Cryptocurrency Ripple (XRP-USD) enjoyed a meteoric spike back at the end of 2017. XRP rose so far that its CEO, Brad Garlinghouse, briefly became one of the richest people in the world.
Garlinghouse’s fortune was on paper however, and soon diminished as the price of Ripple dropped more than 90% from its peak. Ripple has been back on an upswing in recent months, though not nearly to the extent that its holders had hoped for.
Indeed, Ripple has been left in the dust by rival cryptocurrencies such as Cardano (CCC:ADA-USD) and Solana (CCC:SOL-USD). While traders enjoyed the Solana summer, XRP barely made a ripple in the broader crypto market. Ripple’s price for 2021 peaked in April, and even at that point, it didn’t come close to topping its highs from the 2017-18 bull run.
As a result, Ripple’s rank in the cryptocurrency universe has started to slide. At one point, Ripple was heralded up there with Ethereum (CCC:ETH-USD) as a potential Bitcoin (CCC:BTC-USD) rival. Now Ethereum has left Ripple way behind as Ripple has slipped down to No. 6 overall in market capitalization of cryptos, according to CoinMarketCap data.
No. 6 overall is still a heavyweight, to be sure. However, Ripple missed a huge opportunity amid the resurgence in cryptocurrency over the past 12 months. And the cause of that starts squarely with the firm’s problems with the Securities and Exchange Commission.
SEC Inquiry Remains A Problem
Previously, the SEC charged Ripple’s developers with running an unregulated securities offering. This was surprising, as the SEC had generally not intervened in the cryptocurrency market too heavily prior to that action. If cryptocurrencies are viewed as commodities, they would likely not fall under the SEC’s purview.
However, the SEC claims that Ripple is a security, and thus needs to comply with the agency’s licensing process. Since Ripple used funds from its offerings to build its operating business, XRP would then be a security. Many analysts expect Ripple to be able to fend off the charges. Regardless, many have been afraid to do business with Ripple until the issue is resolved. Coinbase (NASDAQ:COIN), for example, stopped trading Ripple on its platform in reaction.
Charles Gasparino, a prominent journalist at Fox Business, tweeted out a scoop. He reported that the SEC had offered an explanation for why it is strictly regulating Ripple and not Ethereum.
According to Gasparino, the SEC views Ripple’s project as a work-in-progress. Ripple (the organization) is still building its infrastructure which incurs significant operating costs. Thus, XRP, its token, is viewed as a security which is being used to finance Ripple’s operations.
By contrast, the SEC views Ethereum’s infrastructure as an already completed entity. Ethereum notably had its big design decisions and internal ruptures within its community years ago. Now, new innovation with Ethereum primarily occurs from other developers building on top of Ethereum. But the core asset is largely a finished good. In the SEC’s logic, this makes Ethereum tokens a commodity, rather than a security being used to finance something.
Only time will tell if this justification holds up to broader scrutiny. Gasparino, however, warns that the Ripple case is important to the SEC in its effort to gain and maintain jurisdiction over enforcement in cryptocurrency cases. Keep in mind that other organizations such as the Commodities Futures Trading Commission also may wish to regulate cryptocurrency.
So, there’s a potential turf war here, and it looks like Ripple is caught up in that.
There’s a lot of complaining on social media about how Ripple has been uniquely singled out for regulatory oversight. There have been all sorts of shenanigans in cryptocurrency in 2021. We’ve seen hacks, rug-pulls, pump and dumps, and a whole lot more. Within Ethereum itself, people have gotten burned in some of that platform’s newer decentralized finance “DeFi” applications.
So, on the one hand, there’s certainly a reasonable argument that XRP has been overly punished within the cryptocurrency arena. However, this sort of thing tends to happen in fast-emerging new sectors of the economy.
Rightly or wrongly, XRP has ended up stuck under a regulatory cloud. And until that potentially changes in 2022, look for XRP to continue to struggle compared to other leading cryptocurrencies.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.