Unchained - Ripple's XRP: Why Its Chances of Success Are Low - Ep.58

Starting point is 00:00:01 Hi, everyone. Welcome to Unchained. You're no-hype resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top rating or review. That helps other listeners find the show. And be sure to follow me on Twitter at Laura Shin. Today's episode is brought to you by Keep Key, the easy, safe, and simple way to protect your Bitcoin, Ether, Lightcoin, and many other digital assets.

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Starting point is 00:01:00 www. bitwiseinvestments.com slash unchained. Unchained is sponsored by Preciate. Appreciate. Appreciate is building the most valuable relationships on Earth. In each episode of Unchained, Precceit recognizes an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out. Today's topic is Ripples XRP. Here to discuss the third largest crypto asset by market cap are Ryan Selkis, founder and CEO of Masari and Matt Lysing, Bloomberg Reporter. Welcome, Ryan and Matt. Thanks, Laura. Thank you having me. 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,

Starting point is 00:01:52 Brad Garlinghouse, emailed me, unhappy about my tweets. I said to him, let's talk it out on my podcast. He said as 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 this 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 were unhappy that I tweeted some choice, quotes from articles critical of XRP. But if he really believes in XRP, then he shouldn't be

Starting point is 00:02:31 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%, triple exclamation point. I never heard back. Over the past few months, I tagged Brad in some tweets 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.

Starting point is 00:03:10 They wrote back proposing instead two of their executives, chief cryptographer David Schwartz and chief marketing officer Corey 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 want to discuss around XRP aren't really about the technology and also because I don't let anyone dictate who comes on my show, I decided I would meet Ripple halfway and take Corey, 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 I have on the show.

Starting point is 00:03:58 I told Ripple that if I couldn't have Brad, I would do a show with one of their execs, Corey, 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 will let Corey 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 Ripple's 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 Corey on your upcoming podcast about

Starting point is 00:04:36 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, as best. Second, if Ripple is going to participate, I want the CEO. I always get the CEO. I got the CEO of Shapeshift, Polychain, Zoppo, Bikko, My Crypto, Chain, BitPesa, zero X, BTCC, and others. I only make exceptions for cases like IBM or NASDAQ where my guests were the more blockchain focus than the CEOs. If Ripple was not going to give me my top choice, I was not going to let them dictate exactly who is going to be in the show.

Starting point is 00:05:14 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 of 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'd prefer to have two

Starting point is 00:05:56 XRP experts and 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 for Brad or Tune on 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

Starting point is 00:06:40 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? Well, that is quite an introduction. You know, I've been in the industry for about five years and I've worn a few different hats. I was on the founding team at Digital Currency Group, which, as a disclaimer, was an investor, is an investor in Ripple Inc. I ran Coin Desk for 18 months, led the restructuring the company before leaving last July and now I am working on a project called Masari, which is building an open source data library that should serve as the industry's Edgar-like database.

Starting point is 00:07:38 and we're really working on disclosures and compliance frameworks for token issuers so that you can easily compare apples to apples, and that 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. as over. XRP and that token treasury. And if you go back to my January post, I started to think just top down in terms of large projects that have control over their treasuries and an outsized

Starting point is 00:08:23 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, I'd say, 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 in 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, you know, the U.S. dollar and euro.

Starting point is 00:09:28 And what you found from Ripple's marketing language quite consistently was there was a marginal benefit 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 that Brad Garlinghouse uses, essentially suggesting that if banks are trialing and piloting, 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 inroads with large institutions like SBI, which is a shareholder of Ripple Inc.

Starting point is 00:10:41 And has said and tweeted some favorable things about the currency for good reason, because they have a vested interest in the company. So I'm sure we're going to go into quite a bit more, but I do want to say that it's actually not all bad. 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 you can quabble over whether they're overmarketing the currency. But out of the token issuers out there, I believe that their quarterly markets 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, you know, parse, you know, much of what Ripple does and much of its behavior and, you know, we can only conjecture about some of its strategic plans, as you noted in the intro, in large part, because it's

Starting point is 00:11:37 very difficult to secure an interview and ask and answer some of these tough questions. But I think, you know, 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 that Ripple will respond and maybe even ultimately do a follow-up with you, Laura. Yes. 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.

