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It’s a question that gets the dander up of every loyal foot soldier in the XRP Army: What is the real story behind the origin of XRP and Ripple, and what does that have to do with whether XRP should be regulated as a security?
Ripple CTO David Schwartz wouldn’t make it out of Austin, Texas, without fielding this one at least once.
During Thursday’s “Blockchain Beyond the Hype: The Ripple Effect” session at SXSW, Schwartz once again retold the creation myth surrounding the birth of XRP and Ripple:
The Ripple Effect
“XRP originated when Arthur Britto, myself, Jed McCaleb, and Chris Larsen built the XRP ledger back in 2011, 2012. The original founders who built that system gifted a bunch of XRP to Ripple to have the company work and build an ecosystem around it.”
That all checks out. But here’s the part Schwartz omitted, which is central to the story: Ripple—the “traditional company” with “stockholders, headquarters in San Francisco, and employees”—was also founded by McCaleb and Larsen. In other words, the creators of XRP “gifted” themselves the token and then sold it to fund their enterprise, which sounds exactly like what we later came know as an ICO.
Within the last year, the SEC has taken the position that virtually every ICO ever conducted was some form of an “unregistered securities” offering and therefore illegal—and the regulator has come down hard on a handful of ICO-funded crypto startups already.
But the SEC has left some wiggle room. Last June, SEC Director William Hinman publicly explained why he believes bitcoin and ether, for example, are likely not securities. And earlier this week, Chairman Jay Clayton told Coin Center he supported Hinman’s analysis of digital assets (while sidestepping the question of ether and bitcoin, specifically).
Schwartz insists it’s all this uncertainty that gives rise to questions about XRP’s legal status. “Securities law has not changed with respect to blockchain technology in a long time,” he told the crowd at the Hilton.
“We’ve gotten writings from some organizations—the SEC recently has talked about how they’re going to think about deciding how these tokens meet securities laws. But they have not given a black and white test.”
Schwartz said the Howey Test may not be up to snuff for deciding the status of crypto assets. “It’s just really hard to figure out how [the Howey Test] applies” to crypto, he said.
“We’re pretty comfortable that XRP is not a security, but ultimately it’s going to be the SEC, and perhaps the courts, that make that decision.”
The courts may indeed soon have their say. While the SEC has refused to comment on XRP specifically, Ripple faces multiple class-action lawsuits from investors in California who are claiming damages over the company’s alleged failure to register XRP as a security with the SEC and provide the public with the appropriate company documents and disclosures.
But Schwartz puts the blame squarely on the shoulders of the regulators who have failed to advance the ball forward. “It’s very hard to decide how the laws are applied. And that’s why I think you’ll see many organizations—Ripple and many others—lobbying regulators. Not so much to change the law, but to clarify it.”
What you don’t want, said Schwartz, is a regulator showing up several years after a crypto project has been in business, “completely in the open and completely transparently,” and being blindsided by “unclear laws.”
“We meet with you, like, every week about what we’re doing. And now you’re telling us we should have realized four years ago that it was fundamentally and completely illegal? That doesn’t make any sense.”
For Schwartz, a decision from the SEC, the courts, or the U.S. Congress couldn’t come fast enough: “We need to get rid of that uncertainty. I'd rather have a bad law than one where I can’t tell whether I’m breaking it or not.”