Take Ripple as an example: How does the encryption industry deal with regulatory risks?


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Perhaps, a lesson learned from the Ripple incident for exchanges is that if Ripple, the fourth largest in market value, can be sued, then in the market, except for Bitcoin and Ethereum, other cryptocurrencies may be recognized by regulators. As “securities.” Although the industry is currently in a bull market, it still needs to be highly vigilant against potential regulatory risks.


The city of Fayetteville in the United States is not well-known, but this third largest city in Arkansas has come out of two prominent figures, one is former US President Bill Clinton, and the other is a very low-key “great god” in the cryptocurrency industry. Level” programmer Jed McCaleb.

Compared to the well-known Vitalik Buterin and BM in the community, the name Jed McCaleb seems to be rarely mentioned, but in fact, he is a “cryptopunk” with amazing talent in programming.

In 2000, Jed McCaleb, who was only 25 years old, wrote the eDonkey (eDonkey) software in only half a year. The eDonkey is a completely free and open source P2P resource downloading and sharing software that can integrate all computers and servers in the world into A huge resource sharing network. Users can search for a large number of excellent resources on this network, and download the required files from multiple points in the network at the same time to achieve the best download speed, and can also quickly upload and share files to achieve the best upload speed and resource release Efficiency, there is a unique identification between the clients, the server does not have a unique central server, anyone can build and run their own server, and the servers can communicate with each other-you will find that this is not the encryption industry today Is the prototype of the “decentralized network”?

However, Jed McCaleb, known as the “father of eDonkey”, was sued for copyright issues and finally reluctantly shut down the eDonkey service in 2006. This blow was so great that he was dormant for four years. In 2010, a depressed Jed McCaleb accidentally saw the Bitcoin white paper on the BitcoinTalk forum and resonated with “Satoshi Nakamoto” because his original intention of creating eDonkey was to use decentralized technology to solve real-world problems. The Bitcoin white paper undoubtedly opened the door to this new world for him. Soon, Jed McCaleb discovered that there were serious fiat currency trading pain points in the bitcoin field, so it only took half a year to create the most famous cryptocurrency exchange Mt.Gox, providing users with fiat currency trading services from bitcoin to US dollars. Perhaps it was the programmer’s genes. Jed McCaleb changed hands after Mt.Gox was successful, because he felt that “transactions are just a small problem in the crypto industry and hope to challenge more interesting things.” Mt. The story after Gox believes that everyone in the cryptocurrency industry knows it very well, and we don’t need to repeat it.

So, what is the “interesting thing” that Jed McCaleb said? In fact, Jed McCaleb discovered that Bitcoin is increasingly playing the role of a “store of value”, which seems to be a departure from the vision of “a peer-to-peer electronic cash system” expected by Satoshi Nakamoto, so he wrote in 2011 Decided to create a new Internet transaction protocol-Ripple Protocol, which allows people to pay with any legal currency, and created their own digital currency in a similar way to Bitcoin: Ripple (XRP). Ripple wants Ripple It can become a bridge between different legal currency transactions. For example, Americans can directly use XRP to pay in US dollars at European merchants, and these European merchants can directly receive Euros through XRP.

In order to allow Ripple to develop better, Jed McCaleb kindly invited Chris Larsen, a big man in the lending finance industry, to be the co-founder. However, in the development process after Ripple, Jed McCaleb and Chris Larsen often had major differences on many issues. He was not cautious enough in inviting Chris Larsen to join Ripple, and his past experience also made him feel that Chris Larsen is not a person worthy of choosing to work with and talking too much. In December 2013, Jed McCaleb was unanimously voted out due to a huge difference in the management philosophy of Ripple’s management- and this also laid the groundwork for Ripple to be severely hit by supervision in the future.

Chris Larsen claims to be a “radical consumer”, and he runs Ripple for only one purpose-to make money. After taking over Ripple, Chris Larsen’s personal assets have grown rapidly. In January and April 2018, “Forbes” estimated that Chris Larsen’s net worth had reached 59 billion US dollars, placing him among the top five on the global rich list and briefly surpassing Facebook founder Mark Zuckerberg. In 2020, Chris Larsen is on the Forbes list of the top 400 richest Americans, ranking 319th.

Soon, this “abnormal” wealth growth attracted the attention of regulators.


Ripple’s good days are over?

For Ripple, it seems that Christmas 2020 is not going well.

On December 22, the U.S. Securities and Exchange Commission filed a lawsuit in the Federal District Court of Manhattan, New York, accusing Ripple and its two executives, Chris Larsen and CEO Brad Garlinghouse, to pass a lawsuit since it determined that Ripple is a “securities.” The sale of “unregistered digital asset securities” raised more than $1.3 billion in funds. The US Securities and Exchange Commission believes that Ripple violated the federal securities laws when selling Ripple, by distributing billions of Ripple in exchange for non-cash consideration (such as labor and market-making services). In the process, Chris Larsen and Brad Garlinghouse not only organized and promoted Ripple’s Ripple sales, but also conducted individual sales of Ripple, involving an amount of up to $600 million.

