In this show, recorded without the participation of Ripple (explanation included in the show), Ryan Selkis, CEO and founder of Messari and Matt Leising, Bloomberg reporter, discuss Ripple’s XRP, the third-largest coin by market cap. We go over whether or not it plays an essential role in Ripple’s products, why banks are unlikely to adopt it, and why it’s centralized. We also discuss whether or not it’s an unregistered security (although the class-action lawsuit alleging XRP is an unregistered security being sold in a “never-ending ICO” came out after we recorded — link below). We also discuss recent attempts by XRP to get it listed on top crypto exchanges, and how, as Selkis puts it, there’s a fine line between some of its business activity and bribes. We also ponder the question: If XRP is meant for banks and financial institutions, why should everyday people own XRP?

Ryan Selkis:

Matt Leising:

Full text of class-action lawsuit against Ripple:

Bloomberg article on lawsuit:

Matt’s article on why big banks have no interest in using XRP:

How Ripple tried to buy its way onto crypto exchanges:

Ryan’s post on XRP:

Izabella Kaminska’s article on XRP:

CoinDesk article on XRP:

XRP chat post by David Schwartz:

Another post by David Schwartz on how XRP is not required:

Bitmex post on XRP:

The dueling lawsuits between Ripple and R3 over XRP:

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Laura Shin: 00:01:20
Today’s topic is Ripple’s XRP. Here to discuss the third largest crypto asset by market cap are Ryan Selkis, founder and CEO of Messari and Matt Leising, Bloomberg reporter. Welcome Ryan and Matt.

Laura Shin: 00:01:34
This may be one of my most anticipated episodes because of an incident that happened on Twitter before recording. I want to give listeners the backstory so they can understand how this episode came to be. Back in January, I tweeted a few articles critical of XRP. Afterward, Ripple’s CEO, Brad Garlinghouse, emailed me, unhappy about my tweets. I said to him, “Let’s talk it out on my podcast.” He said his PR person would give me an answer, which turned out to be no. The day after, a friend of mine emailed me and said, “Any chance you want Brad Garlinghouse on a podcast?” They asked me to ask you dot, dot, dot smiley face. I said, “What?” And explained that the previous day they had declined me. She wrote, “This is not what I heard at all. Perhaps his team messed up as he really wanted to be on your podcast last I checked. I’m tracking down the Info for you back to you soon.” I responded, “I think they are unhappy that I tweeted some choice quotes from articles critical of XRP, but if he really believes in XRP, then he shouldn’t be scared of some tough questions by me. He should be able to handle the answers easily if it really has the potential, he seems to think it does.” She wrote back, “Agreed, 100%!!!” I never heard back. Over the past few months. I tagged Brad in some tweet saying, “I wanted him on my show and got zero response. I finally decided I would do a show anyway and scheduled two non Ripple guests. I chose Ryan Selkis because he’s working on token standards and has written about XRP. And Matt, because he’s done some writing and reporting about XRP and interviewed Brad. Since the show was about XRP, I emailed ripple beforehand to get their answers to some questions so they could have a voice in the show. They wrote back proposing instead two of their executives, Chief Cryptographer, David Schwartz and Chief Marketing Officer, Cory Johnson. When I realized they were willing to participate, I requested Brad. They said, “Brad had an insane schedule.” However, I would like to note here that Brad has appeared on at least one podcast with a fraction of my listenership. Because the issues I wanted to discuss around XRP aren’t really about the technology and also because I don’t let anyone dictate who comes on my show.

Laura Shin: 00:03:37
I decided I would meet people halfway and take Cory, the Chief Marketing Officer with one of my original guests, Ryan. Ripple kept insisting on their two guests, but no one decides who goes on my show but me. Friends or sources I’m friendly with have found out the hard way that I will bite the head off of anyone who tries to dictate or even influence who I have on the show. I told Ripple that if I couldn’t have Brad, I would do a show with one of their execs. Cory, the CMO and one of my original guests. They would not agree and so late on a Monday afternoon they said they weren’t going to participate. The next morning, the PR woman emails me that they’ve changed their minds and we’ll let Cory come on the show. We book everything. I’m happy. I was traveling that day and was not on Twitter for a few hours. When I logged in later I saw that I had 99 plus notifications because ripples, chief cryptographer David Schwartz, who has 98,000 twitter followers had tweeted at me, quote, “Laura Shin heard you weren’t interested in having me join Cory on your upcoming podcast about XRP. Bummed because I think your audience is smart enough to follow along and I could add to the conversation in a meaningful way. Are you sure you can’t make room for one more?” First of all, when I started podcasting, I learned two guests max is best. Second, if Ripple is going to participate, I want the CEO. I always get the CEO. I got the CEO of Shapeshift, Polychain, Xapo, BitGo, MyCrypto, Chain, BitPesa, 0x, BTCC and others. I only make exceptions for cases like IBM or Nasdaq where my guests were the more blockchain focused than the CEOs. If Ripple was was not going to give me my top choice, I was not going to let them dictate exactly who is going to be on the show. Plus in this case, it should have been a layup for them since they already had a bunch of questions in advance.

