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XRP: Neither a security nor centralized? A zoom-in on the conundrum

Priyamvada Singh



XRP: Neither a security nor centralized? A zoom-in on the conundrum
Source: Pixabay

Opinion: In recent reports, XRP, a cryptocurrency which is often thrown under the evaluation of being a security or not, has seen a wide range of opinions on the inquiry. While some deem the coin as a currency, others have argued that XRP is also a security, thus, its parent company must comply with the corresponding regulations.

In the last week of October, one such opinion was put forth by Nicholas Weaver, a researcher of Computer Science at UC Berkeley. In one of his tweets, the academician blatantly demonstrated his views on XRP, stating the token as a security through the Howey test. He stretched as far as accusing Ripple of committing securities fraud. He wrote:

“Lets walk through the “Howey Test” with XRP (“Ripple”). This is why @SEC_Enforcement needs to come down like a ton of bricks on those behind Ripple the company… XRP is a security, and as such Ripple Inc is committing securities fraud by not following the rules.”

Howey test came into inception after the apex court of the United States established it in 1946, after a case between the Securities and Exchange Commission [SEC] and W.J. Howey. According to the test, an asset should meet four criteria to be deemed security, which are:

  • The investment of money
  • A common enterprise
  • An expectation of profits
  • The efforts of a third party or promoter pushing that profit

Here, it can be noted that though the cryptocurrency has a common enterprise – XRP II LLC, it will continue to circulate and flourish as an alternative currency to outgrow its roots, i.e., Ripple and the subsidiary. Therefore, the second point on the Howey test is invalidated by XRP, henceforth defeating its status as a security.

In fact, in May 2015, Ripple came under the radar of The Financial Crimes Enforcement Network [FinCEN], wherein the authority penalized the blockchain firm of a fine worth $700,000 over the violation of the Bank Secrecy Act [BSA]. The civil money penalty was assessed against Ripple as it was acting as a money services business [MSB] without registering with the treasury department. This case evidenced XRP as being a virtual currency, rather than a security.

Therefore, by the legal explanation of several US financial authorities, XRP is yet not proved to be a security. However, the extent of decentralization in the XRP Ledger is still a disputed matter, which rebuts the fact that the ecosystem will remain unaffected in case of a disruption within Ripple, the company.

This comes from an exhausted argument that about 60% of the XRP is owned by Ripple and that all of the XRP in circulation is pre-mined by the creator. The most popular refutal to the centralization debate is that while the majority of XRP is owned by its parent company, the tokens are locked via smart contracts in escrow accounts wherein only 1 billion XRP is allowed to be released per month.

However, blockchain-genius Charlie Lee, who is also the creator of Bitcoin [BTC]’s intended companion Litecoin [LTC] does not consider XRP as a cryptocurrency, stating that the token is widely centralized in nature. One of the tweets by Lee mentioned XRP as a “semi-centralized digital asset”.

In September 2016, Ripple signed an agreement with its rival, R3 Holdco LLC that allowed the latter to purchase up to 5 billion XRP at the price of $0.0085 per unit. Reuters reported that Ripple chief Brad Garlinghouse attempted to terminate this settlement a few months ahead of the signing.

This caused R3 to file a lawsuit against Ripple in September 2017, reserving its rights to buy XRP at the given price for the specific time period as stated in the agreement. R3 further alleged that the blockchain firm did not have the rights to terminate the agreement on unilateral bases. This was one major fallback in the journey of decentralization for the XRP ecosystem.

On the other hand, the feature that attenuates the centralization in the XRP ecosystem is the Unique Nodes Lists or UNL. UNL is a group of validators who agree upon, or give ‘consensus’ to the transaction sets, which further pass as the accepted ledger on the XRP network. The inflow of decentralization occurs by the fact that each node can choose its own UNL or adopt the one provided by Ripple.

Winding up, the report rises to the conclusion that XRP is neither a security nor fully-centralized. The smart contracts and UNL have played out in favor of decentralization to secure investors’ interest within the XRP ecosystem. Subsequently, the digital asset is a non-security by law, receiving the most contribution from its nature of decentralization.

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Priyamvada is a full-time journalist at AMBCrypto. A graduate in Journalism & Communication from Manipal University, she believes blockchain technology to be a revolutionary tool in advancing the future. Currently, she holds no value in cryptocurrencies.