Even If Ripple Beats the Charges, XRP Is No Longer Worth the Risk

For the second time in fewer than two months, Ripple (CCC:XRP) is plunging. The culprit this time around is an apparently coordinated buying attack. According to CoinDesk, traders on a Telegram channel worked together to boost XRP starting last weekend.

a ripple coin

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No doubt the idea came from the r/WallStreetBets-driven buying of equities like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). The strategy moved to the silver market, and now cryptos as well.

The pump worked briefly. Ripple went from 29 cents on Friday night to as high as 73 cents on Monday morning. But — perhaps not coincidentally — as GME and AMC faded, so did XRP, trading around 44 cents now.

The initial plunge is much more important as its catalyst will have staying power. On Dec. 22, the U.S. Securities and Exchange Commission announced an action against Ripple Labs, the developer of the Ripple cryptocurrency. The SEC charged Ripple Labs and two executives with conducting an unregistered securities offering.

It was that action that sent XRP to pre-pump lows — down about half from where it traded before the SEC announcement. The sell-off doesn’t seem like an overreaction.

The problem for Ripple is that, unlike other cryptocurrencies, it needs a regulatory imprimatur. While there’s a case that the SEC is overreacting as well as the possibility that Ripple will wind up winning a legal battle, the damage may already have been done.

Regulation by Enforcement

The SEC hasn’t done a great job giving clear-cut guidance on whether or not cryptocurrencies are securities. If they are securities, then (roughly speaking) the same regulations that apply to equity offerings apply to ICOs (initial coin offerings). If not, then crypto developers retain far more leeway.

To determine whether a crypto qualifies as a security, the SEC largely uses the “Howey test.” The Howey test has four points that aim to define whether a transaction is an investment contract and thus falls under the agency’s purview.

The Howey test ascertains if money is invested, whether there’s an expectation of profit, whether it’s an investment in a common enterprise and whether any profit comes from the efforts of a promoter or third party.

One obvious problem is that the Howey test was developed by the Supreme Court (in SEC v. Howey) back in 1946. The other is that cryptocurrencies are not the same. Bitcoin (CCC:BTC), Ether (CCC:ETH), and Ripple, to name just three, have different origins and different use cases. Meanwhile, buyers of those cryptos aren’t necessarily buying them for the same reasons.

What has resulted is largely regulation by enforcement, in which the crypto community tends to find out the SEC’s opinion only when it’s too late. Two big cases last year surrounding Telegram and its Gram coins, and Kik Interactive and its Kin, both fit this trend.

Ripple Labs Fights Back

For its part, Ripple believes the SEC is simply wrong. Chief executive officer Brad Garlinghouse, who is named in the SEC complaint, penned a blog post on his company’s site entitled “The SEC’s Attack on Crypto in the United States.”

Garlinghouse argues that Ripple, like Bitcoin and Ether, is a currency rather than a security, arguing that other U.S. agencies have come to the same conclusion.

It’s possible Ripple Labs’ arguments will win out in court. There are investors and industry participants who back the company. They too believe the SEC is wrong “on the facts and law.” Others don’t believe the SEC — or even the U.S. government more broadly — should have any jurisdiction at all.

And those investors might well see XRP as attractive below pre-action levels, particularly if the boost from this weekend’s pump continues to fade. At least part of the plunge in the cryptocurrency has come because it’s been delisted by multiple exchanges.

From a long-term perspective, that’s not a bad thing. Indeed, stocks that are delisted can become attractively priced because the delisting itself leads to forced selling, and thus a price below intrinsic value. Luckin Coffee (OTCMKTS:LKNCY) and Tile Shop (OTCMKTS:TTSH) are two recent examples of stocks that have soared following their moves to the so-called ‘pink sheets’.

An investor easily could see XRP as the crypto version of those two names: sent to attractive levels by exchange mechanics and an overreacting market.

The Big Bank Problem

But there’s a rather large problem with that thesis: Ripple’s design.

BTC and ETH were designed to disintermediate large banks. In contrast, Ripple is designed to work with those institutions. As I’ve written before, XRP benefits from an evolution toward crypto rather than an evolution by crypto.

A report a year ago said that one-third of the world’s 100 largest financial institutions had at least tested Ripple’s technology. Mitsubishi UFJ Financial (NYSE:MUFG), with annual revenue over $30 billion, is an official partner of Ripple.

To be fair, U.S. banks have largely avoided the cryptocurrency. The SEC action, even if Ripple Labs proves victorious in the end, is only going to cement their reluctance. And without U.S. institutions, the long-term case for Ripple’s ability to improve cross-border payments begins to fall apart.

Meanwhile, nearly all major international institutions have business in the U.S. Even those that don’t can fall subject to so-called “dollar hegemony.”

Simply put, no big bank anywhere wants to cross the U.S. government in any way. If the SEC action raises the perceived risk even minutely, those banks may well calculate that the rewards of Ripple are no longer worth that risk.

That’s a potentially fatal problem to Ripple, which already has struggled to make real progress in recent years. The SEC probe looks like one more nail in the coffin.

On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Article printed from InvestorPlace Media, https://investorplace.com/2021/02/ripple-beats-charges-arp-not-worth-risk/.

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