So I decided I would leverage this tweet from David to get what I have been asking for since January, Brad. I told the PR woman that I was taking the option of anyone but Brad off the table. So their two choices were either Brad or no one from Ripple. I thought, “There’s no way they’re going to prefer a podcast if two non Ripple people discussing XRP over a podcast featuring Brad talking about XRP.” But, the next day they refused. I asked the Ripple comms person, “You would rather have two non Ripple people talk about XRP on my podcast than your own CEO. He wrote back, “I prefer to have two XRP experts in C level, executives from Ripple who are moving mountains to make themselves available to you. Come on your podcast to answer your questions.” I wrote, “I told you the two options were Brad or two non Ripple people and you are choosing two non Ripple people?” He did not respond. Then I asked him, “And you were not going to send me the answers to the questions I sent previously?” No response. So here we are folks. I gave them the option of Brad or two non Ripple people discussing XRP and they chose the latter. And, they didn’t even give me the answers to my written questions. For the record, I’ve put Ripple on the Forbes Fintech 50 list for three years straight. They were the only company I cover to send me a holiday card last year, just weeks before Brad refused to come on my show. They also invited me to interview Brad at their company offsite last fall, which I couldn’t make. And now here we are from invitations and holiday cards to the cold shoulder.

Now that you have the backstory, let’s dive into the discussion with Ryan and Matt. Ryan, why don’t you start with a brief description of what you do and how you came to write a long article titled “ICU XRP?”

Ryan Selkis: 00:07:04
Well, that is quite an introduction. You know, I’ve been in the industry for about five years, and have worn a few different hats. I was on the founding team of digital currency group, which as a disclaimer, was an investor, is an investor in Ripple Inc. I ran Coindesk for 18 months. Lead the restructuring the company before leaving last July and now I am working on a project called Messari, which is building an open source data library. It should serve as the industry’s Edgar like database. And we’re really working on disclosures and compliance frameworks for token issures. So that’s, you can easily compare apples to apples and that’s anyone in the industry that’s purchasing these tokens, has access to the same information that the insiders have. Ripple has been in some ways an easy target to kind of pick on as an example, just because of their size and because of the outsized influence, that Ripple Inc. has over XRP in that token treasury. And if you go back to my January posts, I started to think just top down in terms of large projects that have control over their treasuries and an outsized control over the code base that their networks are actually operating on. And the goal was not necessarily to pick on them, but to highlight some of the things that they’re doing well in disclosures and some of the areas that are a little bit pushing the envelope in terms of marketing language, particularly given that XRP is held by a pretty large mass of retail investors. And in the initial article that I wrote, I highlighted a few things. One, RippleNet and the messaging systems that Ripple has created for enterprises that are thinking about cross border payments, that doesn’t require XRP. And then the XRP currency which can be used as an addition to RippleNet in order to boost liquidity for less liquid currency pairs and ultimately serve as they say, “As a potential bridge currency” for institutions that are facilitating payments in corridors that have less liquidity than something like the US dollar and Euro. And what you found from Ripple’s marketing language quite consistently was there was a marginal benefits to using XRP in addition to RippleNet versus just using other Fiat currencies. And at the same time, you heard about a lot of bank partnerships where the insinuation was crawl, walk, run. I think is one of the lines of Brad Garlinghouse uses. Essentially suggesting that if banks are trialing and piloting this software, they would ultimately use XRP in the future. Once they saw the additional benefits. And that’s where I think the line starts to become a little bit blurry between how XRP is marketed and positioned. And who actually buys and owns XRP. It’s not the institutions at this point. It is very much a retail driven phenomenon in terms of the price action and it is still largely controlled and held by a very, very small group of insiders and otherwise retail speculators that are buying it on exchanges, particularly in Korea and Japan and other areas where Ripple’s made in rows with large institutions like SBI, which is a shareholder of Ripple Inc. And has said and tweeted some favorable things about the currency for good reason because they have a vested interest in the company.

Ryan Selkis: 00:10:48
So I’m sure we’re going to go into, you know quite a bit more. But I do want to say that it’s actually not all bad. And, and if you read my initial critique of the company, I said as much that in many ways you can disagree with some of the tactics. You can quibble over whether they’re over-marketing the currency, but out of the token issuers out there. I believe that their quarterly market reports are among the most helpful and useful things that any token issuer puts out with respect to transparency over how they’re managing their treasury tokens. So there’s, I think, good and bad and I’m sure we’re going to parse how much of what Ripple does and much of its behavior and we can only conjecture about some of its strategic plans. As you noted in the intro in large part because it’s very difficult to secure an interview and ask and answer some of these tough questions. But I think, I and I’m sure Matt and you may end up leaving this podcast with more questions than answers. My goal is to ask some of the questions with the hope that this gets enough traction that a Ripple will respond and maybe even ultimately do a follow up with you, Laura.

Laura Shin: 00:12:01
Well, you’re giving a preview of how I was going to end this interview, but let’s get through all the other questions first. So, Matt, tell us what you do and what your history has been with writing or reporting on Ripple or XRP?

Matt Leising: 00:12:12
Sure. Yeah, I agree quite an intro. Lots of stuff to unpack here. I’ve covered market structure for Bloomberg News for about 13 years. I was first in derivatives and fixed income and futures markets, but in about early 2015, I understood blockchain finally, I had sort of dismissed Bitcoin to my chagrin, but when I got blockchain I understood that it would probably change the way that I write about these other markets, the traditional financial markets like the bond market or futures. And so I started reporting on it. It’s really aware of the intersection between market structure, Wall Street and Blockchain, and the future sort of dynamic that all represents. As your listeners know, it’s been a wild three years since then and I don’t remember exactly how I started writing about Ripple, but I do remember visiting them in San Francisco. Brad was not the CEO then it was Chris at that point. And I remember my first impression was, “Wow, here is a blockchain, app or service that is actually working,” because so much of what I was writing about and reporting on were ideas and sort of proof of concept stages. And I felt like, “Oh, look, Ripple is actually moving, helping to move currencies around the world.” But then at some point I think I started to dig a little deeper and started asking just… it started with myself. I’m like, “Well, who? Who are the banks”… the announcements that come out sort of periodically about, there’s new banks joining the Ripple network and, we now have more than 100 banks who are our customers. And I started looking back and realize that almost in every single one of these statements it was that they were going to test Ripple. They were entering a pilot program to see about XRP. And so I just started wanting to answer the question, “Is there anything in the real world that’s being done here?” And so that led me to one of the bigger stories I did on this was with my colleague at Robinson and we used our contacts at the major banks around the world who are basically the market for cross border payments. And we went to them and we’re able to talk to seven executives at these different banks who would only talk to us on background. So I can’t tell you who they were or the name of the bank, but you know, these are large global institutions that everyone would know the names of and it turned out that none of them were willing to use XRP and so we just sort of built on that and kind of came to… we just wanted to sort of do what a reporter should do and sort of just check out what people are saying about the claims the companies make. And you don’t know if it’s going to be positive or negative when you start, but it’s just the journey you take as a reporter is to try to be a check there on whether it’s a politician or a company or, anybody else who is in a position of power. So that’s what I would say when my reporting got real about Ripple was sometime late last year.

