Blockchain File (Ripple and XRP Case)

Published in

Coinmonks

10 min readFeb 17, 2022

What I am describing in this article is not investment advice!

Introduction

Most of us remember the year of 2008 with the housing bubble in the United States of America in 2007 and spread all over the world a year later, causing the world’s fourth-largest investment bank Lehman Brothers to go bankrupt with a debt of 613 billion dollars, the FED intervened with cheap liquidity and We remember with the great crisis that this liquidity caused inflation. In those years, another event took place, although it was not given much importance. A white paper was published by the person or persons nicknamed Satoshi Nakamoto. In this white paper, Satoshi Nakamoto stated that this financial crisis was caused by the governments that provide liquidity in the world and the banks that distribute this liquidity. The cryptocurrency, which is explained in detail in the white paper, aims to eliminate incompetent governments and greedy banks and to transact with the P2P (peer to peer) method through bitcoin. Bitcoin and blockchain technology, which were the first sparks of this revolution that emerged that day, became the pioneers of many innovations taking place today. In this article, I will explain ripple, which transfers money quickly, safely, and cheaply using blockchain technology, XRP coin, which is the bridge of this transfer, and the lawsuit filed by the SEC (Security and Exchange Commission) against this coin.

Ripple

With the development of international trade, international money transfers have become one of the most important problems for the actors. Until 1973, money transfers and payments were made through the telex system. After 1973, the SWIFT (Society for Worldwide Interbank Financial Telecommunication) method started to be used for transfers and payments, which still continues today but has lost its popularity due to its cost and slowness. Transfers with the SWIFT method can sometimes take up to a week and are costly. Transfers and payments, which take days, are one of the biggest problems of companies doing business in the international arena at these times when even seconds make millions. Founded in 2012, Ripple Labs. The company is able to make these transfers and payments within a few seconds, with very low fees and securely, through the system it has established using blockchain technology and the distributed ledger system.

Today, the most widely used SWIFT system is a messaging system that communicates through codes. As you can see in the diagram below, the SWIFT process consists of multiple stages. The service user applies to the sending financial institution for a money transfer to another country and financial institution. Transfer details are automatically converted to SWIFT code through the system and the code is sent to the receiving organization via the SWIFT network. Before the receiving organization receives the message, the code reaches the SWIFT terminal and all stages can be viewed by the service user and the sending organization.

Ripple vs. SWIFT: Transforming Cross Border, Remittance Using Blockchain Technology/ Tianyi Qiu

According to 2021 data, 46 million SWIFT transactions are performed per day. I explained the messaging process above, now I will explain the money transfer process. As you can see in the diagram below, it is carried out in a layered manner. The sender deposits the money in the sending bank, the sender bank sends the money to the correspondent of the sending bank, and the correspondent sends the money to the correspondent of the receiving bank, but this process takes place through the central banks. The receiving correspondent reaches the receiving bank and the money reaches the recipient from the receiving bank.

The SWIFT system contains strengths and weaknesses, threats and opportunities. The strengths of the SWIFT code are that it is international and can be carried out securely with a simple operation, but its weaknesses are that the transfer takes days and is costly. The adoption of new technologies and their potential are considered as opportunities, but the fact that all control is in the banks is perceived as a threat.

Fintech experts liken the Ripple system to the hawala system. The Hawala system originated in South Asia in the 8th century. In this system, along with users A and B, there are contractors A and B. User A contacts contractor A in city A and says you will take and deliver the following amount of money to be delivered to user B to contractor B in that city on this day and time. On that day and time, the contractor A goes to that city, contacts the contractor B and delivers the money so that it reaches the user B. After Contractor B has verified the identity of user B, he also verifies the money transfer with the password sent by user A and delivers the money to user B, or vice versa, the money is transferred from user B to A. The hawala system takes place on hawala networks built on trust.

The key components of the Ripple system are distributed ledgers, the blockchain system, and cryptocurrencies. The system provides the opportunity to send both the transfer information and the transfer amount at the same time in seconds. Consider that the message and money are sent in synchronization in the SWIFT system, the ripple system provides this. The system uses cryptocurrencies and blockchain technology to decentralize the transaction via the P2P method, so as soon as the transfer information is sent, the transfer or payment agreement is made and the money is sent via cryptocurrencies. As seen in the diagram below, the message system opens communication between the sending organization and the receiving organization and transmits the payment or shipping details via ripple net. In the relevant details; foreign currency exchange rate, payment details, fee and expense process, etc. information is included. ILP (Inter-Ledger Protocol) are sub-ledgers for tracking money transfers between credits, debits, and transactions. ILP ensures that the deal is done very quickly and precisely and provides control of whether the process is successful or not. FX Ticker, on the other hand, allows the system to monitor the exchange rates of coins. The Validator, on the other hand, provides confirmation of whether the transaction is successful, thus avoiding the risks of agreement and saving time. Before the sender sends, the sending organization requests a transfer to the relevant destination via the blockchain and receives the information of the shipping fee and different exchange rates from the receiving organization through the message system, so that the sender can choose the best option and send. When the transaction is initiated by the sender, the transaction is locked by the receiving organization and the FX Ticker displays the rates of the currency sent by the sender and XRP (the cryptocurrency used by the ripple system for sending). The sending organization converts and sends the sent local money to XRP, and the receiving organization converts the XRP sent by the sending organization to the local currency of the recipient, meanwhile, all records are kept by the ILP while these transactions are taking place.

