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  Perhaps, this Ripple incident brings a lesson to the exchanges: if Ripple, the fourth largest currency by market capitalization, can be sued, then in addition to Bitcoin and Ethereum, other cryptocurrencies in the market may be recognized as "securities" by regulatory agencies. Although the industry is currently in a bull market, it still needs to remain highly vigilant about potential regulatory risks.  Author: Carbon 8 Editor: Black Earth Produced: Carbon Chain Value (ID: ccvalue) Fayetteville in the United States is not well-known, but this third largest city in Arkansas has produced two well-known figures. One is former US President Bill Clinton, and the other is Jed McCaleb, an extremely low-key "master-level" programmer in the cryptocurrency industry. Compared with Vitalik Buterin, BM and others who are well-known in the community, the name Jed McCaleb seems to be rarely mentioned, but in fact, he is a "cryptopunk" with amazing talents in programming. In 2000, Jed McCaleb, who was only 25 years old, wrote the eDonkey software in only half a year. 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 not only search for a large number of excellent resources in this network, but also download required files from multiple points on the network at the same time to achieve the best download speed. They can also quickly upload shared files to achieve the best upload speed and resource release efficiency. Clients have unique identities, and there is no unique central server on the 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 prototype of the "decentralized network" in today's encryption industry? However, Jed McCaleb, known as the "Father of eMule", was sued due to copyright issues and finally had no choice but to shut down the eMule service in 2006. This blow was such a blow to him that he stayed dormant for four years. In 2010, a depressed Jed McCaleb accidentally saw the Bitcoin white paper on the BitcoinTalk forum, and suddenly resonated with "Satoshi Nakamoto" because his original intention in creating eDonkey was to use decentralized technology to solve real-life problems, and the Bitcoin white paper undoubtedly opened the door to this new world for him. Soon, Jed McCaleb discovered that there were serious legal currency transaction pain points in the Bitcoin field, so it only took him half a year to create the most famous cryptocurrency exchange, Mt. Gox, to provide users with legal currency trading services from Bitcoin to US dollars. Perhaps due to the genes of a programmer, Jed McCaleb changed hands on Mt. Gox after its great success, because he felt that "trading is just a small problem in the encryption industry, and he hopes to challenge more interesting things." I believe everyone in the cryptocurrency industry knows the story of Mt. Gox very well, and we don't need to repeat it. So, what are the "fun things" Jed McCaleb talks about? In fact, Jed McCaleb found that Bitcoin was increasingly playing the role of a "store of value", which seemed to deviate from Satoshi Nakamoto's vision of "a peer-to-peer electronic cash system", so in 2011 he decided to create a new Internet transaction protocol - Ripple Protocol allows people to pay with any legal currency and has created its own digital currency: Ripple (XRP) in a manner similar to Bitcoin. Ripple hopes that Ripple can become a bridge between different legal currency transactions. For example, Americans can directly use XRP to pay U.S. dollars at European merchants, and these European merchants can directly collect euros through XRP. In order to allow Ripple to develop better, Jed McCaleb kindly invited Chris Larsen, a big figure in the lending and finance industry, to serve as co-founder. However, in the subsequent development of Ripple, Jed McCaleb and Chris Larsen often had major differences on many issues. He admitted that he was not cautious enough when inviting Chris Larsen to join Ripple, and his past experience also made him feel that Chris Larsen was not a person worth choosing to work with and talk too much about. In December 2013, Jed McCaleb was unanimously voted out due to huge differences with Ripple's management's business philosophy - and this also paved the way for Ripple to be hit hard by regulation in the future. Chris Larsen calls himself a "radical consumer" and he has only one purpose in running Ripple - to make money. After taking over Ripple, Chris Larsen’s personal assets grew rapidly. In January 2018, Forbes estimated that Chris Larsen's net worth had reached US$59 billion, making him among the top five richest people in the world and briefly surpassing Facebook founder Mark Zuckerberg. In 2020, Chris Larsen appeared on the Forbes 400 list of the richest Americans, ranking 319th. Soon, this "abnormal" wealth growth attracted the attention of regulators. 01 Are Ripple’s good days over? For Ripple, Christmas 2020 does not seem to be going well. On December 22, the U.S. Securities and Exchange Commission filed a lawsuit in the Federal District Court in Manhattan, New York. Because it determined that Ripple was a "security," it accused Ripple and its two executives, Chris Larsen and CEO Brad Garlinghouse, of raising more than $1.3 billion in funds by selling "unregistered digital asset securities" starting in 2013. The U.S. Securities and Exchange Commission believes that Ripple violated federal securities laws when it sold XRP by distributing billions of XRP in exchange for non-cash consideration (such as labor and market-making services). Along the way, Chris Larsen and Brad Garlinghouse conducted personal sales of XRP worth as much as $600 million, in addition to organizing and promoting XRP sales used to fund Ripple. The SEC did not prosecute Jed