The US Securities and Exchange Commission did not prosecute Jed McCaleb because Jed McCaleb “coincidentally” was forced to leave Ripple in 2013.

Stephanie Avakian, the head of the law enforcement department of the US Securities and Exchange Commission, said that the reason for prosecuting Ripple and its two executives is because they must fully disclose long-term protection measures to potential buyers. It is essential for a sound public relations market system, but Ripple has not done so. According to the regulations of the US Securities and Exchange Commission, individuals and crypto companies must register their issued “securities” products with regulatory agencies or apply for exemptions. Not only that, the US Securities and Exchange Commission also emphasized that Brad Garlinghouse and Christian Larsen are important XRP “securities” holders. These two people conducted “personal sales” of up to $600 million in Ripple, but they did not trade in U.S. securities. The committee applied to register for the Ripple sale and offer. At the same time, the two individuals were not exempted from registration, thus violating the registration requirements of the Federal Securities Law.

The US Securities and Exchange Commission has previously stated clearly that the “decentralized” nature of Bitcoin and Ethereum can characterize them as cryptocurrencies, not securities. But on the issue of Ripple, the US Securities and Exchange Commission’s attitude is very different. Judging from this prosecution, the regulators have clearly regarded Ripple as a “centralized” institution, and therefore will regard it as “Securities”.

More importantly, the US Securities and Exchange Commission’s lawsuit against Ripple, Chris Larsen and Brad Garlinghouse has a great impact on investors! Just after this news was released, the price of Ripple dropped rapidly by 17%. At the time of writing this article, Ripple had fallen to $0.3, a drop of 48% in seven days. It can almost be said to be “cut in half”! Ripple, once one of the “Big Three” of cryptocurrencies, has now lost more than $10 billion in market value, and its market position, which has always been ranked third, has also been replaced by the stable currency Tether.


Will Ripple encounter a “delisting tide”?

Seeing Ripple being sued by the U.S. Securities and Exchange Commission and the price of Ripple falling lower and lower, the cryptocurrency exchanges that are at regulatory risk seem to be a little panicked… Then, which cryptocurrency exchange was affected by this storm The biggest one? According to the information disclosed on Ripple’s official website (as shown in the figure below), Binance may be the biggest victim of this turmoil, because (at the time of this writing) up to 40.41% of Ripple coins were processed on this exchange . In addition, the current multinational regulatory agencies have included Binance under the “scope”, forcing it to abandon its operations in the United States and South Korea, which has also led to further negative effects.


On the other hand, in order to avoid regulatory risks, some cryptocurrency exchanges have decided to adopt the simplest and most effective response: delisting Ripple.

On December 23, the day after the media disclosed that the U.S. Securities and Exchange Commission sued Ripple, the Hong Kong-based digital currency trading platform OSL was the first to announce the delisting of Ripple, and the two exchanges CrossTower and Beaxy followed suit. The same decision. Kristin Boggiano, President of CrossTower, explained the reasons for the delisting in a statement. He said that the current market position of Ripple is uncertain, so he decided to temporarily delist and when it will be relaunched, “further notice is required.”

On December 24, Coinbase, a regulated cryptocurrency exchange based in the United States, was considering whether to delist Ripple. It is reasonable for Coinbase to have this idea. After all, the exchange is currently “seeking” the US Securities and Exchange Commission because they hope to seek regulatory approval before IPO listing. If the U.S. Securities and Exchange Commission prevails in this lawsuit, Ripple will be classified as a security, and entities that provide Ripple trading services under the current U.S. legal framework must apply for a stock exchange license and register as a stock exchange. .

On December 25, Bitstamp, one of the largest cryptocurrency trading platforms in Europe, announced that it would suspend Ripple trading and became the first major mainstream exchange that officially did not support Ripple. Specifically, Bitstamp US users will start from January 2021. Ripple trading and deposits will not be possible from the 8th, but withdrawals and non-US users will not be affected. The reason why Bitstamp will be the first to jump out may be because an “unknown wallet” transferred 40 million Ripple coins to it in November this year.

According to Roy Murphy, a member of the Bitcoin Association, disclosed on Twitter that before the U.S. Securities and Exchange Commission sued Ripple, 192 cryptocurrencies went online to trade Ripple, but within 20 hours after the news was exposed, this number was reduced to 138. , Which means that at least 54 exchanges have stopped Ripple trading and deleted Ripple trading pairs. In this context, the crypto community has begun to worry about whether exchanges, especially the large-scale top exchanges in the industry, will cause a wave of “Ripple delisting”?

