When it comes to cryptocurrencies, there are always complexities. Let’s face it, this cutting-edge area of finance is about rethinking the whole concept of traditional currencies. And then there are the myriad of technologies. However, as for Ripple and the XRP cryptocurrency, things are even more complex.
First of all, there is often confusion about the two. Ripple is a technology company that develops systems for handling cross-border payments. The platform is based on a blockchain infrastructure that helps with the speed, cost and reliability of transactions. Keep in mind that the traditional cross-border system is fairly antiquated. It can take a few days to make a transaction.
As for XRP, it is the digital currency for the Ripple platform. And it does not require a central intermediary. As a result, XRP is quite effective with managing multiple currencies.
But in late December, XRP has seen its price plunge from 51 cents to 26 cents. The reason: The SEC filed a lawsuit against Ripple for allegedly engaging in improper securities offerings.
So, let’s take a closer look at this and the implications.
The XRP Problem
The federal securities laws generally require that a company register securities before they are sold to the public. This means there must be an approval process and disclosure of material information about the offering. For example, when a company like Palantir (NYSE:PLTR) or Airbnb (NASDAQ:ABNB) goes public, they must file extensive documents like an S-1 with the SEC. This is to ensure that all investors have an opportunity to make an informed decision.
Regarding the situation with the lawsuit with Ripple, the SEC has made the claim that the company sold unregistered securities. The amount at issue is about $1.3 billion.
For the most part, the legal case is likely to have a consequential impact on the cryptocurrency market. It could mean more limitations on this type of asset, which could hamper growth.
Also, as it relates to Ripple, an adverse judgment could be potentially devastating on the company. The SEC is seeking “injunctive relief, disgorgement with prejudgment interest, and civil penalties.”
In fact, there have already been adverse impacts. Consider that various crypto exchanges – including Coinbase – have delisted trading in XRP. Oh, and even Ripple’s main venture capital investor, Tetragon Financial Group, has filed a legal claim to demand a redemption of its investment! There was also a request for the judge to freeze assets of Ripple.
Keep in mind that the first hearing will be on Feb. 22. This is when there will be a pretrial conference in the Southern District of New York. Now it is far from clear what may happen. But it could present further risk to both Ripple and XRP.
It’s also important to note that President Joe Biden’s new SEC chair, Gary Gensler, has a background with cryptocurrencies. He is a former head of the Commodities Futures Trading Commission (CFTC). And during his tenure, he was known for trying to help ensure fairness with cryptocurrency transactions.
Bottom Line on Ripple and XRP
XRP operates on an open and distributed network. That is, even if Ripple has problems, there could be continued trading activity in the cryptocurrency.
But despite this, XRP is really for those who have a big appetite for risk. Besides, without the support of major cryptocurrency exchanges, it will be tough to get much momentum. So, it is probably better to look at alternatives like Bitcoin, Ethereum, Bitcoin Cash and Litecoin.
It also looks like an IPO for Ripple is a nonstarter. It seems like a stretch that Wall Street underwriters would have enough clarity to put together an offering any time soon.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.