Ripple Labs is fighting a legal battle to prevent XRP being labeled as a security, trying to dodge the long arm of securities law. If it were to fail, Ripple would become a poster child for securities fraud class action lawsuits. However, lawyers could get Ripple’s ass served to them even without resorting to securities fraud - simply because Ripple’s methods for promoting the virtues of its XRP coins look shaky at best.
The nature of Ripple’s fraudulent activity
Fraud is defined as a “deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right”. An act of fraud must involve two components: one must do something unfair or illegal, with the intention of benefiting from one’s own actions.
Ripple Labs’ acts of deliberate deception are out there for everyone to see. The company has, on numerous occasions, posted on Twitter and issued press releases, that were factually incorrect, and systematically exaggerated the level of adoption of its technology, along with the true nature of its partnerships with financial institutions.
Ripple Labs has explicitly stated that the value of XRP coins it owns and sells to investors, is directly linked to their usefulness as an asset for payments. Ripple’s website describes XRP as an integral part of its payments solution, and even floats an idea for the valuation it could achieve, should Ripple’s technology become widespread.
Thus, by providing a falsely positive image of the degree to which clients its partners were using its payment solutions, Ripple Labs led XRP investors to believe that the value of XRP coins was much greater than what these investors would have believed, had they been presented with truthful and unbiased facts.
Let’s look into both of the components of this case.
On multiple instances, Ripple Labs, through its official Twitter account @ripple, or through the Twitter accounts of its executives, has provided falsely positive information about the degree to which its solutions were being used by its partners, and about the degree to which other companies were willing to become its partners.
Ripple Labs’ Twitter posts and press releases about its partnerships included facts and statements that were materially exaggerated, and could have led XRP investors to believe that Ripple Labs’ solutions were being used by its partners to a degree that was substantially greater than it was in reality.
Here are a few examples.
Brad Garlinghouse, Ripple Labs’ CEO, March 2017:
“World’s 3rd largest bank, MUFG, has joined Ripple’s growing # of customers moving actual $ across borders instantly”
This statement could only be interpreted by XRP investors as proof that MUFJ was using Ripple’s technology, because Ripple states on its webpage that bank transactions take 3 to 5 days, and that only Ripple lets perform transactions in seconds:
In reality, MUFJ wasn’t a client of Ripple Labs, and wasn’t using Ripple’s solutions. It had simply joined Ripple’s Global Payments Steering Group (GPSG). The GPSG was only a consultative body, not a network of banks who are actively using Ripple’s solutions.
Ripple Labs on Twitter, April 2017:
“Now over 50 Japanese banks are transferring money in real-time on #Ripple (up from 47 last month!).”
This statement was factually incorrect. The use of the continuous form “are transferring” could only be interpreted as “banks are currently using Ripple to transfer money”, which was false: the banks had only run trials of Ripple’s technology.
Ripple Labs on Twitter, April 2017:
“Excited to welcome BBVA to Ripple’s growing network of real customers using blockchain to move money in seconds.”
This statement is either intentionally misleading, or materially false. BBVA didn’t join a Ripple’s network of clients (supposedly RippleNet), because it didn’t, and couldn’t, transact with every other of Ripple’s client, as it had only run a trial of Ripple’s technology from BBVA Spain to BBVA Mexico.
The distinction is important, as Ripple states that:
Ripple falsely claims that its 200 banking partners can transact with each other. In reality, most of these banks don’t transact using Ripple’s technology at all. A minority transacts using Ripple’s technology either with a limited number of partners, or only with themselves.
Ripple Labs on Twitter, June 2017:
“With SBI Group, SCB Thailand & Ripple, 45,000 Thai nationals living in Japan can send money home faster.”
The linked press release (also from Ripple) stated that:
“The rollout of the service begins today. It’s the first commercially-available remittance service powered by Ripple. Those who use SBI Remit in Japan can instantly send money in JPY to a recipient’s SCB savings account in Thailand and receive funds in seconds.”ripple.com
This was false. SCB didn’t have the regulatory approval from the Bank of Thailand to perform any such operations. For at least one more year, it was simply testing Ripple’s technology in a sandbox environment:
“The bank’s cross-border remittance through blockchain, which is only available for the Japanese yen, has trended positively, though the service is being tested out in the Bank of Thailand’s regulatory sandbox.bangkokpost.com
The bank is waiting for the central bank’s approval to allow its cross-border remittance service to exit the sandbox after testing began last June.”
Securing an unfair or unlawful gain
Ripple’s CEO has clearly stated that the value of XRP coins is directly linked to its status as a payment asset:
Ripple’s own website also paints XRP as an integral part of its technology:
Ripple expands on this notion in its “Liquidity Explained” page, stating:
“there is approximately $5 trillion dollars sitting dormant in these accounts around the world – tying up capital that could be used in more productive ways.”ripple.com
along with (same page):
“A digital asset designed for enterprise use can take the place of nostro accounts and offer on-demand liquidity.”ripple.com
In so doing, Ripple implies that XRP coins will take the place of nostro / vostro funds, to the tune of $5 trillion. This has led to a proliferation of back-of-the envelope valuation models where XRP prices reach north of $30, owing to a maximum total issuance of 100 billion coins. Although neither Ripple nor its executives have not been at the origin of these valuation models, they haven’t denied them either, despite being obviously aware of their existence.
By the way Ripple paints the role of XRP coins within its technology and development plans, XRP investors were led to believe that XRP coin value is directly linked to the success and rate of adoption of Ripple’s technology.
Thus, by promoting a falsely positive image of the rate of adoption of its technology, Ripple has artificially inflated the price of XRP coins, of which it owns over 50 billion, and which it sells to investors.
Had Ripple communicated in a fair and accountable way about the rate of adoption of its technology, and the true nature of its partnerships, i.e., that they were mostly trials and limited in scope, investors in XRP coins would probably have never formed such a positive opinion about the value of XRP coins.
Due to Ripple’s biased and misleading posts on Twitter and press releases, XRP investors have paid a price that they would probably never have paid, had they been made aware by the company of the true state of its partnerships.
Ripple has thus secured an unfair gain, to the detriment of XRP investors. Also known as fraud. Maybe some lawyer readers, with a better understanding of these matters than me, could venture a comment or two below.