In this regard, Kucoin Exchange CEO Johnny Lyu holds a more cautious attitude: “As the SEC’s lawsuit against Ripple continues to ferment, the price of XRP has experienced huge fluctuations, especially after its price has fallen sharply. Many users choose to enter the market at this time to buy the bottom. Not only Kucoin, but also the trading volume of XRP on major exchanges have seen a significant increase recently. Our legal team is also closely monitoring the progress of this event. And make a final assessment. Although this incident will have a greater impact on Ripple in the short term, investors need not be overly pessimistic, because in the long run it will speed up Ripple’s compliance process. And this incident has not yet been completed. In conclusion, EOS was also sued by the SEC before, but the two parties finally reached a settlement. Therefore, the attitude of both Ripple and the SEC determines the further direction of the incident. Kucoin will also keep a close watch on the latest development of the incident.”


How does the crypto industry respond to regulatory risks?

There is no doubt that the U.S. Securities and Exchange Commission’s lawsuit against Ripple has sounded the alarm for cryptocurrency exchanges. If the U.S. Securities and Exchange Commission wins, it is likely to destroy the value of Ripple, because regulators want to prevent Ripple from selling more tokens. , Let Ripple, Brad Garlinghouse and Chris Larsen be punished, “spit out” the illegal profits before the judgment and bear civil fines!

In fact, cryptocurrency exchanges cannot pretend to be ignorant and cannot “bury their heads in the sand” regarding the US Securities and Exchange Commission’s view of Ripple as “securities”, because the attitude of the regulators has been very clear. Therefore, cryptocurrency exchanges must pay attention to such regulatory risks, especially those that “require” regulatory agencies, such as Coinbase, which is seeking approval from the U.S. Securities and Exchange Commission for IPO listing, as well as those that have just taken it in Nevada. Huobi to the trust license.

On the other hand, regulatory agencies such as the US Securities and Exchange Commission may not directly and explicitly require cryptocurrency exchanges to delist Ripple, but they may tell investors that there are risk factors for those cryptocurrency exchanges that do not delist Ripple. Because they did not properly explain to investors how to get Ripple and other similar cryptocurrencies online for trading-if the compliance burden is too much, these cryptocurrency exchanges will eventually choose to let Ripple based on “user and regulatory feedback” Currency delisting.

Looking back at Ripple’s prosecution, the US Securities and Exchange Commission seems to be confident in winning the lawsuit. After all, they have won precedents on Telegram and Kik. Although some cryptocurrency exchanges, market makers and funds have begun to delist Ripple, or withdraw from the use of Ripple positions and related transactions, this may not be a simple “black and white problem” for large top exchanges. , Because regulatory risks are likely to make them “in trouble.”

It is not difficult to delist a cryptocurrency, but exchanges must think-both from a business perspective and from a legal perspective. What kind of precedent might this set in the crypto industry? If a cryptocurrency is dropped just because the regulator accuses it of being a security (note: the Federal District Court of Manhattan in New York has not yet issued a judgment on the SEC litigation), what should we do next time? Did the cryptocurrency exchange give the US Securities and Exchange Commission a power? That is: as long as a certain cryptocurrency is accused of being a security, it will be delisted. If this is true, it may not be a good thing for exchange customers.

Generally speaking, when encountering the problem of determining whether a cryptocurrency will be recognized as a “securities”, the transparency and consistency of the project information disclosed to the token holders may also be beneficial to the cryptocurrency founding team and provide Consistent project information disclosure is actually very convenient for open source encryption projects. The easier it is to obtain information disclosed by cryptocurrency projects, the easier it is to prove that tokens are not “securities.” This is because the main purpose of the federal securities laws is to protect investors by promoting full disclosure of information required for investment decisions.

As analyzed by Gabriel Shapiro, an attorney at the Belcher, Smolen & Van Loo LLP law firm, top cryptocurrency exchanges such as Huobi, Binance, and Kubi can actually be For the analysis of securities, we will not delist Ripple for the time being, and hope that the court will make a judgment that Ripple is not a security. Alternatively, cryptocurrency exchanges can also take “remedial” measures, such as restricting Americans from conducting Ripple wallet transactions, and then considering whether to delist (or not delist) based on the actual situation-of course, these situations may have been cryptocurrency transactions Covered by the terms of service. (Carbon chain value note: At the time of writing, Coinbase plans to suspend XRP trading on January 20, Beijing time.)


to sum up

It is an established fact that the US Securities and Exchange Commission sued Ripple. If the court decides that Ripple is a security, cryptocurrency exchanges may have to face the risk of token delisting, because the listing of Ripple means that cryptocurrency exchanges must Obtaining “stock exchange” qualifications-for most exchanges in the cryptocurrency industry, this requirement seems difficult to meet. Of course, Ripple may also reach a settlement with the US Securities and Exchange Commission, but it may pay a large sum of money.

Perhaps, a lesson learned from the Ripple incident for exchanges is that if Ripple, the fourth largest in market value, can be sued, then in the market, except for Bitcoin and Ethereum, other cryptocurrencies may be recognized by regulators. As “securities.” Although the industry is currently in a bull market, it still needs to be highly vigilant against potential regulatory risks.


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