Laura Shin: 00:15:40
And what were the reasons they were citing for not wanting to use XRP?

Matt Leising: 00:15:44
So first of all, it’s a multi-trillion dollar business correspondent banking and cross border payments. So it’s a huge revenue stream for banks. They’ve spent millions of dollars and hired hundreds of thousands of people around the world to staff these trading desks, in far flung regions of the world, like in Thailand or down in Columbia. And so that, their customers who are global corporations, who have supply chains that stretch over continents and need to send money all around the world. Their customers rely on the banks to be able to move money from New York to Bogota, to Thailand and everywhere else in the world, so there’s a huge vested interest in the banks already have in the sort of resources they’ve poured into it and the money they make from it on a revenue sense. Then there’s also the idea that XRP is rather volatile and is new and it does face regulatory risk. No one is going to come out and say the dollar is an invalid means of currency or Fiat, but there is a risk that XRP could face regulatory scrutiny if that was embedded in your trans national sort of cross border payment system, that would gum up the works that. Then there’s also the companies themselves, like let’s say it’s Toyota or John Deer or Harley Davidson, are they going to be okay that XRP, this digital currency that many of them might not know much about is now in the middle of their payment system and their supply chain. So these were the reasons, the main ones that we heard over and over again. And it was striking how consistent the answers were from the different executives at these banks. So we felt very confident that this was sort of the state of play at this point about whether XRP was working its way into the banking system.

Laura Shin: 00:17:47
For the rest of the podcast, I want to just make a few distinctions. Let’s just start with the basic one, to make things clear going forward, we’ll call the company Ripple and the token is XRP. And let’s also now differentiate kind of like what Ripple does and how it’s doing versus how XRP is doing. I actually mentioned earlier that I had put Ripple on the Forbes Fintech 50 list for three years in a row. My take on what I know of the company is that I personally think they may be the leading enterprise blockchain company, or at least one of the leading ones. From a Fintech perspective, they made such huge inroads. They have real traction with, like their website says 100 plus customers and 75 plus commercial deployments. The investors, I believe, gave it a valuation of $410 million dollars last fall, which I think if you contrast that with the $34 billion market cap of XRP shows some difference there. That’s another way to differentiate between them and I just wanted to talk a little bit about, as I mentioned what Ripple does versus what XRP does and one way to think about it is a quote from an article that Isabella Kaminska of the Financial Times wrote last fall. She said, “XRP is entirely centrally controlled, operating more like an ETF unit than anything else. Since the issuer has the capacity to release or absorb, premined tokens in accordance with their valuation agenda. More egregiously though the token plays little part in Ripple’s central business case. For the most part it’s just a cute add-on.” Let’s unpack those criticisms and start with a question of whether or not XRP is really necessary for Ripple’s products or whether it is indeed a cute add-on. Do either of you have an opinion on that?

Ryan Selkis: 00:19:35
Well, I alluded to this a little bit and in my opening statement, there was a graphic, I’m not going to recall exactly which set of marketing materials this was located in, but there was a graphic that basically showed the cost of cross border payments and it was something like 20 basis points for just using the current system and correspondent banks. They noted there was a six basis point improvement from using Ripple as just the messaging platform without XRP and that equates to about a 33% reduction in costs. The marginal benefit of adding Ripple, the messaging system with XRP was only an additional two basis points and again, that’s from the company’s own marketing materials. So you could argue that that’s wildly optimistic and doesn’t really take into account the volatility of the asset. And even if they assume that XRP ends up getting much more liquid over time, that’s gonna take quite a while and it’s still not a slam dunk. That’s using XRP as this bridge currency actually creates real cost savings. What is pretty interesting, and I know Matt picked up on this a little bit in one of his more recent articles, is this is a company that essentially has a negative customer acquisition cost and that’s just astounding for an enterprise software company, but the reason I say that is they have rolled out programs where they offer 300% rebate on integration fees using XRP. And this is public, right? They outlined this in their October markets report, they have seeded a $300 million ecosystem development funds or a Ripple net accelerator. They, as Matt can speak a little bit more to seem to have agreements behind closed doors or are at least suggesting that they will lend out XRP to market makers and other strategic partners basically at zero cost. And the return of that capital could either come and dollars or XRP, which is basically a free call option on the currency. And you’re talking about real money for their end customers their end targets with this currency. For them it’s funny money, right? I mean, this XRP does not become valuable, does not become a bridge currency. It doesn’t come anywhere close to growing into his current valuation unless it’s properly distributed across the globe. And so there are real benefits to making inroads and distributing this even if it’s for free to institutions, provided that those institutions signed some type of agreement where, they’re gonna hold XRP for some period of time, whether it’s a year, five years, whatever, we don’t really know, and that’s something that Ripple the company will not disclose because they’ll site confidentiality agreements. But you can see just at a high level why some of their targets might also be a little bit cagey about participating in that because there’s a very fine line between that activity and a bribe. Right? Those incentives get that very murky very quickly. And I would imagine given that retail investors are ultimately going to trade on those types of announcements and that type of news institutions would be very wary of attaching their name to that anytime soon. That said, it is real money, right? You’re in some cases maybe talking about nine figures worth of potential revenue or more for some of these enterprises. So it’s conceivable that you’ll get some of these institutions to bite.

