Perhaps there is no greater irony in the cryptocurrency market right now than Ripple Labs and be XRP (CCC:XRP-USD) Token, also known colloquially as the ripple coin. Many years ago, crypto advocates blew up XRP as a farce coin. Yes, the project itself was useful and delivered cross-border transactions at lightning speed and at a low cost. However, it is the centralization bit that has pissed people off.
You see, most of the virtual currencies are decentralized. Instead of an intermediary body such as a central bank that controls the supply, what matters in crypto mining is to “mint” new tokens. A complicated concept, the most important one is that different nodes or computers compete with each other to secure the right to store transaction data on the underlying blockchain network.
The first to win the competition will receive a blockchain reward token (crypto coin).
The medium of this competition is now an algorithmic problem, the solution of which requires an enormous amount of computing power, known as proof-of-work. Gradually, the crypto market is moving towards a less energy-intensive process known as proof of stake. The bigger point, however, is that minting these tokens takes real work. But everyone has the right in most crypto blockchains to do this work for the reward.
However, this is where XRP is different. Unlike other decentralized coins, XRP is a centralized process. In essence, Ripple Labs is the ultimate arbiter when it comes to delivering the cryptocurrency. While I’m not a lawyer and none of this should be construed as legal advice, I believe this is where the Ripple saga becomes problematic.
As you know, the Securities and Exchange Commission has filed a lawsuit against Ripple Labs, arguing that XRP is a security, not a cryptocurrency. As a result, the company is violating laws that govern going public. Given the general negative effects, XRP fueled.
That is, until something remarkable happens.
Can Social Media Save Ripple?
Recently, Ripple responded to the SEC, claiming that XRP is not a security but a virtual currency. In 2019, then-SEC chairman Jay Clayton stated so Bitcoin (CCC:BTC-USD) was classified as “no security, but much more a payment mechanism and store of value”. Since XRP has a similar functionality to BTC, Ripple just has to prevail.
Additionally, other countries view XRP as a cryptocurrency rather than a security, which can be important in defending the company.
It does not escape me, however, that years ago some advocates of decentralized cryptos would have viewed the current problems surrounding Ripple Labs as the organization’s fair reward. But things have changed.
As you know, social media has grown into a powerful platform in the finance space, recently tackling the topic of the little boys versus the fat cats of Wall Street. As our own Sarah Smith explained, several people on the Telegram forum started bidding on XRP and temporarily sent prices up to a three-year high.
Where I am currently at, the Ripple Coin has fallen sharply from its most recent peak. Even so, alongside the uptrend in other cryptocurrencies, it is gradually recovering. But the question now is, should you join in?
Obviously, there are two main drivers here: the SEC lawsuit and the power of social media. I will go into the latter first. On the surface, it’s tempting to jump in. It’s not just about the pursuit of profit, although that’s the main catalyst. Rather, camaraderie – something most of us miss during pandemic lockdowns – provides fuel to the flames.
It is equally important that a sense of just indignation reinforce such contrary deals. Still, I think investors need to be very careful. Emotions alone have never proven to be a lasting tailwind.
The legal question remains
In my last story on Ripple, I found that XRP may be invoking the US Supreme Court case, SEC v WJ Howey Co. Colloquially known as the Howey test, Ripple appears to meet two-thirds of the criteria that XRP is not a security.
However, it is the final criterion that states that an asset defined as a security “has an expectation of profit arising from the management or entrepreneurial endeavors of others”. I believe this is where the lawsuit becomes challenging for XRP because of its centralized platform.
One thing I can say for sure is that legal analysts are foaming at the mouth explaining what’s going on. In my view, the spirit of the law versus the letter of the law will matter. Is XRP centralized enough to make Ripple fail? Or is the broader understanding that the primary purpose of XRP – a cross-border transaction experiment – is convincing enough that it is not a security?
After looking at most of the angles so far – I’m sure there will be other news that could change the trajectory – Ripple might be able to get out of it. I wouldn’t put your life savings on this questionable asset, however. It could really go either way.
At the time of publication, Josh Enomoto was long in XRP and BTC.
Josh Enomoto, former senior business analyst at Sony Electronics, has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has provided unique, critical insights into the investment markets as well as various other industries including law, construction management and healthcare.