Ripple Labs, the company behind the cryptocurrency Ripple (XRP), are facing a class action lawsuit filed by an investor, Ryan Coffey, who alleges the company sold it’s cryptocurrency tokens to the public in violation of US securities laws.
The filing also claims the company has engaged in a “never-ending ICO (Initial Coin Offering)” and has, “earned massive profits by quietly selling off this XRP to the general public… and has consistently portrayed XRP as a good investment, relayed optimistic price predictions, and conflated Ripple Labs’ enterprise customers with usage of XRP.”
In early April, Bloomberg reported that Ripple Labs offered to pay American crypto exchanges Gemini and Coinbase to list Ripple tokens for trading last year.
A listing on a popular exchange could enhance the value of Ripple by providing a “liquidity premium,” write Bloomberg authors Annie Massa, Lily Katz and Mathew Leishing:
“Few things have propelled XRP’s price more in recent months than speculation that the token is set to graduate to a U.S. exchange…A U.S. listing would also cement XRP’s standing among titans of cryptocurrency such as Bitcoin, the most popular and valuable of the bunch.”
However, the industry-wide scrutiny by regulators that characterized the first part of 2018 may have ruined chance of a prime listing of Ripple for the time being. “U.S. officials have warned unlicensed exchanges not to list tokens that could be deemed securities,” says Bloomberg.
Gemini reportedly declined an offer of a million dollars to list Ripple, and Coinbase are said to have declined a loan of $100 million dollars worth of the cryptocurrency for a spot on its high-profile exchange.
Taylor Copeland Law filed the class action lawsuit last week in the state of California alleging that Ripple was in breech of securities laws for selling unregistered securities. The complaint stated:
“This is a securities class action on behalf of all investors who purchased Ripple tokens (XRP) issued and sold by Defendants. It arises out of a scheme by Defendants to raise hundreds of millions of dollars through the unregistered sale of XRP to retail investors in violation of the registration provisions of state and federal securities laws.
Unlike cryptocurrencies such as Bitcoin and Ethereum, which are mined by those validating transactions on their networks, all 100 billion of the XRP in existence were created out of thin air by Ripple Labs at its inception in 2013.1 “In other words, unlike some virtual currencies, XRP was fully generated prior to its distribution…20 billion XRP, or 20 percent of the total XRP supply, were given to the individual founders of Ripple Labs, with the remaining 80 billion retained by Ripple Labs.”
Forbes contributor, Bernard Marr wrote in February, “That Ripple recently added a new feature whereby, through a smart contract system (escrows), the company releases 1 billion of its XRP holding to themselves each month to help fund business operations, incentivize customers, and sell to accredited investors. Any unused tokens will be placed back into escrow.”
Taylor Copeland Law has filed multiple class action lawsuits pertaining to initial coin offerings. In fact, the law firm filed the very first suit against Tezos that got the class action movement in crypto going.
Many companies that have issued crypto “tokens” claim that, although the tokens are often traded speculatively for cash and other cryptos on exchanges, these tokens do not constitute securities because they are needed to access special features of the networks that generated them.
According to Marr, “Ripple is a payment settling, currency exchange and remittance system intended for banks and payment networks…for direct transfer of assets (e.g. money, gold, etc.) that settles in almost real-time, and is a cheaper, more transparent and secure alternative to transfer systems used by banks today,” such as Swift.
Rather than converting to US dollars in a currency exchange, writes Marr, “which incurs currency exchange fees and…takes up to three days to process….By first converting the value of the transfer into XRP, rather than USD, exchange fees are eliminated and processing of payments is reduced to seconds.”
Marr reports that Fidor Bank, Santander, the Commonwealth Bank of Australia, and 61 Japanese are currently trialing Ripple in their systems.
But, like the plaintiffs in the class action, Medium blogger “Coin and Crypto” disputed the veracity of that notion that Ripple is the preferred cryptocurrency of banks. In a recent article at Hacker Noon, “Coin and Crypto” claimed Ripple Labs makes a number of banking network products including its xCurrent, xRapid and xVia Only xRapid uses Ripple.
As well, writes “Coin and Crypto”:
“Remember that impressive 100+ list of financial institutions Ripple is working with? Guess what, they are all using xCurrent. And xCurrent does not use XRP (Ripple).”
Last Saturday at the Edcon Ethereum Conference in Toronto, author and former Ethereum Foundation Board member William Mougayar presented a slide that defined tokens as:
“a unit of value that an organization creates to self-govern…and empower its users to interact with its products while facilitating the distribution and sharing of rewards and benefits to all its stakeholders.”
Joseph Lubin, Ethereum co-founder and Creator of Ethereum satellite companies, stated last week that, after consulting with numerous lawyers during Ethereums’ creation faze, he was “extremely comfortable” that ether, the widely-traded cryptocurrency native to the Ethereum network, “is not a security.”
It may be that that privately-managed cryptocurrency creators may simply have found an incredibly lucrative loophole to exploit- the whole time using words like “empower,””rewards,” and “community.”
Ethereum inventor Vitalik Buterin told a interviewer at Vice last year, that after the creation of cryptocurrencies, “Here, it just made it very obvious that money is just something a community can create for itself whenever it wants.”
Meanwhile, the cat is already very far out of the bag. Ethereum not only raised $18.4 million dollars selling its tokens for real-world money in 2014, subsequent run ups of the value of tokens on exchanges have made three of its founders billionaires. Ethereum Satellite companies like Consensys continue to facilitate and take cuts of ensuing ICOs built on Ethereum.
“The problem,” writes Medium Blogger Ryan Selkis, “is crypto companies tend to want things both ways”:
“Act like a securities offerer when it’s convenient from a capital formation perspective or when you’re doling out ‘founders’ rewards.’ Pretend you’re actually selling a currency or commodity when it becomes markedly less convenient from an investor disclosures standpoint.”
And while six-figure annual listing fees on major stock exchanges are “standard,” Selkis writes, these “usually carry with them the expectation that listees will be regulated and subject to some level of standardized reporting.”
It is standard for ICOs to extend absolutely no rights to investors.
Big money must pay big money. Autonomous Research have reported, “the average listing fee charged by top crypto exchanges…(is) 10x what you’d expect in the public markets.”
See the lawsuit filing.
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