Ripple: Super Bowl For Crypto Lawyers #58

Market Meditations | December 23, 2020

U.S. Securities and Exchange Commission Charges Ripple With Conducting $1.3 Billion Unregistered Securities Offering ❗

Dear Meditators

Let’s take a look at one of the biggest topics in crypto right now…

Today’s letter covers the SEC’s charges against Ripple.

We take a look at XRP’s price action going into the allegations and whether the rumors were already visible on the chart. After that, let’s explore what will likely change and what would happen if exchanges were to start delisting XRP en masse. 



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Ripple: Super Bowl For Crypto Lawyers

U.S. Securities and Exchange Commission Charges Ripple With Conducting $1.3 Billion Unregistered Securities Offering ❗


The ‘inevitable’ has happened. After rumors earlier this week that the U.S. Securities and Exchange Commission (SEC) had been building a case against Ripple over the alleged sale of unlicensed securities, the news was confirmed just a day later.
 


Initial reactions on Twitter by well-respected lawyers in crypto were unanimous and concluded that this doesn’t look good for Ripple nor their token XRP.

Jake Chervinsky, General Counsel at Compound Finance, said:

‘This is quite bad for Ripple. Not exactly the worst case, that’d be securities fraud, but close. XRP is basically useless if deemed a security. Alleging violations through present day is a kill shot. Charging individual executives is remarkable. This is the SEC playing hardball.’ 


Price Action

November was very promising for XRP, gaining over 100% in the second half of the month. The SPARK airdrop which we wrote about last month, coupled with new retail investors joining this market, led to an increase in demand leading up to the airdrop.

Although price looked to be consolidating and preparing for a next impulse move upwards, we did warn our readers to be careful for crypto’s typical ‘buy the rumor, sell the news’ scenario. 

XRP broke down on the day of the airdrop and minus the big short squeeze in December just like we saw on ETH, the chart continued to show weakness until yesterday.

On Tuesday morning, Ripple CEO Brad Garlinghouse tweeted:

‘Today, the SEC voted to attack crypto. Chairman Jay Clayton – in his final act – is picking winners and trying to limit US innovation in the crypto industry to BTC and ETH’. 

This rumor was confirmed yesterday evening when the official Twitter account of the SEC officially announced their charges against both Ripple and two executives, including CEO Brad Garlinghouse.

XRP started selling off immediately and fears of exchanges delisting the token due to the security status of the token further increased the panic in the market, leading to a +30% crash overnight. 


The SEC’s charges against Ripple

In the announcement of the charges against Ripple, we read that the SEC thinks that XRP is indeed a security:

‘The complaint alleges that Ripple raised funds, beginning in 2013, through the sale of digital assets known as XRP in an unregistered securities offering to investors in the U.S. and worldwide.‘  

In the complaint itself, it’s arguably even worse: 

‘Ripple engaged in this illegal securities offering from 2013 to the present, even though Ripple received legal advice as early as 2012 that under certain circumstances XRP could be considered an “investment contract” and therefore a security under the federal securities laws. Ripple and Larsen ignored this advice and instead elected to assume the risk of initiating a large-scale distribution of XRP without registration.’


Katherine Wu, a former lawyer with an influential voice in crypto summarized and annotated the case on her website:

‘I personally think that what’s really insane about this complaint is that it actually names the founder and the COO in their individual capacities — thereby naming them all jointly liable along with the company. ‘ 

She thinks that the SEC has a high chance of winning this case as the evidence against Ripple is quite overwhelming:

‘Another thing that is super important to note is that the only charges here are around selling unregistered securities- so no criminal charges, no ‘jail time’— nothing that’s perhaps as DRAMATIC as people wanted this to be.’ 


Overall, it seems that if the SEC does indeed win this case and XRP is indeed a security, the token will get delisted from a lot of exchanges, which would lead to liquidity drying up severely and selling pressure for the foreseeable future. Some exchanges have already stopped XRP trading pairs until they receive clarity and we can expect others to follow as well.

It’s yet another reminder that black swans, ‘unpredictable’ and high impact events, can have a severe impact on the market when you least expect it. 

Some traders will have learned that a stop-loss should always be in place, no matter how confident you are in your position. On the other hand, some investors will learn that it is never wise to put all your eggs in one basket.

Conclusion 

To wrap it all up: the general consensus is that the SEC’s charge does not look good for Ripple or XRP. To make matters worse, the founder and COO are being held jointly liable along with the company. Liable for the perceived failure to consider XRP as an “investment contract” and therefore a security under the federal securities laws. 

The overnight 30% price crash is reflective of the significance of the charges and their implications. What’s more, some analysts believe the SEC has a high chance of winning the case. Now if that does happen, the token will get delisted from a lot of the exchanges, leading to a liquidity dry up and further exacerbating selling pressure for the foreseeable future. 

This is not the first unpredictable event to impact crypto trading and it is not the last. If you take away one thing from all this: learn proper risk management and apply to all trading positions. 


#34 Ki Young Ju (CryptoQuant): Providing Actionable Trade Signals Through On-Chain Analysis

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Ki Young Ju (@ki_young_ju) is a cryptocurrency trader and entrepreneur. He is the founder of on-chain analytics firm CryptoQuant, which provides actionable data to traders. Prior to founding CryptoQuant, Ki served as project manager at the Icon Foundation.

? Things I learned:

  1. For bitcoin to reach massive adoption, allegations of money laundering through bitcoin should decrease significantly.

  2. On-chain analytics is useful to see the money flows between entities and finding nuggets of insights within that data, especially differences between supply and demand.

  3. In the end, exchanges determine the price so it’s very important to keep an eye out for exchange inflows and outflows.

  4. There are tons of early adopters who have lost their keys so the actual circulation supply for bitcoin is a lot less than commonly advertised.

  5. Whenever whales send a lot of coins to exchanges, the order book tends to change as well. Cryptoquant tries to label entities who are responsible for changing the order books significantly.

  6. An entity often owns multiple bitcoin addresses but sometimes only has 1 address for their ETH and other ERC-20 tokens. This allows Cryptoquant to profile their trading styles by watching them trade on DEX’s like Uniswap


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Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision. 


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