actual bank coins like JP Morgan, and the proliferation of private stablecoins.

Important Links

• Whitepaper
• Website
• Github
• Block explorer
• Charts
• Reddit
• Blog
• Wallet- Ledger and TREZOR
• Where to buy? Coinbase 

If you want more XRP analysis as well as other top 30 coins, use the code "Publish0x" when subscribing to CryptoEQ.io to make your first month of CryptoEQ just $10!  

Vulnerabilities

Ripple’s code is open source, and had nearly 70 developers contribute to the code in 2019. However, just one individual accounted for >75% of the commits in the dev portal since the start of 2019. The rippled repo saw a more equal distribution of the code commits but again, only over 6-7 different individuals. Developer activity on GitHub averages about 5-7 commits per week since 2017 and ranks ~80th on project activity ranking website CryptoMiso for the last 3 months. This is significantly fewer than the number of commits to the Bitcoin code each week, which has been averaging around 35 over the same time frame. The number of XRP commits, while not a perfect gauge of project health, has been steadily declining year over year since 2013, which could be a sign of a mature product, or conversely, a sign of stagnating development.

Operating in essentially a trusted client-server system, Ripple shares some of the same vulnerabilities of standard client-server infrastructure would experience. If one trusted validator node gets hacked by gaining unauthorized access, the entire system and its transactions are much more at risk than if one node in the Bitcoin protocol was acting maliciously. This is simply a conscious tradeoff made for higher performance but at the cost of introducing overlapping, highly-trusted nodes.

Furthermore, Ripple’s founder, Jed McCaleb, moved on from Ripple and created another cryptocurrency called Stellar. Stellar is very similar to Ripple in terms of project structure, premine, central entity parent company, and wealth centralization. However, while Ripple the company has control over the Ripple network and can indirectly have funds frozen, Stellar does not have a for-profit company in control of its network. Therefore, Stellar may be able to compete with Ripple and cut into Ripple’s market share by boasting of a greater degree of decentralization. In addition to Stellar announcing a partnership with banks in March 2019, XRP’s use case as a bank-friendly coin has gained further competition from actual bank coins like JP Morgan, private companies like Facebook, central bank digital currencies (CBDCs), and the proliferation of private stablecoins. Nearly all of these projects will be able to outcompete XRP in price stability, a critical component of any bridge currency that cannot be ignored.

In addition to increasing competition, XRP suffers as a cryptocurrency from its own token distribution, centralization, economics, and use case as a bridge currency. Roughly 60% of all XRP is owned/controlled by Ripple which can be spent or sold at their discretion, essentially controlling the supply and diluting current token holders. The fact that Ripple Labs Inc. controls a majority share of the XRP supply subjects every token holder to systematic risks at the whims of one company. Moreover, Ripple can and has actively intervened to freeze users funds nullifying any illusion of censorship resistance or immutability. This means the current architecture of the XRP ecosystem has made Ripple Labs Inc., relatively speaking, a more centralized and powerful version of a central bank, only with an obligation to shareholders for profit at all costs. 

The economic issues with XRP center around the fact that there are 100 billion XRP in circulation, and the amount of XRP destroyed per transaction in fees is minuscule (~10 tokens are destroyed per million transactions). At this burn rate, even if banks choose to use XRP, they do not need to hold a large amount to suit their transactional needs. This and the combination of high token velocity both suppress buy-side pressure on the asset. Not only do banks need an insignificant amount of XRP to operate, retail investors, the majority of XRP holders outside of Ripple, have (next to) zero need for XRP. Retail holders are merely speculating on price, in turn increasing the volatility in the actual use case as a bridge currency for banks and cross border payments. This deters banks or any other financial services provider aside from exchanges from holding the asset on their books.

The final obstacle is that XRP is not, in many instances, required or needed for banks to settle transactions within the Ripple protocol. Ripple Labs’ current initiative to lump all three products together under the RippleNet umbrella does little more than to help blur the lines into which products are actually being used: ones involving the use of XRP vs. the ones that do not. Banks, in many cases, can settle cross border payments simpler and with less volatility using traditional currencies (USD, Euro, etc.) where adequate liquidity exists and potentially use XRP for smaller niche, more illiquid settlements.