Laura Shin: 00:23:22
And Matt, I know you have probably a little bit to add on that because of this story that Bloomberg reported about Ripple trying to get XRP listed on Gemini and Coinbase the two crypto exchanges. Can you tell us what happened there?

Matt Leising: 00:23:36 Yeah, sure. That was a story I wrote with my colleagues, Annie Massa and Lily Katz. We basically were able to report that Ripple had gone to the two biggest, maybe the biggest or best known US exchanges, Coinbase and Gemini and offer them different kind of. So they offered Gemini a million dollars to list XRP and to Coinbase they said, “We would happily give you a loan of $100 million in XRP. So it’s $100 million worth of XRP for you to list it on your exchange. And when you pay it back to us, you know, you can pay it back either as $100,000,000 or $100,000,000 worth of XRP. So one of the things that’s this consistently driven up the price of XRP over the last year or so is rumors that it’s about to be listed on Coinbase. Earlier this year, I believe it shot up something like 20% and that was a rumor just the Coinbase was going to list. So, I think this is somewhat prevalent in the digital exchange world, in different parts of the world that for an ICO that somebody is trying to promote and that you want somewhere to have it trade so that the values can go up. So, we’ve seen reports between $1 million and $5 million for exchanges like in South Korea or other parts of the world to list new ICO tokens. The difference here is that this is XRP and it’s been around, I think since 2014 or maybe even earlier it. And its got a valuation already. It’s the third largest by market cap in the world. So, we just found it rather amazing that Ripple was going through these lengths to get it listed on the US exchanges.

Laura Shin: 00:25:39 And I wanted to go back because I think that sort of goes to Ryan’s point about how some of this is a fine line between what they are offering and, a bribe. And I also wanted to ask Ryan something. You mentioned rebates, but I didn’t know what that meant. Can you explain that?

Ryan Selkis: 00:25:59
Sure. I believe this might’ve been from the Q3 markets report that’s available on Ripple’s site, but essentially what they had offered as an incentive scheme to encourage more enterprise experimentation with XRP was up to a 300% rebate for any fees that the institution would incur in actually implementing the system, right? So that goes back to the negative customer acquisition costs. In some ways in an enterprise sales cycle like this, you’d spend quite a bit of time and resources and money on this implementation, but for ripple, so much of what they’re covering, in terms of costs is going to get covered in XRP, which is just this kind of company created currency, it doesn’t actually come off their real balance sheet, and get paid out in dollars. So that is something that they have repeatedly referred to as a strategic weapon to encourage adoption. Certainly something that, a legacy institution like Swift doesn’t have at its disposal or any other Fintech incumbent. And it generally amounts to, hey, if you’re an early adopter in XRP and we can really brute force this and create a snowball effect where we get a handful of institutions to experiments and then that leads to more institutions, you know, experimenting with XRP, then you can kind of fake it until you make it. And, and actually bootstrap this as a true global reserve. At least that’s the pitch, right? I think what is, very much at odds with that pitch is that no institutions, to my knowledge have experimented with this in any meaningful way. And again, what we don’t get from the markets report is a breakdown of who is trading XRP and I hope that as Ripple adds other enterprise customers that are using XRP in particular, they’ll be able to report on a consolidated basis the amount of XRP that’s being used in these institutional transactions versus the amount of XRP that’s just being traded on retail focused, speculative exchanges.

Laura Shin: 00:28:12
And to go back to the question I asked earlier about Isabella Kaminska’s article where she called XRP “a cute add on”. I did find a post that the Ripple chief cryptographer David Schwartz had put on the XRP chat, and I’ll link to this in the show notes he wrote, “There is a business that Ripple has providing transaction processing software to banks. It can work without XRP and without any blockchain tech.” And so, given that what he said there, and also what you guys have noted in your comments, what do you sense is the adoption by financial institutions, which ones are using XRP and how much adoption does it really have?

Ryan Selkis: 00:28:56
Well Laura, I do think it’s worth mentioning in defense of that quote that is the first line of a much longer explanation and David goes on to explain how XRP could get incorporated into that system and it’s actually fairly cogent argument. And it’s something that I wrote in my initial post ICU XRP. So, as an introductory line and something that supports what Isabella had written that certainly seems to jive, but there’s quite a bit more context there about how exactly XRP can penetrate some of the corridors. Like, the euro and Indian currency. I forget what, what, what’s the Indian currency? I’m blanking

Laura Shin: 00:28:56
The Rupee

Ryan Selkis: 00:29:41
The Rupee, right. So how ultimately as you get more currency pairs like that, more institutions will have an incentive to not just hold dollars as part of the treasury management, but also XRP, for the smaller corridors. So I’d encourage, hopefully you can link to that full thread because it was probably the best one that I had seen that the company to communicate it and it’s from a while back.

Laura Shin: 00:30:03
And what do you make of that argument because you wrote a little bit more about that as well?