Starting point is 00:12:06 So, Matt, tell us what you do and what your history has been with writing or reporting on Ripple or XRP. Sure. And yeah, I agree quite an intro. Big, big, 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.

Starting point is 00:12:33 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 was really where the intersection between market structure, Wall Street, and blockchain. and the future sort of dynamic that 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,

Starting point is 00:13:08 but I do remember visiting them in San Francisco. Brad was not the CEO. Then it was... Chris Larson. Yeah, it was Chris at that point. And I remember my first impression was that, wow, here is a blockchain, you know, app or service is actually working, you know, because so much of what I was writing about and reporting on were, you know, ideas and sort of proof of concept stages.

Starting point is 00:13:35 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 I started asking, just it started with myself. I'm like, well, who, who are the banks that, you know, they, all the announcements that come out sort of periodically about, oh, there's new banks joining the Ripple network, and, you know, we now have 100, more than 100 banks who are our customers. And I realized that I never, you know, if I started looking back and realized that almost in every single one of these statements, it was that they were going to test Ripple.

Starting point is 00:14:15 They were going to, they were entering a pilot program to see about XRP. And so I just started wanting to answer the question, okay, is, 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, you know, basically the market for cross-border payments. And we went to them and we were 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

Starting point is 00:14:58 were willing to use XRP. And, you know, so we just sort of built on that and kind of came to, you know, we just wanted to sort of do what a reporter should do and sort of just check out what what people are saying about, you know, claims that companies make. And, you know, you don't know if it's going to be positive or negative when you start, but it's just, it's just the journey you take as a reporter is to try to, you know, be a check there on, you know, whether it's a politician or a company or or anybody else who is in a position of power. So that's sort of, you know, that's what I would say when my reporting got real about Ripple was, you know, sometime late last year. And what were the reasons they were citing for not wanting to use XRP?

Starting point is 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 or thousands of people around the world to staff these trading desks in far-flung regions of the world, like in Thailand or down in Colombia. 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, you know, you know, Thailand and everywhere else in the world. So there's a huge vested interest in that the banks already have in the sort of resources they've poured into it and the money they make from it in the revenue sense. Then there's also the idea that XRP is rather volatile and is new.

Starting point is 00:16:42 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, you know, face regulatory scrutiny. If that was embedded in your, you know, transnational sort of cross-border payment system, that would gum up the works. Then there's also the companies themselves, like let's say it's Toyota or John Deere 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,

Starting point is 00:17:25 you know, 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, you know, this was sort of the state of play at this point about whether XRP was working its way into the banking system. For the rest of the podcast, I want to just make a few distinctions and let's just start with the basic one which is we'll just to make 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 um i actually mentioned earlier that i had put ripple on the forb fintech 50 list for three years in a row my take on what i know

Starting point is 00:18:15 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 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, you know, as I mentioned, what Ribble does versus what XRP does. And one way to

Starting point is 00:18:56 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 pre-mined tokens in accordance with their evaluation agenda. More egregiously, though, the token plays little part in Ripple's central business case. For the most part, it's just acute 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? Well, I alluded to this a little bit in my opening statement. There was a graphic, I'm not going to recall exactly which set of

Starting point is 00:19:43 marketing materials that 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 material. 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,

Starting point is 00:20:35 that's going to 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 those more recent articles, is this is a company that essentially has a negative customer acquisition cost. And that's just a just, 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 outline this in their, I believe, their October markets report. They have ceded a $300 million ecosystem development funds or RippleNet Accelerator. They, as Matt, you know, can speak a little bit more to,

Starting point is 00:21:26 seem to have agreements behind closed doors or are at least suggesting that they will lend XRP to market makers and other strategic partners basically at zero cost. And the return of that capital could either come in 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 own targets with this currency. For them, it's funny money, right? I mean, this, this, you know, XRP does not become valuable, does not become a bridge currency. It doesn't, you know, come anywhere close to growing into its current valuation unless it's properly distributed across the globe. And so there are real benefits to getting, making inroads and distributing this, even if it's for free to institutions,

