Ripple (CCC:XRP-USD) has had a bit of a rocky road as a project. The coin has fallen from a peak of more than $3 in early 2018 to around 45 cents now. In comparison with Bitcoin (CCC:BTC-USD), Ripple looks even worse, as the price of Bitcoin has more than doubled over that same span.
However, we must give some credit to Ripple. It’s still the sixth largest crypto asset out there despite its underperformance in recent years. Adding to that, it has managed to hold that spot despite taking fire from the Securities and Exchange (SEC) commission.
In the wild west that is the crypto space, it speaks to Ripple’s strength that it was able to endure a blow like that and keep on moving forward.
SEC Takes Aim
On Dec. 22, the SEC launched a major enforcement action against Ripple. It alleges that Ripple’s management sold $1.3 billion of unregistered securities to the public without proper disclosure. More specifically, the SEC states in part that:
Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide […] According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, [Ripple co-founder] Larsen and [CEO] Garlinghouse also effected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.
The SEC has a clear disclosure process necessary for listing securities for sale to American investors. In this case, the SEC charges that Ripple failed to meet the regulatory guidelines. Adding to that, Ripple insiders supposedly cashed out of a cool $600 million from the unregistered securities. If true, this is a major breach of proper operating procedure and could be a big negative for Ripple overall.
There’s a central matter at the heart of the SEC action. The SEC is saying that Ripple is selling stock to the public, rather than a currency. Precious metals like gold and silver have long acted in a different regulatory environment because they are hard assets rather than shares of an operating entity. But in this case, the SEC is saying that Ripple is acting like a company, issuing tokens to fund its operating business. Therefore, XRP falls under its regulatory orbit, unlike currencies, which are a different matter.
Ripple acknowledged that many exchanges stopped trading the Ripple coin following the SEC move. In all, Ripple disclosed, 33 different firms took restrictive actions against Ripple as a result. U.S. exchanges were especially quick to cease trading of the Ripple token, as it’s legally questionable to buy and sell unlicensed securities in the United States.
Trading Volumes Rise Anyway
Despite this seeming big blow to the business, Ripple powered on. Its net XRP sales for the last quarter nearly doubled. It stated that strength in the Asia-Pacific region more than made up for the loss of North American business. Trading volume in XRP surged by an even larger amount. Admittedly, much of that is probably due to the gigantic rally in crypto overall rather than any particular confidence in Ripple.
Still, it was easy to see a scenario where Ripple’s usage would have plummeted the moment it came under regulatory crackdown. That hasn’t happened. And that can only bode well for the project’s future prospects. If Ripple can find a way to settle quickly with the SEC and move on from that, it might start to recover more of its losses from the 2018 peak-onward.
I personally tend to steer clear of investments that are under SEC scrutiny. There’s plenty of things to buy in the world, so there’s no need to rush into XRP or something else that is the subject of active governmental investigation.
That said, you have to respect Ripple for still posting strong usage numbers recently despite the SEC crackdown. Normally, you would have expected losing all those exchanges to have a bigger impact on Ripple. Yet its community still appears to be quite active nonetheless. That could make Ripple worth another look if and when it is able to settle the SEC complaint.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.