Ryan Selkis: 00:30:09
Yeah, I mean, it’s a plausible argument, but in practice, what that essentially would amount to is all of the correspondent banks just rolling over and saying you can take our business because, this winning scenario that Ripple has predicted or laid out as a proposal, essentially amounts to creating a non sovereign private central bank and putting themselves in a scenario where all of the other correspondent banks just adopt XRP and everybody gets along. And, they just forget about the many, many billions of dollars that they essentially siphoned off of the big banks who are essentially government’s own businesses at this point. It seems very well articulated, as David had communicated it, but highly implausible to actually pull off in practice. And if this were a token or a currency that was trading at $100 million or even a billion dollars, you might be able to wrap your head around that from a risk reward standpoint. And, it might make a little bit more sense, but we are many, many, many multiples above that. And I don’t think the company has done anything to tamp down that hysteria.

Matt Leising: 00:31:26
And let’s not forget, I’ll just say it again. For the most part, banks are not sending money to other banks. They’re doing this for their customers who are global corporations, like I said before, so those corporations have boards of directors, some of them might be, you know, entirely conservative and would never want to associate with one of these new digital currencies. So even if you got the banks to roll over, like Ryan said, which is a huge “If,” You would then have to get them to convince their corporate clients like Caterpillar or Audi or whoever you want to think of to also buy into this. And, there’s going to be costs, if you’re gonna inject XRP into the middle here. You can’t have the volatility that it has currently, and that’s going to be a cost. If Ryan, if those figures are right, like two basis points, if you’re hedging your XRP exposure, you’re going to be blowing out two basis points, before you even sign the first document, but by an order of magnitude.

Laura Shin: 00:32:30
Next we’re going to discuss whether or not XRP is even legal, but first I’d like to take a quick break to tell you about our fabulous sponsors.

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Laura Shin: 00:35:03
I’m speaking with Ryan Selkis of Messari and Matt Leising of Bloomberg. Let’s dive into this question of whether or not XRP is centralized. How do you guys measure that? You’ve kind of hinted at that in different ways, but is it who controls the nodes or the monetary supply or who manages the GitHub? I want to read this one quote I got from a {??} article which says, “An XRP token is absolutely nothing like Bitcoin. Instead of needing to trust only the mathematics of proof of work, you can only trust the XRP token by setting up trust lines that almost inevitably end at Ripple. And while in theory, anyone can set up such a server. If Ripple does not include your server in their trust lines, then you’re not part of the consensus making process.” So what do you think? Do you think XRP is centralized?

Matt Leising: 00:35:52
I think you can use Ripple’s own words they have on their website about their efforts to decentralize and the conclusion says, “Ripple remains committed to decentralizing the XRP ledger and divesting itself of operational control.” At that point in October, there were 25 validater nodes and five of them were managed and owned by Ripple. So what they’re trying to do is as time goes on here and into the future, they’re trying to bring on a third party validators and they say for every two that they bring on, they’re going to get rid of one of the ones that the company itself controls. I think there’s been some cases in the history of Ripple that should scare anybody who is thinking that it’s a Bitcoin like process where the censorship is a strong component. They had a dispute with one of the family members of Jed McCaleb who was one of the original founders. The family member sold about a million dollars worth of XRP to the company in 2015. And then Ripple froze the funds and tried to get them. They froze it at the node level and tried to get them the million dollars they had paid, returned, that doesn’t sound decentralized to me.

Laura Shin: 00:37:12
I also checked the GitHub and I noticed that for the top 18 contributors, all of them except one either work or had worked or consulted for Ripple. And the 18th person who had only contributed 0.02% of the commits of the top 18 contributors, I think he doesn’t work at Ripple. So that was one other data point I wanted to put in there. Ryan what do you think, how would you measure this?

Ryan Selkis: 00:37:41
Jackson Palmer, the Dogecoin creator actually published an excellent site a little while back. It’s called, and it kind of lays out all of the top 20 or so projects by whether they have miners and and independent nodes that are incentivized to process transactions. What number of entities control the majority of voting and mining power. What is the percent of the money supply held by the top hundred accounts and a couple of other metrics and out of the top currencies, Ripple was almost without question the most centralized in the whole ecosystem. So obviously, Ripple controls the majority of validation today through their own unique node list. According to this research from Jackson, it’s unconfirmed, but, I tend to think it was well sourced, at least over 80% of XRP is held by the top 100 accounts. That actually could be a little bit more because others at the company may have their own independent accounts. But you could still argue that that’s controlled by Ripple. And then, you know, obviously as you just pointed out, Laura, they contributed almost all of the developments to RippleNet and their other systems. So I think it is very centralized. Now having said that, I think, where we are in the industry, particularly with the kind of broader ICO ecosystem, pretty much all of these projects are starting centralized and then gradually decentralizing or at least that’s the plan and how that ultimately plays out in practice remains to be seen. In that case, I don’t think Ripple is unique in that it’s centralized early and will hopefully decentralized over time. But what is unique is just the sheer scale and size of their treasury, which if you look at coin market cap it can be a little bit misleading. But onchainfx for instance, has the estimate for the fully diluted token supply. And by that measure Ripple currently is about a $90 billion market cap versus the 34 that’s currently reported. If you factor in their entire treasury, which you know, for context puts them about, you know, just about 15-20% behind Ethereum in terms of market value. So it’s just a stat. The numbers are staggering, right? And that’s why you kind of laugh at the marks that the VCs are trying to put on their books to incorporate, to capture the value of the stakes that they have in the value in the company because you could make the argument that some of these early investors and Ripple or sitting on pro rata rights to, you know, a $90 billion currency that could be measured in the billions versus $410 million for the entire company, which is the mark that you had referenced.

