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The SEC tells you about Ripple's control methods

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In the past 48 hours, XRP once fell from 0.58 USDT to 0.32 USDT, with a cumulative maximum drop of 44.8%.

Original title: "SEC Decrypts Ripple's Manipulation Method: Soliciting Institutions to Ship, Cooperating with Favorable Offers"

Original Source: Shenchao TechFlow

On December 23, the U.S. Securities and Exchange Commission (SEC) formally charged Ripple, its CEO Brad Garlinghouse and United Founder Chris Larsen filed a lawsuit accusing the defendants of raising more than $1.3 billion in unregistered digital asset securities offerings starting in 2013.

Affected by this news, in the past 48 hours, XRP once fell from 0.58 USDT to 0.32 USDT, with a cumulative maximum drop of 44.8% .

Shenchao TechFlow dismantled the 71-page indictment of the SEC, explaining in detail the evil of Ripple in the eyes of the SEC, how Ripple sits on XRP, Earning more than $1.3 billion?

XRP has no real purpose

Ripple propaganda The first potential use of XRP was as a "universal digital asset" for cross-border bank transfers, but this never really materialized.

It was only in mid-2018 that Ripple began seriously testing ODL for the first time. ODL is an enterprise-grade software product designed to manage the day-to-day and long-term financial operations of financial institutions, and to date, it is the only product that supports XRP for use.

In the process of using ODL, the currency sender converts legal currency into XRP and transfers XRP to the recipient and exchange the XRP for the fiat currency of the region. Typically, currency dealers do not hold XRP directly, but instead convert XRP into their local currency, with XRP in and out of trades in about 90 seconds.

On June 21, 2018, Ripple CEO Garlinghouse explained in a public speech, As of the day, no one was using XRP for cross-border transactions, and it wasn't until October 2018 that Ripple officially launched ODL for commercialization.

Since its introduction, ODL has received very little attention, partly due to the relatively high cost of using the platform. From October 2018 to July 26, 2020, only 15 money transmission institutions (none of which were banks) signed up to potentially use ODL, and ODL transactions accounted for no more than 1.6% (often significantly lower than this).

In addition, most of the usage of ODL is not market-driven, but comes from Ripple official subsidies. While Ripple officially advertises ODL as a cheaper alternative to traditional payment methods, it actually costs a lot more, so institutions don't want to use the product without substantial compensation from Ripple.

Specifically, from 2019 to June 2020, Ripple paid 200 million XRP to currency payment institutions, On the day the XRP is received, these institutions immediately sell the XRP to the open market to monetize it. The money transmitters disclosed earning more than $52 million in fees and rewards from Ripple in September 2020.

Money payment institutions become another channel for Ripple to sell unregistered XRP, and Ripple gets the added benefit that it can Touting its meaningless XRP "use" and transaction volume.

On the other hand, Ripple started selling two software systems xCurrent and xVia in 2016 as a way to open up the financial market The gimmick, which has earned about $23 million in total by 2019. But neither software system uses XRP or blockchain technology.

In July 2019, a senior vice president of Ripple told the CEO of the US branch of a cryptocurrency exchange Sent an email, Ripple wanted to work with the company to make XRP tradable. In the email, Ripple executives explained that “XRP’s primary use case today is speculation, and exchanges are the primary enablers of this use case.”

Ripple’s source of income: selling XRP

From the beginning of Ripple's operation, Ripple CEO Garlinghouse has made it clear publicly that Ripple will sell XRP to raise funds for a common cause.

Ripple made a similar statement in the Ripple Wiki:

;

“Ripple Labs sells XRP to fund its operation and promotion of the network. This gives Ripple Labs a highly skilled team to develop and promote the Ripple protocol.”

For now, Ripple continues to make it clear on its website that it holds at least 54 billion XRP, making it by far the largest single asset holder .

In the seven years since 2013, Ripple has sold a total of 14.6 billion XRP and made a profit of 1.38 billion US dollars .