Starting point is 00:22:18 provided that those institutions sign some type of agreement where, you know, they're going to hold XRP for some period of time, you know, 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, you know, they'll cite 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 very, 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

Starting point is 00:23:05 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. And Matt, I know you have probably a little bit to add on that because of the 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? 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 biggest or best. known U.S. exchanges, Coinbase, and Gemini, and offered them different kind of, so they offered Gemini a million dollars to list XRP, and to Coinbase, they said, we, we would happily give you a loan of $100 million in XRP, so it's $100 million worth of XRP for you to list,

Starting point is 00:24:16 to list it on your exchange, and when you pay it back to us, you know, you can pay it back either as $100 million or in $100 million worth of XRP. So one of the things that's 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 that 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's trying to promote and that, you know, you want somewhere to

Starting point is 00:24:56 have it trade so that the values can go up. So, you know, 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 this is XRP and it's been around, you know, I think since 2014 or maybe even earlier. I think 2012 maybe. Yeah. Sorry, I think you're correct. And it's got a huge, you know, it's got a valuation already. It's the third largest by market cap in the world. So we just found it rather amazing that, you know, that Ripple was going through these lengths to get it listed on U.S. exchanges.

Starting point is 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, you mentioned rebates, but I didn't know what that meant. Can you explain that? The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking. Nah, no more statistically speaking. I want hot takes.

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Starting point is 00:26:30 and this is bad news for all of us. With less local news, noise, rumors, and misinformation fill the void. And it gets harder to separate truth from fiction. That's why CBC News is putting more journalists in more places across Canada, reporting on the ground from where you live, telling the stories that matter to all of us, because local news is big news. Choose news, not noise. CBC News. Sure. I believe this might have been from the Q3 markets report that's available on Ripple's site,

Starting point is 00:27:04 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. 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, you know, that is something that they have repeatedly referred to

Starting point is 00:27:57 as a strategic weapon to encourage adoption, certainly something that, you know, 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, you know, 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 actually bootstrap this as a true global reserve. At least that's the pitch, right?

Starting point is 00:28:31 The, I think what is, you know, very much at odds with that pitch is that no institutions to my knowledge have experimented with this in any meaningful way. And again, we actually, 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, you know, retail focused, you know, speculative exchanges. And to go back to the question I asked earlier about Isabella Kamenska's article where she called XRP Acute Adon, 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's a business

Starting point is 00:29:31 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 all, 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 I really have? 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, you know, as an introductory line and something that supports what Isabella had written, that certainly seems to, you know, jive.

Starting point is 00:30:24 But there's quite a bit more context there about how exactly XRP can penetrate some of the corridors like, you know, the Euro and Indian currency. I forget what's the Indian currency? I'm drawn to blank. The rupee. The rupee. Yeah, the rupee, right? So, and, you know, how ultimately as you get more currency pairs like that, more institutions will have an incentive to not just hold, you know, dollars as part of their treasury management, but also XRP for the smaller corridors. So I'd encourage, hopefully you can link to that full thread. Yeah, I'll see to the whole post.

Starting point is 00:30:58 It was probably the best one that I had seen that the company had communicated. And it's from a while back. And what do you make of that argument? Because you wrote a little bit more about that as well. Yeah, I mean, it's a plausible argument, but in practice, what that essentially, what amount to is all of the correspondent banks just rolling over and saying, you can take our business. Because this winning scenario that Ripple is 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, you know, adopt XRP and everybody gets along and, you know, they just forget about the many, many billions of

Starting point is 00:31:48 dollars that they essentially siphon off of the big banks who are essentially government's own businesses at this point. So it's just, it seems very well articulated as David had communicated it, but highly implausible to actually pull off in practice. And if this were, you know, a token or a currency that was trading, you know, $100 million or, you know, 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're many, many, many multiples above that. And I don't think the company has done anything to tamp down that hysteria. And let's not forget. I'll just say it again. It's not, for the most part,

Starting point is 00:32:30 the 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, you know, get them to convince their corporate clients like, you know, Caterpillar or Audi or, you know, whoever you want to think of to also buy into the, And it's also, there's going to be costs if you're going to inject XRP into the middle here. You can't have the volatility that it has currently.