Matt Leising: 00:40:34
I think there’s another one interesting thing. Bitmex did a good report on Ripple and XRP back in January and it’s a must read. Hopefully you can link to that too, Laura. So for part of their research, they downloaded the node software and they noted that all the five keys that they were assigned were downloaded from Ripple. So Ripple is basically in control of this consensus system. And, the Bitmex researchers also noted that they had an expiration so that they were going to expire in a few weeks, meaning that they would have to go back to the Ripple server to get the keys again. So again, that doesn’t strike me as a decentralized platform.

Laura Shin: 00:41:30
And some other stats I want to throw out there are that currently, according to their website, the percentage of XRP is controlled by ripple is at 60.84% with 54% of all XRP being held in escrow. And back when I reported on the net worths of Chris Larson, the former CEO and the current CEO, Brad Garlinghouse, Chris has, at least at that time, he had 5.19 billion XRP in his personal holdings and a 17% stake in the company. And the current CEO had at that time, nine figures in US dollars, back in December and he has 6.3% of Ripple the company. One other thing I wanted to ask you about is, as far as I understand this seems like a permissioned system and are tokens even necessary in permission systems? I was trying to think of other private blockchains that use tokens because to my mind, a permissionless system needs a token to incentivize behaviors and they don’t have middle men, but a permissioned system doesn’t need a token. Since the actors trust each other. And in this case where Ripple’s system basically keeps the middlemen in place and doesn’t replace them. I really don’t understand what purpose the token has? Do you guys have thoughts on that?

Ryan Selkis: 00:42:52
Yeah. My short answer is Ripple is a unique beast because they’re the only company that I know of that is truly trying to build a private central bank. That’s really the only way that you can describe what they’re doing and how they’re issuing XRP to their partners and thinking about driving liquidity and this new currency. And, if you think about it from a regulator standpoint, there is a bit to like about that because it is centralized and you can very easily monitor transactions and you can more easily do AML and KYC on anybody that uses XRP the currency through their regulated gateways, but I don’t know of any other project that’s quite taking this approach where they’re very aggressively saying this is a money like currency, not a token. It is a true digital currency and we’re going to centrally manage it and distribute it over time. I don’t know that this becomes decentralized just because they distribute a certain percentage of the tokens. This is still going to be an issuer and a distributor of private money, on a global scale if they get it right.

Matt Leising: 00:43:58
Ryan, I’m looking at that. Arewedecentralizedyet website as well. And I noticed they have a number of public nodes and for Ripple, they have a 596. Now, how do you square that with the 25 validater nodes that the company itself says is out there. Does that mean there’s 596 minus 25 that don’t actually do anything in the system to kind of reach consensus?

Ryan Selkis: 00:44:23
I didn’t source that data so I’m not quite sure, but I believe that Jackson had a footnoted somewhere.

Matt Leising: 00:44:29
I believe if you click on it, it takes you right to the Ripple website and that’s where they show you where the nodes are working around the world.

Ryan Selkis: 00:44:38
I wouldn’t be able to… I don’t know the difference.

Laura Shin: 00:44:40
This would be a question for Ripple.

Ryan Selkis: 00:44:42
Yeah, it’d be great to have someone from Ripple on.

Laura Shin: 00:44:42
Yes, like the CEO.

Matt Leising: 00:44:49
I would say. I mean I think based on my reporting and my colleague, Ed’s reporting, I think Ripple has kind of gone back and forth on what XRP is and whether they need it or not over the years. I think there have been times when it was central to what they were doing. And then there have been times when they developed RippleNet which is just payment or it’s a messaging system that will compete with Swift that doesn’t use XRP at all. And then I think that last year they kind of came back around to XRP. One thing I think we should talk about a little bit is the lawsuit between Ripple and R3. It involves, an option for up to 5 billion XRP that was granted to R3. The strike price or the exercise price was, it was less than a cent. It was 0.0085 cents. And that was done in September of 2016. What I found interesting, I went back and looked at the price of XRP at that point. And, and when they entered into this option, a XRP was a closed at 0.00796 cent. So very, very close to the exercise price. Now, what they were doing here, in my opinion, is in the lawsuit, says this as well, that it was R3’s belief that Ripple was trying to get the banks that make up R3’s network to adopt it. And they were saying, “Here’s XRP, why don’t you take it and work with us.” I think they were hoping that news that the banks that made up the R3 network were now, you know, taking on XRP and testing it and trying to use it in their systems would increase the value. What I find astonishing here is that Ripple granted the option through September of 2019. So I don’t know…. Usually an option, you know, in this kind of situation would have some sort of incentive effect. Like, let’s work together, let’s see 50% gain here and then this option is going to come into the money. They basically granted the option in the money. It was very slightly out and then the term that they put on it was astonishing to me because as we know, I think at its high XRP went up to like $3.20. So your listeners know, the reason there’s this lawsuit is because Ripple of just sort of unilaterally said that the option was canceled and according to the option contract, there wasn’t a unilateral right, to cancel the option. But that’s of course what’s going on in the court battle, which is still underway. So I just, I feel like Brian said it was funny money and I feel like Ripple has treated XRP like funny money at certain points in its history and not as funny money in other points in its history. One of the things, so I’ll just quickly end with Brad. One of the interviews I did get with him on the record, he told us that XRP is absolutely essential to their business.

