Ripple May Have Divorced From XRP Not To Be Considered A Security
In the last months, XRP has been in the media for different reasons. But one of them is related to how regulatory agencies around the world consider this virtual currency. Does XRP qualifies as a security under the Howe Test? However, Ripple Labs is working in order to be compliant with a definition of security that has been presented by William Hinman.
William Hinman, Director of Corporate FInance at the U.S. Securities and Exchange Commission (SEC), explained what factors make digital assets a security. He explained that during a speech at the Yahoo Finance All Markets Summit in San Francisco.
For example, Bitcoin (BTC) and Ethereum (ETH) are not considered securities. Furthermore, he said that a token issued through an initial coin offering is considered a security. But in the future, this token can become decentralized enough not to be considered one anymore. This is what happened with Ethereum, which was launched as an ICO but it became completely decentralized later.
There were some investors that believed that XRP was a security and was included in this category.
Since that moment, Ripple has taken different strategies in order to improve its situation. Ripple created a new logo for the XRP coin that is different to the one used by Ripple. Additionally, Ripple wrote a post in which David Schwartz, CTO of Ripple, explains why XRP is more decentralized than Ethereum and Bitcoin.
Furthermore, Ripple decided to hire a former SEC commissioner as a counsel. Moreover, the company explains that Ripple did not create XRP.
Mr. Hinman has specified a list of requirements for determining whether a digital asset is considered a security or not. With these requirements it is possible to build the Howey Test.
The first thing that we need to take into account is whether people is investing in an company with the expectation to receive a profit in the future. If the answer is yes, then, the token should be considered a security.
Although the requirements are clear, they are just an opinion given by Hinman and has yet to create an actionable case law. The questions are related on the asset and if a third party drives the expectations of a probable return in the future. Companies need to focus on whether there was a group sponsoring the creation of the token, if the group has an important stake in the asset to motivate them and increase the value of the asset, if the instrument has been marketed to general public or potential users, and other things.
It is also important to take into account the intention of the person that buys the asset. Is the investor purchasing the asset for personal consumption or for an investment? Finally, are the assets concentrated in the hands of few that can exert influence over the application?
Ripple’s case is different. We will be writing about how Ripple behave in the last years and how it is able answer these questions.
The company behind RIpple has been using the same logo for their business and for the XRP token since it was created back in 2013. Later, the company decided to change the logo.
Back in 2017, Ripple informed that they escrowded 55 billion XRP for ‘supply predictability’ that means that they held 55% of the total token supply. In their website they informed that they were going to use XRP in order to incentive market makers. Clearly, they were trying to increase the value of the asset and incentive market makers.
Ripple has been created with the intention to provide financial institutions a tool to process transfers such as remittances across borders. However, they have sold the tokens to the general public. But it can be argued that there are individuals that want to process fast payments using XRP.
What is not clear is whether investors are purchasing XRP to process payments or to expect incredible returns in the next bull market. This is something that can’t be evaluated in a simple way. The same happens with other assets.
Ripple as a company owns currently 60% of the total XRP supply. Additionally, they publish market reports each quarter on their profitability. This is something quite important because these statements are required by securities laws.
Ripple does not want to be considered as a security. This is why they are now doing everything what they are able to be compliant with these rules and avoid being considered a security by the SEC.
If they are not able to pass this test, then, Ripple and XRP would have a big problem. They would not be able to be listed in some exchanges. Moreover, the XRP currency would lose an important part of its price.
This is why, the company decided to take distance from XRP. Back on July 9, the company said that XRP is different than Ripple. Ripple is the technological company that has created several financial solutions, while XRP is an asset that is independent from Ripple. Moreover, they informed that Ripple does not control XRP and its success in the market.
Then, they were able to change the XRP logo to a new one, different from the one owned by Ripple.
Furthermore, Ripple informs that they did not create XRP. Back in July, David Schwartz said that Ripple did not create XRP. He claimed that the people who created it gifted it to the company.
Ripple didn't create XRP. The company that became Ripple was gifted XRP from the people who created it. Ripple is building a regulatory compliant payment system that can settle cross-currency payments using XRP. Whether and how that will affect the price of XRP is unknowable.
— David Schwartz (@JoelKatz) July 3, 2018
As mentioned before, Schwartz explained that XRP is more decentralized that Bitcoin and Ethereum. In order to explain that, he mentions that Bitcoin and Ethereum use the Proof-of-Work (PoW) algorithm, which means that, as time passes, they become more centralized by forming mining pools. Then, he says that Ripple works in the other way. As time passes, the network becomes more decentralized using a majority consensus protocol and reducing the number of validators.
Ripple has also hired two layers that worked in order to defend the company after a security fraud lawsuit. At the moment, they are defending four different cases that are all securities class actions where all plaintiffs argue that XRP is a security. Moreover, they claim that the company violated all the state and federal securities laws.
Regulators are discussing about whether Ripple is a security or not. There is no clear answer to this question. In the last months, Ripple took several measures to avoid being considered as a security.
Ripple started to make these changes when the regulator made these statements and when it announced that Bitcoin and Ethereum are not securities. It could be a good thing since they could already have announced that XRP is a security.
At the moment of writing this article, XRP is the third most important virtual currency in the market. It is being traded around $0.2772 dollars and has a market capitalization of $11 billion dollars. In the last 24 hours it has registered an increase of 2.23%.