Additional concerns were raised by a Bitmex report reviewing Ripple and XRP’s history. In it, Bitmex revealed that some 32,570 blocks at the start of the blockchain contain missing headers, an early transparency and auditability flaw for a project marketed to banks. They also discovered that Ripple controlled all the public keys issued when attempting to download the Ripple software.

  Regulation

While the director of corporate finance at the SEC, William Hinman, appeared to declare on June 14, 2018, that neither bitcoin nor Ether were securities, no direct comments were made about XRP. The lack of clarity from formal regulators and the SEC left XRP in legal limbo.  However, clarity seems to be coming as of Q4 2020 as the SEC has sued Ripple Labs for not registering XRP with the agency and illegally selling a security. The case is ongoing but the SEC's stance is clear below:

Ripple Labs raised at least $1.38 billion “over a years-long unregistered offering of securities. Ripple used this money to fund its operations without disclosing how it was doing so, or the full extent of its payments to others to assist in its efforts to develop a ‘use’ for XRP and maintain XRP secondary trading markets.”

It is expected that the SEC will make its case for XRP to be deemed a security based on the common definition and interpretation of the Howey Test, the most common legal test applied to securities. The four component questions of the test are listed below:

1. Is there an investment of money?
2. Is there an expectation of future profits?
3. Is the investment of money in a common enterprise?
4. Do any profits come from the efforts of a promoter or third party? 

When examined through the lens of the Howey Test, XRP passes or narrowly skirts the line on at least two points. The first failure (i.e. being classified as a security) is the investment of money and the expectations of profit. Retail users undoubtedly invested money into XRP and now Ripple is left to defend that they did so for some other reason aside from speculation. XRP’s intended use case is as a bridge currency for banks in cross-border payments and therefore no average person has a need to own XRP. The second issue with XRP deals with numbers 3 and 4 of the Howey Test questions concerning a common enterprise and Ripple’s control over XRP. The connection between the activities of Ripple Labs Inc. and the market price of its native token has been put under question. This report has covered the multitude of ways in which Ripple Labs Inc. has an overly-centralized control over XRP and yet, ultimately, it may be Ripple themselves that makes the case against them. Since late 2018, Ripple has tried to distance the company from XRP the token although in the early years of Ripple’s development they appeared to state clearly that Ripple Labs created XRP. More recently, the Ripple website has changed that language to directly contradict their original statement and now claim that Ripple did not create XRP. If XRP is ultimately deemed a security, it means Ripple Labs would be considered the “common enterprise” and retail investors would be seeking “profits from a third party.” Ripple is currently engaged in a federal lawsuit over this very issue of its relationship with XRP and whether their sales of XRP constitute unregistered securities. The case is currently ongoing and no timetable has been set for a decision. 

While this is still unsettled, if XRP is deemed a security it will be subject to regulations, such as having to register with the SEC. In November 2018, Hinman intimated that “plain English” regulations would be published to help determine whether a digital asset is a security or not and in January 2019 a loose regulatory framework for digital assets was discussed. Additionally, XRP would have to be listed solely on regulated exchanges that support securities, limiting its exposure to potential holders across the globe because of the fact that exchanges wishing to continue legal operations might need to delist the XRP token in order to not face SEC scrutiny. More recently, in late Q4 2019, CEO Brad Garlinghouse hinted that Ripple Labs is looking to take the company public (IPO) in 2020. While it’s far from certain, the ramifications of Ripple Labs conducting a public offering certainly adds yet another layer to the already complex Ripple-XRP picture. With an IPO comes incredible scrutiny from the SEC and US regulators, which may be something Ripple would rather avoid.  

 Ripple is no stranger to run-ins with regulators. Shortly after creating the 100 billion XRP tokens, in May 2015, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) fined Ripple $700,000 after determining Ripple Labs was the “administrator” of the XRP tokens and failing to register as a money service business.