Ryan Selkis: 00:48:06
Well, of course it’s essential. I mean it’s got to be the lion’s share of revenue right now. They made $170 million in revenue in Q1 of this year from sales of XRP. And I would be shocked if that were anything less than 80% of the company’s revenue. Now, they won’t disclose that because it’s a private company. But I think it’s important to understand that. And, I would love to see them actually disclose how important XRP sales are to the company’s bottom line because I think you’ll find that even if they had wavered and gone back and forth in 2015, 2016 and in some cases essentially writing off XRP as part of their business. Now that token sales came back in vogue and they recognized that there was this huge honeypot that they could tap, not just for enterprise incentives as we talked about earlier, but straight to the bottom line of their company. The tuna certainly has changed. And, I think you see that bear out with the R3 agreement, right? That was back in late 2016, right as they were starting to get XRP markets going and part of the forefront. That’s right around the time that they had hired Miguel Vias who heads up XRP markets now and was tasked really with “Building liquidity in XRP”. And another way to say building liquidity is increasing the market cap by increasing adoption. And retail speculation, so follow the incentives and you normally get to some pretty clear cut answers.

Laura Shin: 00:49:39
Yeah. And just out of curiosity, Matt, when did he say that to you? That it was central to their business because I imagine it was probably more in the 2017 era than like 2015.

Matt Leising: 00:49:49
Yes. This was for the December story that we ran.

Laura Shin: 00:49:53 Okay. Yeah, of course at the height of everything. So we have so much left to cover in a short time, but just the two main questions I want to get to the first one is one thing I’ve always wondered is why should every day people own XRP if it’s meant to be used by banks?

Ryan Selkis: 00:50:09
I mean this was the genesis of my initial post, Laura. The reason that a retail investor would buy XRP is in anticipation that they’re front running the stodgy old institutions that are just slower to adopt. And that is something that Ripple the company and in their marketing they’ve done absolutely nothing to shy away from. And in fact, they’ve encouraged it and they’ve encouraged the insinuation that if you buy XRP it could be a very good investment because all of these banks, by the way, are going to rush in and start to use it as a bridge currency. And that means that the price is gonna go up. That means the market cap is gonna inflate into the trillions and you’ll end up with a very good investment as a retail buyer. They haven’t explicitly said that, but, you can review a lot of their language, a lot of the interviews that have been done by executives and that’s the goal, right? And, that’s why I use the term, Fake it till you make it. Right now in a bull market, that seems to be paying off and working out. I think that the biggest risks of the company is if we just have a bear market for cryptocurrencies in general and all assets start crashing across the board, the plaintiff’s bar. And, the attorneys that are going to have their teeth out in terms of class action suits against all of the tokens and in particular Ripple, just given the sheer size of the currency and scope. I think it would be enormous. So buyer beware. I guess.

Matt Leising: 00:51:40
I would agree with what Ryan just said, 100%. One thing, Brad, I think when they make these announcements about new partnerships and one thing we haven’t talked about is, the remittance business or companies like Western Union or Moneygram who you use to send money around the world. That’s obviously separate from the banking system. So when Ripple got to an agreement with Moneygram for them, Brad tweeted out that Moneygram agrees to use XRP in it’s money transfer business. Now it didn’t. I covered that story. And what Moneygram is doing is it’s a pilot program. So they’re testing it and it’s, it’s these little [??] that I think are what… they add up over time. And I think they’re troubling. And I think if you’re not a careful reader of the actual material that comes out, you will think that all of a sudden XRP is in the middle of Moneygram transfers, which is not the case. So that’s where I think they could be more careful and I think I’m trying to let people know about what’s really going on. That was sort of the genesis of what I started getting into this about was like, “Well, okay, what are the actual real world uses right now?” So there’s two, two use cases that they’re pointing out here. One is the cross border payment system which is controlled by the largest banks in the world and the other is money transfer, which is dominated by Western Union and a few other companies. Where does the retail investor ever have to touch either of those? So I don’t have a problem with XRP being created or available, but I do think if Ripple was kind of trying to disrupt these two industries or help them become more efficient, they would sell directly to banks and they would sell directly to these companies that already have the infrastructure around the world for you to wire money back and forth to India or wherever. Why can I go out and buy XRP? Frankly, I find that troubling.

Laura Shin: 00:53:40
I agree. And to reference the Moneygram thing. One other thing I noticed is that the press release itself also said that Moneygram was quote, “Using XRP” and it was only in the quote provided by the Moneygram CEO that the word pilot was used and afterward I noticed that the Moneygram Twitter account kept replying to different people who were super excited about this. They were tweeting, “Hello, this is a pilot program being tested on internal Moneygram processes and is not intended for consumer use.” Oh, just to go back. Matt, did you ask Brad why everyday people should own XRP?

Matt Leising: 00:54:19
Yes. And he said basically that they need XRP to be liquid. They need it to be available all over the world and they want it to be on as many exchanges as possible so that there’s no trouble if for anyone who needs to use it, that they can go out and get it,

Ryan Selkis: 00:54:41
Which is completely backwards by the way. Normally, you build liquidity through deep pocketed institutional investors. In this case, those enterprise users wouldn’t use XRP until the market cap and liquidity in the system is high enough. So you’re basically using the retail audience and the less sophisticated purchasers to help make the case for the smart money, which is the total inverse of how you’d expect this to work in practice.

Matt Leising: 00:55:09
He also distanced himself from… he said, “Well, we didn’t let that XRP get into the public sphere.” And I didn’t quite understand. And he said, “First of all, I will quickly tell you Ripple as it exists today, did not create XRP that was a predecessor company,” So they tried to distance themselves that way and then he said, “Some of this has gotten into the public sphere over the years.” And yet, as Ryan has noted, they in their quarterly reports talk about selling XRP and how much money they make in a quarter from various sales. So again, it’s difficult to get good answers. I wish we had somebody from the company on here who we could talk to about this.