Among them, approximately US$780 million was used for investment and business operations, but the reasons and payments were not disclosed. Even institutional investors in XRP only have access to information that Ripple selectively releases.

In the external sales of XRP, institutional sales are the main part.

Ripple sees institutional sales as a pillar of its strategy to generate speculative interest in XRP from public investors. As Ripple put it in a document posted on its website on January 24, 2017, "Ripple's institutional sales of XRP "indicate XRP's broader capital market potential".

At the same time, through institutional sales, Ripple can also obtain credit endorsement from well-known institutions.

Since 2013, Ripple has sold XRP to at least 26 institutional investors, and at least seven institutional investors have sold XRP at a discount of 4% to 30% below the market price Buy XRP.

Ripple's sales agreements to institutions generally do not limit the buyer's ability to resell XRP, only providing for a short A lock-up period, usually three to twelve months, or limits the amount of XRP a buyer can resell.

Ripple via Selling at a discount to the market price incentivizes these buyers to sell their XRP to the open market for a deterministic profit.

For example, on September 24, 2018, Ripple signed an agreement with C, a Japanese institution that describes itself as "operating a crypto asset sales and exchange service to provide safe and secure encryption to as many people as possible." Asset Transaction".

According to the content of the agreement, Ripple agrees that from November 1, 2018 to November 1, 2021 , provide institutional investor C with up to $1 billion worth of XRP for their purchase, of which the price of $800 million is 15% to 30% lower than the market price of XRP, and the specific price depends on the total amount of XRP purchased by institutional investor C, Institutional Investor C agrees to limit the amount of XRP he sells or transfers to no more than 10 basis points of the average daily trading volume of XRP in the market (a basis point is 0.0001 or 1/100th of 1%).

From 2018 to the end of 2019, Ripple sold more than $170 million worth of XRP to institutional investors C, about 719 million XRP, and by 20209 At the end of the month, about 361 million XRP were sold to Institutional Investor C, and around December 15, 2020, there will be at least 20 million XRP left.

Ripple sits on XRP

Sued by SEC Later, Ripple CEO Garlinghouse publicly responded that XRP is not a security. One of the reasons is that the market value of XRP is not related to Ripple's activities, but to other cryptocurrency market conditions. However, in the SEC's indictment, it revealed in detail how Ripple sits on XRP.

From the outset, Garlinghouse has publicly committed to a significant and meaningful effort on XRP, namely Saying that the value of XRP depends on the company Ripple.

In a 2014 promotional document, Ripple stated, "Ripple Labs' business model is based on a Belief that "if the Ripple protocol is widely adopted, the demand for XRP will increase, leading to price appreciation".

Since at least 2014, Ripple has committed to creating and maintaining a secondary market for XRP.

For example, Ripple states on its website, “We will engage in investment strategies that are expected The exchange rate stabilizes or appreciates.”

Among them, the most important thing is to let XRP go online on more exchanges.

In 2017 and 2018, Ripple signed agreements with at least 10 cryptocurrency exchanges, none of which The identity is registered with the SEC and at least two of the platforms have their principal place of business in the United States.

Ripple pays these exchanges in XRP to allow XRP to be traded, sometimes offering rewards for meeting volume metrics .

For example, in May 2017, Ripple paid a US-based cryptocurrency exchange 17 million XRP , used to pay the currency listing fee and a transaction fee return of up to 60,000 USD per month within three months.

Ripple distributed approximately 28 million XRP to these platforms between October 2016 and October 2017, when the Market cap is $6.8 million.

In addition, Ripple intervenes in the XRP secondary market through various means.

Throughout the release, as indicated by Garlinghouse and Larsen at various times, Ripple put in a lot of effort To monitor, manage and influence the XRP trading market, including XRP trading price and trading volume, these efforts include:

( 1) Algorithmically determining when to sell XRP to the market and at what price;

(2) Rewards are paid to certain market makers if sales reach a certain volume level of XRP.

