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What is Ripple?

Is XRP a security?

Discover whether XRP is a security, the implications this could have, and why it's such a controversial question.

Is XRP a security? Although it hasn’t been officially recognised as a security, many experts believe it is – based on the way the token is governed, marketed and sold.

The goal of the Ripple network, or RippleNet, is to connect banks and payment providers, allowing one frictionless experience for sending and receiving money globally. The Ripple cryptocurrency, XRP, offers banks and payment providers a reliable, on-demand option to source liquidity for cross-border payments. At the time of writing, the XRP token is used within the Ripple ledger mainly to pay fees and to avoid spam, although at its core it still lacks some utility functionality.

State of affairs

During 2018, Ripple and R3 settled a longstanding dispute over the sale of XRP. The latter went on to launch Corda Settler, a universal payment application that uses XRP as its first payment rail. Not only that, but XRP also managed to upstage Ethereum into the second spot as the largest cryptocurrency by market capitalisation for much of November and December 2018.

The U.S. Securities and Exchanges Commission’s Director of Corporation Finance, William Hinman, deemed Ethereum wasn’t a security for the simple reason that it is “sufficiently decentralised”. He added that together, Ethereum and Bitcoin were not securities.

However, no conclusions have been drawn regarding XRP.

SEC’s stance

The SEC has a clear view when it comes to answering the question “is XRP a security?”.  The SEC chairman said that issues regarding a specific token and whether the SEC deemed it a security or not weren’t easy and that the agency would need to have a lot of information to definitively declare its position on the matter.

Hinman’s sentiments should be read with XRP token historical background and the words of Ripple Lab’s chiefs in mind.

Ripple Labs’ sale of XRP is a continuous process that won’t stop anytime soon. Nevertheless, the Ripple team has, on numerous occasions, declared that the XRP Ledger is ‘functional and decentralised’.

Several voices have disputed the above assertion, even as it occurred that Ripple sold XRP worth $163 million in Q3 2018. All along, it has been clear that it uses the revenue gained through the sale of the token to develop and grow Ripple Labs.

Despite that, numerous decision-makers at Ripple have often maintained that XRP isn’t a security and shouldn’t be seen as one. They have also pointed out that XRP and Ripple Labs are distinct entities and that XRP does not grant any type of legal rights or ownership over the company.

The other pointer to whether an asset qualifies as a security is when an individual buys a token expecting to get profits at some point in the future.

Does Ripple promise any future returns?

Former Ripple CEO Larsen once said:

“(…) since there’s a limited amount of XRP, the value of XRP should go up, because it’s in demand by market makers.”

Although this statement does not promise any fixed return, one could interpret it as someone stating investors should expect the price of the asset to rise, because there’s limited amount of XRP in the market and, henceforth, price will go up.

Plus, if the Ripple Ledger is a functional network, why do its creators continue the massive sales, more than what is sufficient to set up a functional system?

It appears Ripple Labs will, for the foreseeable future, sell XRP to fund operations that would aid in the increase in investment of holders.

Therefore, the sale of XRP does come out as the company’s primary source of income.

The SEC will have its input when it does decide to, but what could be challenging for Ripple is to disapprove statements from some executives concerning XRP’s promise of expected returns, through the increase of XRP price.

To find out more about Ripple and its roadmap for xCurrent, xRapid, and xVia, read our definitive guide. 

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