Laura Shin: 00:55:58
Okay. So we’re going to have to go over time a little bit because we have not covered the most important question yet. I hope you guys have a few minutes because we should unpack this and this is where I was going also with these questions about whether or not it’s centralized. The biggest question of all is, is XRP an unregistered security? And I’ve defined this on my podcast many times, but I want to explain again the Howey test, which is the main test that regulators are used to determine whether not a token is a security. So according to this four pronged test, a security is one, an investment contract, two, in a common enterprise three, with an expectation of profits, four, with those profits being dependent on a third party promoter. And it’s often this fourth prong where certain investments such as Bitcoin would fail because there isn’t one entity you can point to as being responsible for the profits of that investment contract. And a recent article that Nathaniel Popper of the New York Times who is a former podcast guest that was a great episode. You should check it out. He recently reported that a former regulator and head of the CFTC, Gary Gensler said that it’s highly likely that XRP will be considered an unregistered security. He cited the fact that Ripple holds most of the XRP tokens and does most of the work to make it valuable as being the reasons it is likely a security. So for both of you, from your understanding of the Howey Test and how it applies the tokens, do you think XRP is likely a security?

Ryan Selkis: 00:57:20
Well, just practically speaking when the SEC and DOJ go after the worst offenders in the token economy and the truly fraudulent offerings and the kind of slam dunk cases of unregistered securities offerings where their were explicit promises made to token holders and in some cases, guarantees or proposals that an investment would lead to outsized gains. The real easy ones. Those are the generally the cases that I think the regulators are gonna want to take first because the first cases are not ones that they would like to lose. So, if you just look at Ripples positioning strategically, given the regulators that they have on the board and, and you know, the size of the company and the resources they have at their disposal on the legal side. I mean, it would certainly be eyeopening and surprising, but I just find it hard to believe that they would be the first easy target that the SEC would look at practically speaking. One of my first managers always used to say, “You know, if you go to a party, you don’t want to be the silver guy. You don’t wanna be the drunk guy.” right? You just got to split the uprights and the token economy, right? If you, if you just wait for permission and you try to do everything by the book when there is no framework that exists, well you’re probably not gonna get very far and you’re probably not gonna be able to push the envelope in terms of innovating. The SEC is going to be going after the drunk guys, right? And Ripple is certainly much more buttoned up. We talked about some of the things that they do to mitigate some of their own risks, including the markets reports and some of their transparency initiatives and the fact that they have a working enterprise product and they have these enterprise pilots. They can make a credible case that this is just part of their strategy and part of their playbook and they’re doing everything the right way as if they are a money transmitter and, XRP is money and not a security. So I would be shocked if this was something that was handed down from on high in the not too distant future, I just don’t see it. I think, the company is maybe gotten too big to fail in some cases because if you think about who gets hurt. If the SEC did come out and issue a C and D or, try to bring some type of enforcement action against the company. Its going to be all these retail investors, all these minnows that purchased XRP more recently that are gonna lose their shirts if a negative action came out.

Matt Leising: 00:59:55
Yeah, I would say, none of my reporting indicates that the SEC is doing anything on an XRP being a security. I think as a lay person and my understanding of just the similarities between the securities that are coming out in a digital world, whether through ICOs or something like Ripple and an IPO. If you line those up and you think, “Okay, Ripple created XRP out of nothing, 100 billion units.” and for all intensive purposes as Ryan has also said, it’s using the value of XRP to a great extent to fund its business. What you do in an IPO is you buy shares from a company so that the company can raise capital and grow its business, continue to operate and expand, go into new areas. Just looking at it from that point of view where it hasn’t been mined. It was pre-mined I think. And then the idea that there’s no way around the fact that that Ripple has used some of those proceeds from XRP to continue to function. You know, those don’t look positive to me. Of course. There’s so many other aspects that the SEC will look at and I think Ryan made a great point. They are well connected, like Ben Lawsky is on the board and they have resources at hand. So Ryan is absolutely right. The SEC is not going to want to bring a case that it’s not a slam dunk and nothing in my reporting indicates that it’s imminent. It is interesting. I think the SEC and the CFTC are considering whether Ether is a security. I think there’s a lot of unknowns right now and it’s hard to say which direction regulators are going to take.

Laura Shin: 01:01:53
Okay, we’re definitely over time, but I did imagine that we will hear from Ripple in their own way after this episode. So are there any questions that you would have for the company or the executives?

Matt Leising: 01:02:04
I would love to see a little more transparency. They don’t have to do this. Where are the revenue streams coming from? How much of their operation is using sales of XRP? How much of the investor, VC capital that they’ve raised is going to those uses. I know they don’t have to do it as a private company, but that would be something I’d be very interested to ask them about.

Ryan Selkis: 01:02:33
I’m sure you’re going to have quite a bit that you can cover with Brad after he hears this episode.

Laura Shin: 01:02:41
Yes, And he also has all my other questions as well. So Brad, the invitation is still open. All right, well thank you both for coming on the show. It’s been fantastic. This has been such a fascinating discussion. Where can people learn more about you or get in touch with you?

Matt Leising: 01:02:59
Well, I’m on Twitter @MattLeisingand and if you Google me, you’re going to find more Bloomberg article than you care to Matthew Leising

Ryan Selkis: 01:03:11
And I am on Twitter @twobitidiot. And uh, of course you can check out is our site. We have new research reports on a new crypto asset every single day. Our libraries up to 20 and we’ll be open sourcing or launching our Beta library in June of this year.

Laura Shin: 01:03:28
Great. Well thank you both so much for coming on Unchained. Thanks so much for joining us today. To learn more about Ryan and Matt, check out the show notes inside your podcast episodes. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin. With help from Elaine Zelby, Fractal Recordings, Jennie Josephson and Daniel Nuss. Thanks for listening.