Ripple internally describes these strategies as designed to maximize the amount of capital Ripple can raise in an offering, or To achieve "more speculative buying volume", externally, Ripple described its efforts to protect the public's investment in XRP.

In order for the price to rise steadily, Ripple has an "XRP Market Team" in charge of monitoring the price and trading volume of XRP , and regularly communicate with Ripple's XRP market maker about XRP sales strategies. Generally speaking, the amount of XRP sold does not exceed a certain percentage of XRP's daily trading volume, generally between 10 and 25 basis points.

Beginning in 2017 at the latest, Ripple co-founders Larsen and Garlinghouse began attending meetings with the XRP marketing team.

In terms of market-making methods in the secondary market, one of Ripple’s commonly used methods is to cooperate with good news and simultaneously pull the market.

In September 2016, Ripple directed market makers to begin actively In September 20th, the vice president of finance sent an email to the market maker, saying that all 300,000 US dollars should be used to purchase XRP within 24 hours after the announcement.

In an email to company executives dated August 12, 2017, Garlinghouse instructed that certain Ripple employees should Proactive attempt to increase speculative trade value with positive XRP news.

In June 2020, Ripple employees provided Garlinghouse and Larsen with an internal report in which they emphasized that, Since early May 2020, "XRP has started to underperform Bitcoin," partly due to Ripple selling XRP. These employees came up with "supply-limiting strategies," such as Ripple's buyback of XRP. Subsequently, Garlinghouse approved the buyback proposal.

Following Garlinghouse’s decision, Ripple in its Q3 2020 market report on November 5 It was revealed that Ripple bought $45 million worth of XRP, and XRP also started to surge.

Two executives made $600 million profit

Ripple's two executives, CEO Garlinghouse and Executive Chairman Larsen, made a total of about $600 million in profits by selling XRP.

SEC report sheds light on XRP sell-off by two executives.

From April 2017 to December 2019, CEO Garlinghouse (Brad Garlinghouse) transferred the 321 million A lot of XRP was sold to market investors, earning about $150 million in revenue.

On the other hand, from 2015 to March 2020, knowing that XRP might constitute a securities offering, Larsen He and his wife sold at least 1.7 billion XRP to the market, netting over $450 million.

In 2015 and 2017, Ripple issued at least 2 billion XRP to co-founder Larsen's other company "Ripple Works”, which aims to invest in XRP-related projects.

But the actual duty of RippleWorks is to represent market makers, helping Ripple sell XRP to the open market. From mid-2015 to the present, RippleWorks has sold a total of approximately 693 million XRP to the public, amounting to approximately $176 million.

As the co-founder of Ripple, Larsen has also faced prosecution by the SEC before.

Ripple co-founder and current board chairman Larsen (Chris Larsen) co-founded a company in 2005, and in 2011 Years ago has been the company's CEO. The company was indicted by the SEC in November 2008 for violations of Section 5(a) and (c) of the Securities Act.

According to public information, the company founded in 2005 is Prosper Marketplace, the first P2P lending company in the United States. PROSPER was sued by a large number of investors to the court due to "substandard securities". In order to settle the matter, it finally reached a settlement of 10 million US dollars with the client.

is defined as a security

SEC will XRP It is defined as an "investment contract" and is also a type of security. Ripple only has a virtual currency business license and no securities license. This is one of the biggest allegations the SEC has made against Ripple.

Ripple conducts institutional sales through a wholly owned subsidiary XRP II. XRP II applied for a license from NYDFS (New York State Department of Financial Services) to engage in "virtual currency business activities" that sell XRP to "institutional and other accredited investors" who "purchase XRP for speculative purposes."

If XRP is a security, what should Ripple do?