Starting point is 00:33:15 And that's going to be a cost that like if you're, 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, you know, before you even sign the first document. By an order of magnitude. Yes. 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. Bitwise is the creator of the world's first cryptocurrency index fund, the Bitwise Hold 10. The fund holds the top 10 cryptocurrencies by five-year diluted market cap, rebalances monthly,

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Starting point is 00:35:29 Now it's time to recognize someone in crypto, sponsored by Preachate. Today, Precet is recognizing Melton Demirers. Meltem's recent presentation, playing in the game, The Nature of Competition among blockchain networks, was full of provocative ideas on the future of network competition and success strategies, and it was shared openly for others to learn from. In a crypto world full of self-promotion, Meltem gets props for guiding the way and sharing knowledge.

Starting point is 00:35:52 Thanks, Meltem. Precet welcomes Unchained listeners to nominate a friend to get props on a future episode of Unchained. Just go to presheat.org slash recognize. That's appreciate. org slash recognize. I'm speaking with Ryan Selkis of Masari and Matt Licing 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 coinness article which

Starting point is 00:36:25 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? I think you can use Ripple's own words. They have a part of 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.

Starting point is 00:37:07 At that point in October, there were 25 validator nodes, and five of them were managed and owned by Ripple. So what they're trying to do is, as time goes on here into the future, they're trying to bring on 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, you know, thinking that it's a Bitcoin-like process where you really, it's the censorship is a strong component. They had a dispute with one of the family members of Jed McCallib, 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 the million dollars they had paid returned. That doesn't sound decentralized to me. 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.

Starting point is 00:38:22 and the 18th person who had only contributed 0.2% 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? Jackson Palmer, the Dogecoin creator, actually published an excellent site a little while back. It's called Are We Decentralized Yet?com. And it kind of lays out all of the top 20 or so projects by whether they have miners and independent nodes that are incentivized to process transactions.

Starting point is 00:39:03 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 counts and a couple of other metrics? and out of the top currencies, Ripple is 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.

Starting point is 00:39:49 And then, you know, obviously, as you just pointed out, Laura, they contribute almost all of the developments to RippleNet and their other systems. So I think it is very centralized. Now, having said that, I think, you know, where we are in the industry, you know, particularly with the kind of broader ICO ecosystem, pretty much all of these projects are starting central. 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 decentralize over time.

Starting point is 00:40:26 But what is unique is just the sheer scale and size of their treasury, which is, you know, if you look at coin market cap, it can be a little bit misleading. But on chain FX, 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,

Starting point is 00:40:56 just about 15% behind, 20% behind Ethereum in terms of market value. So it's just stat, the numbers are staggering, right? And that's why, you know, you kind of laugh at the marks that the VCs are trying to put on their books to incorporate, you know, capture the value of the stakes that they have in Ripple the company because you can make the argument that some of these early investors in Ripple are sitting on, you know, pro rata rights to, you know, a $90 billion currency that could be measured in the

Starting point is 00:41:29 billions versus, you know, $410 million for the entire company, which is the mark that you had referenced. I think there's another one interesting thing. Bitmex did a good report on Ripple and XRP back. in January. And they... It's a must read. Hopefully you can link to that too, Laura.

Starting point is 00:41:47 Yeah. Yeah, absolutely. 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 to, you know, Ripple was 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 I think I don't, again, that doesn't strike me as a decentralized platform. Yeah.

Starting point is 00:42:29 And some other stats I want to throw out there are that currently, according to their website, the percentage of XRPs 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 Carlinghouse, Chris has, at least at that time, he had 5.19 billion XRP in his personal holdings and his 17% stake in the company. And the current CEO had at that time nine figures worth of XRP,

Starting point is 00:43:07 nine figures in U.S. dollars back in December, and he has 6.3% of ripple the company. So one other thing I want to ask about is, as far as I understand, this seems like a permissioned system. And are tokens even necessary in permission systems? Like, 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 middlemen, but a permission 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?

