XRP, one of the top ten cryptocurrencies with a trading volume of $3,591,481,563. Despite getting embroiled in several controversies, XRP (Ripple) remains to be a top crypto investment. It has a total market cap of $83,260,210,209 with its price at $ 1.81 in recent data by Crypto.co. Its price has tremendously spiked in the last few days.
XRP (Ripple) has been popular with banks and other institutions. For the past few months, the Ripple team has been very aggressive in acquiring partnerships with institutions worldwide.
With more adoption, XRP will definitely become one of the most established cryptocurrencies in history. But why is the sudden change in its status from commodity to security? Let’s take a brief overview of the history of XRP and Ripple, the company behind it.
The Birth of Ripple and XRP
According to Investopedia, Ripple is a technology that serves a dual purpose. It acts as a cryptocurrency and a digital payment for financial transactions. It was founded by Chris Larsen and Jed McCaleb in 2012. It operates on an open-source and peer-to-peer decentralized platform allowing seamless transfer of money in any form, whether USD, Yen, litecoin, or bitcoin. It uses a similar remittance process used by banks and financial middlemen like SWIFT for international money and security transfers.
XRP (Ripple) is the digital currency used in the platform that acts as a bridge to other cryptocurrencies. But unlike other cryptocurrencies like Bitcoin, XRP is not mined but minted.
Other cryptocurrencies are being accused of causing damage to the environment brought by their carbon emission, but XRP is free from blame. While the mining of cryptocurrencies is a power-hungry process, minting, the process XRP uses requires no resources. But here’s the catch. Mined cryptocurrencies have a limit to their supply like in the case of BTC (Bitcoin) with its maximum supply of 21 million only. According to Ripple’s claim, there is a 100,000,000,000 total supply of XRP which was entirely minted when the network was launched. Due to this, XRP (Ripple) has faced massive dumping by its former founders causing the price of the altcoin to plunge.
Ripple and XRP have been hounded with controversies and lawsuits. On Dec. 22, the US SEC filed a lawsuit against Ripple alleging that XRP was a security. This has been a long-standing issue faced by Ripple but in the past has found allies with some regulators. Why the sudden change in stand by regulators on XRP?
The Legal Battle on XRP Status
How do regulators classify whether a crypto asset is a security or not? Regulators use the Howey Test to determine the classification of a crypto asset which consists of three questions.
- Is there an investment of money with the expectation of future profits?
- Is the investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
A commodity falls under the jurisdiction of the Commodity Futures Trading Commission (CFTC) and security under the US SEC.
In 2018, a debate over XRP (Ripple) as security ensued following a statement issued by the US SEC.
In an interview with CNBC, Cory Johnson, Ripple’s chief market strategist in defense of XRP stated:
“We absolutely are not a security. We don’t meet the standards for what a security is based on the history of court law.”
XRP (Ripple) has also found an ally with former CFTC Chairman Chris Giancarlo. In his co-written detailed argument published in the International Financial Law Review, he stated that XRP (Ripple) is not a security.
In his statement about XRP, Giancarlo stated:
“Ultimately, under a fair application of the Howey test and the SEC’s presently expanding analysis, XRP should not be regulated as a security, but instead considered a currency or a medium of exchange.”
The debate on XRP as security continued but the altcoin continued to function as a commodity.
But at the dawn of 2020, dark clouds began to form and a bolt of lightning struck Ripple’s XRP.
In December 2020, Ripple was slapped by a lawsuit by the US SEC alleging that XRP is a security subject to the registration requirements of the federal securities laws.
Following the lawsuit, XRP was faced with massive delisting from major exchanges and crypto businesses worldwide.
Just a week after the US SEC lawsuit filing, the XRP (Ripple) price plunge to $0.171.
But there has been a contradicting opinion whether XRP (Ripple) is a commodity or security with regulators worldwide. In a statement by Japan’s Financial Services Agency (FSA) on The Block, the regulatory body stated that “it views XRP as a cryptocurrency and not as a security.”
“FSA regards XRP as a cryptocurrency based on definitions of the Payment Services Act.”
But the regulatory body also refused to comment on other authorities’ response on the issue.
XRP Under Biden’s Administration
The emergence of a new administration with Biden winning the presidential race against Trump gave Ripple a glimpse of hope.
When news of Gary Gensler’s appointment as the new US SEC Chief, Ripple CEO Brad Garlinghouse expressed in a tweet that they are ready to work with the new SEC leadership.
Will this be the end of a tumultuous stage for Ripple’s XRP? In its preliminary reply to the lawsuit filed by SEC on Jan. 29, Ripple claimed that the SEC’s action is contrary to its mission to bring order to markets.
“XRP lost almost half of its market value, causing retail holders of XRP with no connection to Ripple– the very people the SEC purports to protect – to suffer billions of dollars in losses. What’s more, part of the SEC’s mission is to maintain orderly markets… and yet their overreach created havoc in the market.”
Ripple strongly argued that XRP (Ripple) is not a security and even accused SEC of being biased after declaring Bitcoin and Ethereum as not securities.
“The SEC’s filing, based on an overreaching legal theory, amounts to picking virtual currency winners and losers as the SEC has exempted bitcoin and ether from similar regulation.”
Additionally, it requested an FOIA from the regulatory body to shed more light on the issue.
Former SEC Chair and current Ripple defense attorney, Mary Jo White, commenting on the matter.
“There’s no way to sugarcoat it. [The SEC is] dead wrong legally and factually.”
Ripple continues to expand its operations to other regions like Asia. In his recent statement to Reuters, Ripple CEO Brad Garlinghouse stated:
“It (the lawsuit) has hindered activity in the United States, but it has not really impacted what’s going on for us in the Asia Pacific.”
With more than three months after the lawsuit filing, the case is still waiting to be resolved. Will XRP (Ripple) finally be declared as a commodity? Or will it be classified as a security as claimed by SEC?