In my recent article on JPM Coin,
I had no idea the can of worms I was opening. At least a dozen articles popped up in the cryptosphere questioning my sources – and perhaps my sanity – in languages as varied as Japanese, Spanish, and even Turkish.
Needless to say, I had to dig deeper – and what I found out about Ripple was chilling.
Peeling Back the Layers of the Ripple Business Model
At its core, the Ripple business model is a pump and dump scheme, as it undergoes numerous activities to increase the value of the XRP cryptocurrency (crypto). Unlike most crypto pump and dumps, however, Ripple takes numerous steps to obscure this basic fact.
To clarify Ripple’s business model, I put together the chart below.
Ripple’s questionable business model.Jason Bloomberg
The starting point in the chart above is the issuance of many billions of XRP tokens – essentially printing Monopoly money out of thin air, except that you can play Monopoly with Monopoly money.
To obscure Ripple’s founders’ intentions, however, an open source ‘community’ – not technically Ripple itself – issued the tokens. “XRP is open source and it was not created by our company, so that existed as an open source technology,” explains Ryan Zagone, director of regulatory relations for Ripple. “We didn’t create XRP.”
How, then, did Ripple end up with its massive stake in XRP, amounting to well over half the available tokens? “What we do have is we do own a significant amount of XRP, it was gifted to us by some of the open-source developers that created it,” Zagone continues. “But there’s not a direct connection between Ripple the company and XRP.”
However, Zagone is being disingenuous at best, as Ripple gets a say as to who can process XRP transactions, essentially making XRP a centralized, permissioned crypto. As a result, many people in the crypto community don’t even consider XRP to be a cryptocurrency at all, because it’s not decentralized.
So Many Customers? Maybe Not
One of the strongest indicators that Ripple is a going concern is the dozens of customers it touts. Look more closely, however, and most such companies are ‘partners,’ not customers – and to make matters worse, Ripple pays companies to become partners.
Ripple calls this arrangement the RippleNet Accelerator Program. “Starting [October 13, 2017], Ripple will offer a unique reward for financial institutions that are the first in their markets to process and promote commercial payments on RippleNet,” according to a Ripple blog post. “The reward will come in the form of rebates through the new RippleNet Accelerator Program.”
Where, then, does the money for these rewards come from? “The RippleNet Accelerator Program is funded by $300 million of XRP from Ripple’s XRP holdings,” the post continues.
In other words, Ripple is using its share of its free XRP tokens to build the illusion it has paying customers – when in fact Ripple is paying them, not the other way around.
The Problem of Liquidity
Ripple’s stated goal of this incentive program is to lower what it calls ‘liquidity cost.’ “Since we’re offering the incentives in XRP, we anticipate seeing an added benefit of building an easy on-ramp for institutions to use XRP in their payment flows to lower liquidity cost in the future,” says Monica Long, SVP of marketing at Ripple. “Early reception of these XRP incentives in a test phase has been very positive.”
The question of liquidity cost, in fact, is at the heart of Ripple’s international payments product strategy. For XRP to work as an intermediate currency, banks or other institutions must maintain sufficient reserves of XRP in order to respond to requests for transactions.
However, there are two massive problems with this approach. First, XRP is simply too volatile. “You need someone to provide the liquidity to be able to change into and out of Ripple,” explains Martin Walker, director for banking and finance at the Center for Evidence-Based Management. “And holding Ripple, a currency which has seen its price drop 80 percent and then back up 100 percent in the course of the last two months is just not credible.”
Second, maintaining liquidity in XRP doesn’t solve the core problem with money transfers from countries with more stable currencies to those with less stable ones, as such transfers generally go only one way. For example, for a financial services firm to handle payments from the US to Guatemala, it would need to have liquidity in Guatemalan Quetzals in order to disburse payments. Liquidity in XRP would be useless.
Is XRP a Security?
As with many cryptotokens, shady operators seek to circumvent regulatory controls by classifying their tokens as not being securities. Ripple takes this approach as well. “XRP is not a security for three reasons: if Ripple, the company, shuts down tomorrow, the XRP ledger will continue to operate; it’s an open-source, decentralized technology,” explains Brad Garlinghouse CEO of Ripple. “if you buy XRP, [you are] not buying shares of Ripple – buying XRP doesn’t give you ownership of Ripple.”
Garlinghouse, however, is confusing ‘equity’ with ‘security,’ and then obscuring his argument with the ‘Ripple doesn’t control XRP’ canard.
The SEC (or other relevant national regulatory body) is the final arbiter of what constitutes a security, but the commonsense way to understand a security is this: if people buy an asset with the expectation of selling it later for a profit, then it’s a security.
XRP clearly qualifies by this informal definition – and in fact, Ripple’s holders of XRP are counting on this fact to pump up its value. JPMorgan’s JPM Coin, in contrast, isn’t tradable, and thus would never be classified as a security.
Does Ripple’s Technology Even Work?
Paying early partners to try out technology isn’t in and of itself dishonest – after all,
Some ‘partners’ like
The Santander product that uses Ripple is One Pay, a mobile app that allows funds transfers between certain European countries. “One Pay is a service that allows international transfers between individuals faster, since they arrive at the same destination in many cases or the next day, thanks to the use of blockchain technology,” the Santander site explains (translation by
Two days, of course, is far from immediate – and may explain the poor reception to One Pay among Santander customers.
Another significant Ripple ‘partner’ is
Only that’s not what happened. “We are always criticized that Western Union is not cost-efficient, blah blah blah, but we did not see that part of the efficiency yet during our tests [of Ripple],” says Hikmet Ersek, CEO of Western Union. “The practical matter is it’s still too expensive.”
Time to Pump and Dump
Given the fact that Ripple has to pay its customers to implement pilots of questionable technology, you might wonder how Ripple is still a going concern. The answer, of course, is that it really makes money only one way: by pumping up the value of XRP.
In fact, Ripple executives are only too happy to point this fact out. “We hold something like 60 billion XRP with a notion value of something like $10 billion,” brags David ‘JoelKatz’ Schwartz, CTO at Ripple. “We want very much to increase and realize that value.”
Garlinghouse is on the same page. “We’re driving velocity and demand of XRP,” he says. “For everything I do, I think what is in the best interest of the XRP ecosystem.”
Pump and dump schemes, of course, leverage the perceived value of the asset in question, not its intrinsic value separate from the speculative interest in the asset. Experts are thus understandably appalled. “I have a tough time understanding, even if a lot of banks use Ripple to move billions of dollars, why does that increase the value of XRP?” wonders Timothy Enneking, managing director of hedge fund Crypto Asset Management. “I don’t understand what drives price formation.”
We’ll leave it to a respected crypto insider to sum up. “I never cared about nor followed Ripple much but their complete dishonesty about the XRP issue is baffling and insulting,” tweets Bruce Fenton, CEO of Atlantic Financial Blockchain Labs and founder of the Bitcoin Foundation. “Their lies are going to turn me from indifferent to an active enemy of the project / company.”
This article was updated to correct Martin Walker’s employer.
Ripple didn’t respond to multiple requests for an in-person interview for this story.
Intellyx publishes the biweekly Cortex newsletter, advises companies on their digital transformation initiatives, and helps vendors communicate their agility stories. As of the time of writing, none of the organizations mentioned in this article are Intellyx customers. The author does not own, nor does he intend to own, any cryptocurrency or other cryptotokens, neither long nor short. Image credit: Jason Bloomberg.