Ripple’s $2 billion fine may close ugly chapter in history

A New York judge has fined Ripple and provided some clarity to the murky underworld of altcoins.

The judge, Analisa Torres of New York’s Southern District Court, had earlier found that Ripple violated Section 5 of the Securities Act of 1933 by making unregistered offers and sales of XRP. In her final judgment, approved in late March, she said Ripple must stop violating this regulation and pay $1.9 billion to the Securities and Exchange Commission by late April. 

Ripple declined a request for comment, but pointed to a recent tweet posted by CEO Brad Garlinghouse: “Gensler’s SEC has repeatedly acted outside the law — not going unnoticed by Judges admonishing the agency for a ‘gross abuse of the power entrusted to it by Congress’ (DEBT Box case) and for acting without ‘faithful allegiance to the law’ (Ripple case). Let’s not also forget Gensler’s lack of attention to SBFraud.” Ripple is likely to appeal, observers say.

Unless the decision is overturned, this final judgment closes the book on a product that initially piqued the interest of many in the U.S. financial services industry but later raised alarms.

For more than a decade, Ripple has used proceeds from the sales of more than 14.6 billion XRP tokens worth more than $1.38 billion dollars, “to fund Ripple’s operations and enrich [original founder Chris] Larsen and Garlinghouse,” in an unregistered securities offering, the SEC said in its complaint. Larsen and Garlinghouse “personally profited by approximately $600 million from their unregistered sales of XRP.” 

When I met several years ago with Ripple leaders, and then spoke with a London bank executive who was planning to start using XRP in international payments, I was taken with Ripple’s vision for making cross-border payments more efficient. At that time, most international payments moved through the Swift network. If a U.S. bank wanted to send a payment to another country, it had to keep money in the form of local currency on deposit in a nostro account at a Swift member correspondent bank in that country. The funds in that account were used to settle the payment at the direction of a message sent over the Swift network. When a bank did not have a direct relationship with a bank in another country, it used correspondent banks as intermediaries. Payments sometimes took months to get to their destination and were expensive and hard to track. (Since then, Swift has implemented technology that speeds up and tracks payments.)

Using Ripple’s technology, theoretically, banks could send payments by exchanging XRP on a ledger. The payments would be instant and low-cost and eliminate the need for nostro accounts.

Some banks embraced this vision. The capital markets division of Royal Bank of Canada, a former Ripple partner, enthusiastically endorsed Ripple and XRP in a 2018 report called “Imagine 2025.” ATB Financial in Edmonton started piloting Ripple software for cross-border payments in 2016. PNC agreed to use Ripple’s RippleNet distributed ledger to process international payments in 2018. In recent years, these banks have refused to comment on Ripple or on XRP.

The more I looked into what XRP was, and understood its origins, the more I saw XRP as a scheme that enriched a few Ripple founders and leaders — and the company itself — at the expense of all who had bought the token. 

These XRP holders, by the way, call themselves the XRP Army. They are fiercely loyal to Ripple and XRP and are still hoping to reap a windfall from their XRP investments. One XRP investor posted this tweet April 8: “RIPPLE XRP CEO PREDICTS CRYPTO TO $5 TRILLION IN 2024 !! MASSIVE OPPORTUNITY & COINBASE GETS BIG WIN!!” When I have written articles that included criticism of Ripple or of XRP, I have received threatening direct messages from XRP Army members.

I started reading class-action lawsuits filed against Ripple by XRP holders who felt they had been duped. For instance, in 2018, XRP investor Ryan Coffey said Ripple had been “selling XRP to the general public and wholesale to larger investors in a ‘never ending ICO’ — initial coin offering.” Around the same time, Ripple representatives started saying their company had nothing to do with XRP, that XRP was an independent digital asset living on an open source distributed ledger. Having met with Ripple leaders only a couple of years earlier who had proudly described the XRP tokens they had created, which at the time were called “Ripples,” I knew this wasn’t true.

Ripple was originally incorporated as “Newcoin, Inc.” in California in 2012, and renamed OpenCoin a month later. Its three founders — Chris Larsen, Jed McCaleb and Arthur Britto — signed an…