Section 5 of the Securities Act of the United States Congress prohibits any unregistered offering of securities. If the issuer's securities are not sold to the public, it can be exempted from registration, while in other cases registration is required, and the issuer is required to disclose financial reports and major events on a regular basis, so that investors in the issue and buyers in the secondary market can obtain the right to know .

However, Ripple never filed a registration statement, did not provide investors with annual sales data, and did not regularly Disclosure of financial and management information.

Ripple Corporation monetizes XRP without obtaining a valid registration statement while taking advantage of their presence in the market The information asymmetry created is for their own benefit and brings huge risks to investors.

Defendant Ripple engaged in the above acts, which violated the provisions of the Securities Act on illegal securities offers and sales, Larsen and Garlinghouse also aided and abetted Ripple Inc. in violating these terms.

Ripple knew the risks 8 years ago

Back in 2012, Ripple received legal advice that under certain circumstances XRP could be considered an “investment contract,” a security under the federal securities laws. But Ripple did not stop this "illegal securities issuance activity," did not register the sale of XRP with the US SEC, and did not apply for an exemption.

Ripple sought advice from an international law firm on the legal risks associated with the distribution and monetization of XRP. The law firm provided two memos in 2012.

The memo states that the risk of XRP being considered an "investment contract" (and thus a security) under the federal securities laws is Yes, it depends on various factors. If an individual purchases XRP to "engage in speculative investment transactions," or if a Ripple employee advertises that XRP may increase in price, Ripple will face a greater risk that XRP units will be considered an investment contract (and thus a security).

XRP is unlikely to be considered a "currency" under the Foreign Exchange Act as it is not the same as a "traditional currency" , XRP is not backed by a central government and is not a legal tender.

Both memos recommend that Ripple and Larsen contact the SEC to clarify whether XRP falls under the federal securities laws securities.

But Ripple and Larsen did not heed the counsel’s advice.

In an email in 2014, Larsen explained that the XRP received when Ripple was established was used to compensate The individual bears the risk of being deemed an issuer of securities.

That is to say, Larsen dumped XRP in large quantities knowing that there was a risk (XRP is defined as a security).

Garlinghouse has been warned and understood on multiple public and private occasions that XRP has "security-like" characteristics.

On March 11, 2017, Ripple’s chief compliance officer and Garlinghouse said in an email: “XRP is of course There are some 'securities-like' features where we do need to revise our outbound messaging."

Accepted February 2018 In an interview with Yahoo Finance, Garlinghouse admitted: "If there is no real application, then it (XRP) is a securities offering. And if it is a securities offering, there is no regulatory uncertainty. It should be regulated as a securities offering."

The legal memo also states that, unlike Bitcoin, there is a specific entity, Ripple, responsible for the sale of XRP and the Ripple Promotion and marketing functions of the network.

In an internal email on April 26, 2018, an equity investor A wanted to know about the XRP Ledger Whether it will be "51% attacked" like the Bitcoin blockchain, he concluded, "Given the current stakeholder incentives, this is more of a long-term question, which means that Ripple has incentives to protect XRP Ledger. Another employee agreed: "This has always been the crux of the matter. Ripple is controlled by 1 entity, not through a distributed entity like Bitcoin."

SEC's claim

The complaint states that unless the defendants (Ripple, Larsen, Garlinghouse) are subject to permanently restricted and prohibited, or they will continue to engage in the acts, practices and business described above.

Under the United States Code, the Securities Act, the SEC would like to ask the Court to render its final judgment:

1. PERMANENT BAR Defendants and their representatives other persons, directly or indirectly, in violation of the Securities Act, including delivering XRP to any person or taking any other steps to effectuate any unregistered offer or sale of XRP.

2. Surrender all ill-gotten gains within the effectiveness of the lawsuit, and pay interest in advance;

3. Prohibit participation in any digital Issuance of asset securities;

4. Civil penalty imposed under Section 20 of the Securities Act;

5. Grant of court approval for investment any other remedy that is just and appropriate in the interest of the recipient.