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Ripple deep dive: bitcoin for bankers?

Harry Hamburg
Harry Hamburg
25 min read
Ripple deep dive: bitcoin for bankers?

The 22nd of December, 2020, was the day everything changed for Ripple.

Up until then, it had been one of the most promising cryptocurrencies on the planet.

It was the third biggest crypto project by market cap. It had a huge, dedicated army of investors. And it was one of the few cryptos to be (sort of) accepted by the titans of traditional finance.

Then this happened:

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Source: The Securities and Exchange Commission

It was charged with “conducting a $1.3 billion unregistered securities offering” by the United States Securities and Exchange Commission (SEC).

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Over the next 24 hours, Ripple lost 42% of its value.

And as if that wasn’t bad enough, over the next week, every major crypto exchange in America announced plans to either suspend or delist Ripple entirely.

It’s safe to say, Ripple didn’t have the best Christmas that year.

But then something strange happened.

Before it brought its case against Ripple, the SEC had mostly targeted no-name projects that would make for slam-dunk legal cases.

Ripple was different.

Ripple had a gargantuan pile of cash at its disposal, and it also fancied its chances in court.

So instead of simply lying down and letting the SEC burn its business to the ground – as every other crypto project had done up until that point ­– Ripple decided to fight back.

Of course, the cards were stacked against it. After all, how many stories can you think of where the US government sues someone and loses?

Now, to give you some context, up until it was sued by the SEC, Ripple was mostly shunned by the crypto community.

Sure, it had its fans. A whole army of dedicated fans, actually. One of the biggest of any project.

But these fans were not exactly well-regarded by the rest of the crypto world. They were stereotyped as newbies, without much knowledge, or corporate shills.

That’s because Ripple has always been at the “corporate, centralised” end of the crypto spectrum.

It went against the original egalitarian ethos of Bitcoin, and instead it courted traditional finance.

Where Bitcoin had been created as a solution to the corrupt financial system in the wake of the 2008 financial crisis…

Ripple was created to help make that same corrupt financial system more money.

So, you can see why it had so many haters.

But over the next few years, as the court case dragged on… and on… and on… and on… another strange thing happened.

The crypto community came the realisation that Ripple – the crypto everyone loved to hate – was the only thing standing between it and oblivion.

If the SEC won, crypto was over.

If Ripple won, there was light at the end of the tunnel.

Ripple became that super villain who sees the error of their ways and eventually becomes the hero of the story.

And a few years into the court case, it seemed like Ripple might be… winning?

There were rumours it might not all go the SEC’s way. That Ripple might be able to salvage something from this seemingly unwinnable court case.

But what chance did Ripple really have against the full power of the SEC?

Maybe, a couple of years earlier when the political elite – and everyone else – was finally warming to crypto.

But after the car crash of 2022, which resulted in a slew of high-profile bankruptcies, millions of dollars in losses for ordinary citizens and crypto’s “best and brightest” being exposed as fraudsters and scam artists… no one in their right mind was going to side with a crypto project over the SEC.

Then, on July 13th, 2023, it happened.

Ripple won.

Well, at least, it won the part of the case that everyone cared about.

Ripple’s XRP token was declared not a security.

But here’s where things get really interesting.

Because the court ruled that Ripple was a security when institutional investors first bought it, but it wasn’t a security when it was traded on public exchanges.

Here’s a link to the judgement in full.

And here’s the conclusion:

For the foregoing reasons, the SEC’s motion for summary judgment is GRANTED as to the Institutional Sales, and otherwise DENIED. Defendants’ motion for summary judgment is GRANTED as to the Programmatic Sales, the Other Distributions, and Larsen’s and Garlinghouse’s sales, and DENIED as to the Institutional Sales.

Basically, the court ruled that when Ripple sold its XRP token to Venture Capitalists (VCs) and institutions, it was a security. But when XRP was traded on exchanges by the public it was not a security.

This was a great outcome for the crypto community.

Because it meant that when cryptos were traded publicly they were not securities. And when they were sold privately to VCs they were securities.

So, it could, in theory, put an end to the practice of projects selling large parts of their supply to VCs (at steep discounts) before listing them on public exchanges (where the VCs could dump them for many multiples of what they paid).

As Bloomberg reported at the time:

Many successful crypto projects these days rely on early sales of their tokens to institutional investors and venture capitalists prior to their public launch in order to get off the ground, often pre-registering those efforts with regulators to avoid any potential repercussions. Many on the SEC’s list of possible securities had conducted these types of arrangements, and the SEC cited those examples as reasons the tokens should fall under its remit. With Thursday’s ruling, that type of pre-funding might be done for, unless VCs fancy buying on the open market when prices are subject to the same volatility as everyone else.

So Ripple had come full circle and saved crypto.

At least, it had. Until the SEC unsurprisingly appealed the court’s decision. Now everything is up in the air again.

And with that, let’s get on with this deep dive proper…


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