Currently, more than 300 financial institutions are included in the ripple net system, and money transfers to more than 75 countries through the system can be made safely within a fraction of a second and up to one hundred thousandth of the market value of XRP. The Ripple system, like the SWIFT system, contains weaknesses and strengths, threats and opportunities. The strengths of the system, which can be used every time in 7 days a week, and offer real-time transfer and consensus-based deals. XRP’s being controlled by the company is its weak side. The system will revolutionize the money remittance industry The potential of XRP as a centralized currency is an opportunity presented by the system, but competition with other cryptocurrencies will always remain a threat.

XRP Case

On May 3, 2018, the SEC (Security and Exchange Commission) filed a lawsuit against Ripple Labs in the United States California state court. The related lawsuit was initially filed against Ripple Labs. but was later expanded and the company’s founders were also involved in the lawsuit because of their XRP sales.

The SEC’s argument is that XRP is actually not like other cryptocurrencies, since it is controlled by a company, they are securities contracts, and security clearance from the SEC is required for the sale of these securities contracts within the borders of the United States. Against this argument of the SEC, there is a set between Ripple Labs company XRP and Ripple Labs, and it is not in our control as the SEC claims.

The SEC conducts the Howey test, developed in the 1940s and still in use, to determine whether a financial instrument is a security contract. This test asks 4 questions to the relevant instrument. We will ask these questions and evaluate their answers according to XRP below.

1. Is it possible to invest money in the relevant instrument?

Our answer is of course yes, if it is not possible to deposit money, we cannot call it a financial instrument anyway. In the meantime, before moving on to other questions, Ripple Labs company is dubious about how real this test will be, because they state that the Howey test was designed according to the financial markets of 70 years ago, and such an outdated test will be insufficient to evaluate an instrument created by today’s technology.

2. Does the relevant instrument arise from a common enterprise?

In this question, the parties were separated, XRP actually appeared to be used in the ripple payment and money transfer system, but as questioned in this test, it did not come out as an instrument that could be valued with the company. The company Ripple Labs never gave a target for XRP, and at every opportunity, they stated that XRP and Ripple should not be lumped together, there is no link between Ripple’s achievements and XRP’s value.

3. When the relevant instrument is introduced to the market, did the relevant institution promise profit, or do investors attribute their profit expectation to the success of the institution?

Ripple Labs has used XRP as a part of its payment and transfer system since its first release and has never promoted it as an investment tool, and has also made statements not to turn it into an investment tool. In order to make the system more functional, it is possible to transfer and pay in other currencies in the ripple system.

4. Is profit generated by the labor and effort of third parties?

The parties are also divided on this question, XRP includes the labor of third parties, but Ripple Labs. Since the beginning of XRP does not offer any profit expectation, although there is the effort and effort of third parties, the profit is not made by the efforts and efforts of these people. The reason for profit is supply and demand, as in other crypto assets.

Although XRP has not yet been accepted as a cryptocurrency due to the ongoing lawsuit in the United States, major economies such as Switzerland, England, and Japan have accepted this instrument as cryptocurrency. Also before this lawsuit was filed in the United States and Ripple Labs. An agreement (agreement of the parties) was made in another case between and the United States of America finances accepted XRP as a cryptocurrency according to this agreement.

Conclusion

Blockchain technology is growing like an avalanche, no state can resist this technology that will revolutionize this century, and they know it. Through this service, Ripple Labs provides that fast, safe, and cheap transfer that world trade has been observing for years. Instead of standing against this avalanche, it is the duty of states to act with it and keep up with this revolution. If they can accept and keep up with this revolution, they can prepare the world for this technological revolution with the regulations that this ecosystem needs. That’s when some opportunists cannot afford the rocket costs of their company by manipulating this revolution, and if they do, they will find the state that truly protects its citizens.

You can visit the link to read the article in Turkish…

References

1. www.ripple.com

2. www.SEC.gov

3. www.finanacefeeds.com

4. www.forbes.com

5. Summary of Ripple’s Wells Submission (Ripple Labs Inc.)

6. White Paper/Bitcoin

7. White Paper/XRP

8. Ripple vs. SWIFT: Transforming Cross Border, Remittance Using Blockchain Technology/ Tianyi Qiu

9. Ripple Effects: How In Re Ripple Labs Inc. Litigation Could Signal The Beginning Of The End of The Payment Platform/ Lindsay Martin