McCaleb because Jed McCaleb was forced to leave Ripple “exactly” in 2013. Stephanie Avakian, head of the U.S. Securities and Exchange Commission's Enforcement Division, said that the reason for prosecuting Ripple and its two executives is that they must fully disclose long-term protection measures to potential buyers. These protection measures are crucial to a sound public relations market system, but Ripple did not do so. According to the U.S. Securities and Exchange Commission, individuals and crypto companies must register their offerings of “securities” with the regulator or apply for an exemption. Not only that, the SEC also highlighted that Brad Garlinghouse and Christian Larsen were important XRP "security" holders. The two conducted "personal sales" of up to $600 million in XRP, but did not apply to the SEC to register the sale and offer of XRP. At the same time, these two individuals did not obtain an exemption from registration, thus violating the registration provisions of the federal securities laws. The U.S. Securities and Exchange Commission has previously made clear that the “decentralized” qualities of Bitcoin and Ethereum qualify them as cryptocurrencies, rather than securities. But when it comes to Ripple, the U.S. Securities and Exchange Commission's attitude is very different. Judging from this prosecution, regulators have clearly regarded Ripple as a "centralized" institution, so they regard it as a "securities." More importantly, the US Securities and Exchange Commission's prosecution of Ripple, Chris Larsen and Brad Garlinghouse has a huge 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 has fallen to US$0.3, with a seven-day drop of 48%. It can almost be said to be "cut in half"! Ripple, once one of the "Big Three" cryptocurrencies, has now lost more than $10 billion in market value, and its market position in third place has also been replaced by the stable currency Tether. 02 Will Ripple suffer a “tide of delisting”? Seeing Ripple being sued by the U.S. Securities and Exchange Commission and the price of Ripple falling lower and lower, cryptocurrency exchanges facing regulatory risks seem to be a little panicked... So, which cryptocurrency exchange has been most affected by this storm? According to the information disclosed on Ripple’s official website (as shown in the figure below), Binance may be the biggest victim in this storm, because (at the time of writing this article) as much as 40.41% of Ripple coins are processed on this exchange. In addition, regulatory agencies in many countries have put Binance under the "target", forcing it to abandon business operations in the United States and South Korea, which will further expand the negative impact.  On the other hand, in order to avoid regulatory risks, some cryptocurrency exchanges have decided to take the simplest and most effective response: delisting Ripple. On December 23, the day after the media revealed that the U.S. Securities and Exchange Commission had sued Ripple, OSL, a Hong Kong-based digital currency trading platform, was the first to announce the delisting of Ripple. CrossTower and Beaxy followed suit and made the same decision. Kristin Boggiano, president of CrossTower, explained the reason for the delisting in a statement. He said that there is currently uncertainty about the market position of Ripple, so he decided to temporarily delist it and "further notice will be required" when it will be re-listed. 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 "requiring" the U.S. Securities and Exchange Commission because they hope to seek regulatory approval for an IPO. If the SEC prevails in this lawsuit, then XRP will be classified as a security, and entities that provide XRP trading services under the current U.S. legal framework will have to 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 XRP trading and became the first major mainstream exchange to officially disclose that it does not support XRP. Specifically, Bitstamp US users will not be able to trade and deposit XRP from January 8, 2021, but withdrawals and non-US users will not be affected. The reason why Bitstamp jumped out first may be because an "unknown wallet" transferred 40 million XRP coins to it in November this year. Roy Murphy, a member of the Bitcoin Association, disclosed on Twitter that before the US Securities and Exchange Commission sued Ripple, there were 192 cryptocurrency exchanges online for trading Ripple. However, in just 20 hours after the news was exposed, this number was reduced to 138, which means that at least 54 exchanges have stopped trading Ripple and deleted Ripple trading pairs. Against this background, the crypto community has begun to worry about whether exchanges, especially the largest and leading exchanges in the industry, will set off a wave of "ripple delisting"? In this regard, Johnny Lyu, CEO of KuCoin Exchange, has a more cautious attitude: “As the SEC’s lawsuit against Ripple continues to unfold, the price of XRP has experienced huge fluctuations, especially after its price fell sharply. We see that many users still choose to enter the market to buy lows at this time. Not only KuCoin, the trading volume of XRP on major exchanges has increased significantly recently. Our legal team is also paying close attention to the progress of this incident and making a final assessment. Although this incident will have a greater impact on Ripple in the short term, investors do not need to be overly pessimistic, because in the long term it will speed up Ripple's compliance process. Moreover, this incident has not yet been concluded. EOS has been sued by the SEC before but the two parties finally reached a settlement. Therefore, the attitudes of both Ripple and the SEC determine the further direction of the incident. KuCoin will also keep a close eye on the latest developments in this incident. 