Starting point is 00:43:52 You know, my short answer is Ripple is the 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 in this new currency. And, you know, if you think about it from a regulator standpoint, there is a bit to like about that because it is centralized and you can, you know, 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, I don't know of any other project that's, you know, quite taking this approach where they're very aggressively saying this is a money-like currency,

Starting point is 00:44:38 not a token. It is a true digital currency, and we are 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. Ryan, I'm looking at that are we decentralized yet website as well. And I notice they have a number of public nodes. And for Ripple, they have it at 596. Now, how do you square that with the 25 validator 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? I didn't source that data. So I'm not quite sure. But I believe that Jackson had a footnoted

Starting point is 00:45:28 somewhere. 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. I wouldn't be able, I don't know the difference. This would be a question for Ripple. Yeah. It'd be, it'd be great to have someone from Ripple on. Yes. Like the CEO. 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 like 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 last year they kind of came back around to XRP.

Starting point is 00:46:25 One thing I think we should talk about a little bit is the lawsuit between Ripple and R3 that 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 cent. And that was so that 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 when they entered into this option, XRP was closed at 0.00796 cent. So very, very close to the exercise price. Now, what they were doing here, in my opinion, and the lawsuit says this as well,

Starting point is 00:47:16 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, like, we, here's XRP. Why don't you, you know, 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 what usually an option in this kind of situation would have some sort of incentive effect of like let's let's work together.

Starting point is 00:48:03 Let's get, you know, 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 and just so your listeners know, the reason there's, this lawsuit is because Ripple just sort of unilaterally said that the option was canceled. And according to the option, you know, contract, there wasn't a unilateral, excuse me, right

Starting point is 00:48:37 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 Did XRP like funny money at certain points in its history and not as funny money and other points in its history? One of the things, 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. Well, of course it's essential. I mean, it's got to be the lion's share of revenue right now.

Starting point is 00:49:10 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, you know, they won't disclose that because it's a private company, but I think it's important to understand that. And, you know, 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, you know, token sales came back in vogue, and they recognized that there was this, you know, huge honeypot that they could tap,

Starting point is 00:49:54 not just for enterprise incentives, as we talked about earlier, but straight to the bottom line of their company. The tune has certainly changed. And I think, you know, 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, quote, unquote, building liquidity in XRP. And another way to say building liquidity is increasing the market cap by increasing adoption and, you know, retail speculation.

Starting point is 00:50:33 So, you know, follow the incentives and you normally get to some pretty clear cut answers. 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. Yes. This was for the December story that we ran. Okay. Yeah, of course, at the height of everything. Yes. 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 just wondered is why should everyday people own XRP if it's meant to be used by banks? I mean, this was the genesis on 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

Starting point is 00:51:19 that are just slower to adopt. And that is something that ripple the company and, you know, in their marketing, they've done absolutely nothing to shy away from it. 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 rich currency. And that means that the price is going to go up. That means the market cap is going to inflate into the trillions. And, you know, you'll end up with a very good investment as a retail buyer. They haven't explicitly said that, but, you know, 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, you know,

Starting point is 00:52:02 that's why I use the term, think it until you make it. That's right now in a bull market that seems to be paying off and working out. I think that, I think that, The biggest risk of the company is if we just have a bare market for cryptocurrencies in general and all assets start crashing across the board, the plaintiffs 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 would be enormous. So buyer be aware, I guess. I would agree with what Ryan just said 100%. One thing, Brad, I think when, so 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 know, you use to send money around the world.

Starting point is 00:52:58 That's obviously separate from the banking system. So when Ripple got an agreement with MoneyGram for them, Brad, you know, tweeted out that, you know, MoneyGram agrees to use XRP. and its 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 these little Elisians that I think are what they add up over time. And I think they're troubling.

Starting point is 00:53:26 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's sort of the genesis of what I started getting into this about was like, okay, what are the actual real world uses right now? So there's 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

Starting point is 00:54:00 is money transfer, you know, 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, you know, back and forth to India or wherever. I don't, why, why could I, why can I go out and buy XRP? I just, I find that, I frankly find that trouble. boy. 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.

Starting point is 00:55:03 They were tweeting, hello, this is a pilot program being tested on internal MoneyGram processes and is not intended for consumer use. And then to reference one other thing, oh, just to go back, Matt, did you ask Brad why individual, why everyday people should own XRP? Yes. And he said basically that they need it, 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.