」 03 How does the crypto industry deal with regulatory risks? There is no doubt that the US Securities and Exchange Commission's lawsuit against Ripple has sounded the alarm to cryptocurrency exchanges. If the US Securities and Exchange Commission wins, it is likely to destroy the value of XRP, because the regulator hopes to prevent Ripple from selling more tokens, allowing Ripple, Brad Garlinghouse and Chris Larsen to be punished, "spit out" illegal profits before the judgment and bear civil penalties! In fact, cryptocurrency exchanges cannot pretend to be ignorant or "bury their heads in the sand" regarding the U.S. Securities and Exchange Commission's view of Ripple as a "security," because the regulator's attitude has been very clear. Therefore, cryptocurrency exchanges must pay attention to such regulatory risks, especially those cryptocurrency exchanges that "beg" regulatory agencies, such as Coinbase, which is seeking approval for an IPO from the U.S. Securities and Exchange Commission, and Huobi, which has just obtained a trust license in Nevada. On the other hand, regulators such as the U.S. Securities and Exchange Commission may not directly and explicitly require cryptocurrency exchanges to delist XRP, but may tell investors that those cryptocurrency exchanges that do not delist XRP are at risk because they have not properly explained to investors how they allow XRP and other similar cryptocurrencies to be listed for trading. If the compliance burden is too high, these cryptocurrency exchanges will eventually choose to delist XRP based on "user and regulatory feedback." Looking back at the case of Ripple being sued, the U.S. Securities and Exchange Commission seems to be confident that it will win the case. After all, they have previously won the case with Telegram and Kik. Although some cryptocurrency exchanges, market makers and funds have begun to remove XRP from the shelves, or withdraw from XRP positions and related transactions, for large leading exchanges, this may not be a simple "black and white issue" because regulatory risks are likely to put them "in trouble." It is not difficult to delist a cryptocurrency, but exchanges must think about it—both from a business perspective and from a legal perspective. What kind of precedent might this set in the crypto industry? If just because a regulator accuses a cryptocurrency of being a security (Note: The Federal District Court in Manhattan, New York has not yet made a decision on the SEC’s lawsuit)Just drop it, so what do you do next time? Do cryptocurrency exchanges give the SEC a right? That is: whenever there is an allegation that a cryptocurrency is a security, it will be delisted. If this is indeed the case, it may not be a good thing for exchange customers. Generally speaking, transparency and consistency in project information disclosure to token holders may also be beneficial to cryptocurrency founding teams when faced with the question of whether a cryptocurrency will be recognized as a "security." And providing consistent project information disclosure is actually very convenient for open source encryption projects. The more readily available a cryptocurrency project's disclosures are, the easier it will be to prove that a token is not a "security," since the primary purpose of federal securities laws is to protect investors by promoting adequate disclosure of information necessary for investment decisions. As Gabriel Shapiro, a lawyer at the Belcher, Smolen & Van Loo LLP law firm, analyzed, leading cryptocurrency exchanges such as Huobi, Binance, and KuCoin can actually not delist Ripple for the time being based on their previous analysis that Ripple is not a security, and hope that the court will rule that Ripple is not a security. Alternatively, cryptocurrency exchanges can also take "remedial" measures, such as restricting Americans from trading XRP wallets, and then consider delisting (or not delisting) based on actual circumstances - of course, these situations may already be covered by the cryptocurrency exchange's terms of service. (Carbon Chain Value Note: At the time of writing this article, Coinbase plans to completely suspend XRP trading on January 20, Beijing time. ) 04 Summarize It has become an established fact that the U.S. Securities and Exchange Commission is suing Ripple. If the court rules that Ripple is a security, cryptocurrency exchanges are likely to have to face the risk of delisting the token, because listing Ripple means that cryptocurrency exchanges must obtain "stock exchange" qualifications - for most exchanges in the cryptocurrency industry, this requirement seems difficult to meet. Of course, it’s also possible that Ripple will reach a settlement with the SEC, but perhaps it will involve paying a large sum of money. Perhaps, one lesson this Ripple incident brings to exchanges is: if Ripple, the fourth largest currency by market value, can be sued, then in addition to Bitcoin and Ethereum, other cryptocurrencies in the market may be recognized as "securities" by regulatory agencies. Although the industry is currently in a bull market, it still needs to remain highly vigilant about potential regulatory risks. Recommended reading: Bitcoin is brewing a large-scale bull market. The National Development and Reform Commission officially incorporates “blockchain” into the new infrastructure. The first application scenario of central bank digital currency is launched in the Agricultural Bank of China’s internal test. “Central Bank Digital Currency” flows out. Yao Qian: The new currency war has just begun. Blockchain is a dream of ten years. < END >    |
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