Starting point is 00:55:36 for anyone who needs to use it, that they can go out and get it. 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 the liquidity in the system is high enough. So you're basically using the retail audience and less sophisticated purchasers to help make the case to the smart money, which is the total inverse of how you'd expect this to work and practice. He also distanced himself from, like, he said, well, we didn't let that XRP get into the public sphere, and I didn't quite understand.

Starting point is 00:56:18 And he said, they first of all will quickly tell you, Ripple as it exists today, did not create XRP. That was a predecessor company. So they try to distance themselves that way. And then he said, you know, they, some of this has gotten into the public sphere, you know, 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. 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 and unretrocentric security.

Starting point is 00:57:15 And I've defined this on my podcast many times, but I want to explain again the Howie test, which is the main test that regulators use to determine whether or 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. 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 in unretured security. He cited the facts that Ripple holds most of the XRP tokens and does most of the work to make it valuable as being

Starting point is 00:58:10 the reasons it is likely a security. So for both of you, from your understanding of the Howey Test and how it applies to tokens, do you think XRP is likely a security? 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 there were explicit promises made to token holders. And in some cases, you know, guarantees or, you know, proposals that an investment would lead to outsize gains. the real easy ones. Those are the generally the cases that I think the regulators are going to want to take first because the first cases are not ones that they would like to lose. So, you know, if you just look at Ripples positioning strategically, I, you know, given the regulators that they have on the board 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 eye-opening and then surprising. But I, I, I, I, I, 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 sober guy, you don't want to be the drunk guy, right? You just got to split the uprights.

Starting point is 00:59:34 And the token economy, right, 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 going to get very far. And you're probably not going to 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. You know, 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. You know, they can make a credible case that, you know, 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.

Starting point is 01:00:12 And, you know, XRP is money and not a security. So I would be shocked if this was something that was handed down from on high and then not too distant future. I just don't see it. I think, you know, the company has maybe gotten too big to fail in some cases because if you think about who gets hurt, if the SEC did come out and, you know, issue a C&D or, you know, try to bring some type of enforcement action against the company, it's going to be all these retail investors, all these minnows that purchased XRP more recently. that are going to lose their shirts if a negative, you know, action came out. 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 layperson and my understanding of, you know, just the similarities between the securities that are coming out in a digital world, whether through ICOs or something like Ripple and an IPO,

Starting point is 01:01:16 you know, if you line those up and you think, okay, ripple created XRP out of nothing, you know, 100 billion units. And for all intents and purposes, as Ryan has also said, you know, it's using the value of XRP for 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, you know, expand. and go into new areas. Just looking at from that point of view,

Starting point is 01:01:51 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 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 Lovsky is on the board, and they have, you know, resources at hand. So Ryan is absolutely right.

Starting point is 01:02:26 The SEC is not going to want to bring a case that it's not, you know, 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. So it's just I think there's a lot of. unknowns right now, and it's hard to say which direction regulators are going to take. Okay. Well, 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

Starting point is 01:03:02 executives? I would love to see a little more transparency. They don't have to do this, but, you know, where are the revenue streams coming from? How much of their operation is using, sales of XRP, how much of the investor, you know, 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? I'm sure you're going to have quite a bit that you can cover with Brad after he hears this episode. Yes, 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

Starting point is 01:03:55 touch with you? Well, I'm on Twitter at Matt Lysing. And if you Google me, you're going to find more Bloomberg articles than you care too. It's Matthew Lysing, L-E-I-S-I-N-G. And I am on Twitter at 2-bit Idiot. And of course, you can check. out Masari.io is our site. We have new research reports on a new crypto asset every single day. Our library is up to 20 and we'll be open sourcing or, excuse me, launching our beta library in June of this year. Great. Well, thank you both so much for coming on Unchained. Thanks, Laura. Welcome, Laura. It's a pleasure. Thanks so much for joining us today. To learn more about Ryan and Matt, check out the show notes inside your podcast episode.

Starting point is 01:04:40 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 Zelvey, Fractable Recording, Jenny Josephson, and Daniel Ness. Thanks for listening.

Unchained - Ripple's XRP: Why Its Chances of Success Are Low - Ep.58

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