Ripple Labs’ XRP token has dropped 20% since the SEC sued the firm, and two top executives, over alleged unregistered securities sales back in December 2020.
And since then, Ripple Labs has poured billions of dollars into buying back the XRP token on secondary markets.
Some reports have focused on Ripple Labs’ direct XRP sales in the fourth quarter of 2022. The move to acquire XRP tokens — ostensibly a bullish indicator — has been trumpeted as boosting the ecosystem’s liquidity.
Those reports often link the nearly $3 billion of in-house sales to XRP’s fast-moving 27% pump in January. They have propped up a narrative in which XRP’s latest revival has been made all the more notable by the fact that it’s played out with an uncertain, and, likely decisive, regulatory outcome hanging in the balance.
Those sales specifically refer to institutions and other corporate clients acquiring XRP from Ripple directly for use within its On-Demand Liquidity (ODL) network, a product pitched to help smooth the cross-border remittance process via XRP-powered crypto rails.
Blockworks compiled the full six-year history of Ripple Labs’ quarterly markets reports, stretching back to the inaugural edition in the fourth quarter of 2016.
Ripple’s direct XRP sales only tell one part of the story. It’s true that Ripple sold around $2.97 billion of XRP last quarter — on par with the previous period’s $2.82 billion — but the reality is that Ripple has appeared to push much of that money into buying XRP on public markets, per its own disclosures.
In total, Ripple Labs has publicly reported $11.1 billion in ODL-related sales from the beginning of 2021 until the end of 2022. Since then, the firm has shelled out nearly $8.4 billion throughout a sustained XRP buying campaign initially pitched to protect the token’s markets and its customers, averaging more than $1 billion per quarter.
Ripple Labs’ disclosures indicate the firm has, since the SEC’s charges, essentially recycled 75% of the revenue generated from direct XRP sales on buying its own token on secondary markets, and 67% of overall sales revenue from the start of 2016’s fourth quarter.
Blockworks reached out to several contacts at Ripple on multiple occasions with the specific details contained in this story, and did not receive any response.
Ripple spends billions on XRP market ‘health’
Collating figures contained in each of Ripple’s quarterly market reports (including the most recent), across the six years of disclosures, Blockworks found that Ripple sold $12.55 billion in XRP directly to customers across that period.
Of that, $744.6 million was sold “programmatically,” a common term for selling on public markets, such as crypto exchanges.
Ripple stopped programmatic sales after the third quarter of 2019. No particular reason was given in the underlying disclosure. But the firm then said it was focusing on over the counter (OTC) sales with partners working in “strategically important” regions including EMEA and Asia.
The following year, Ripple said it was focusing “solely on its OTC sales as part of providing increased XRP liquidity to RippleNet’s ODL customers.” It described that liquidity as “vital” as ODL grows.
Ripple first disclosed that it was an XRP buyer on secondary markets in 2020’s second quarter, although purchase figures didn’t appear until the third quarter of that same year.
“A healthy, orderly XRP market is required to minimize cost and risk for customers, and Ripple plays a responsible role in the liquidity process,” Ripple said in Q2 2020.
“As more financial institutions leverage RippleNet’s ODL service, more liquidity is added into the XRP market. That said, Ripple has been a buyer in the secondary market and may continue to undertake purchases in the future at market prices.”
To start, Ripple Labs was snapping up around $40 million per quarter, in Q3 and Q4 2020. It then took a break until Q4 2021, when it ramped up efforts significantly by spending $322 million.
Around $1.08 billion was spent in the first three months of 2022, then $1.71 billion in the following quarter. That expenditure jumped almost 50% in the quarter after that, when Ripple reported $2.5 billion in secondary purchases.
Last quarter, it spent $2.74 billion on XRP. The price of XRP, meanwhile, dropped by 30%.
Ripple described its buying campaign as a “near-term product solution” for an XRP lending operation announced in Oct. 2020.
The firm said in its Q3 2020 report that it was building “new ODL capabilities to dynamically source XRP liquidity from the open market, not just Ripple,” hinting that its XRP buys on secondary markets would eventually slow — but its budget for XRP buybacks has only increased.
Centralization and securities laws
The question of whether XRP and its underlying crypto infrastructure are sufficiently decentralized to avoid SEC scrutiny plagued San Francisco-headquartered Ripple Labs for years.
That debate culminated in the SEC’s lawsuit, which seeks to prove that purchases of the XRP token constitute investment contracts. Ripple Labs holds sway over the network and the value XRP, the regulator has argued, which would mean that its token offering falls under securities law per the Howey test.
Companies selling securities must register with the SEC and lodge regular financial disclosures, among other things, in order to provide reliable information on which investors can base their decisions.
In a landmark speech in 2018, William Hinman of the SEC noted that “If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.” He specifically named Bitcoin and Ethereum as tokens that met this standard. XRP’s omission from his speech was the first sign that XRP was potentially under the gun.
Still, decentralization is a spectrum, and there are many ways by which to gauge decentralization of crypto projects. Some relate to their technological underpinnings — how many validator nodes the network has, for example, and how they’re chosen.
Another is the centralization of supply; if one party holds too many tokens, they could wield outsized influence over markets.
In October 2022, Ripple declared that it — for the first time — owned less than 50% of the outstanding supply of XRP, which is currently about 50.8 billion ($21.08 billion). In 2017, that figure was as high as 61%.
Ripple distributing XRP through its direct and ODL-related sales contributed to that reduction.
It’s difficult to gauge the actual market impact of Ripple consistently buying so much XRP over the past two years (it’s now the sixth largest digital asset by market value, in 2015 it was the second-biggest behind bitcoin).
Buybacks common Wall Street practice
While order book depth is a fluid metric and changes rapidly, CoinGecko recently placed the 2% depth of Binance’s XRP/USDT market at about $2.3 million on the upside and $1.6 million on the downside — meaning bids of those sizes would shift XRP’s price 2% in either direction.
When averaged out on a daily basis, Ripple’s XRP buys over 2022 would’ve amounted to $22 million per day – more than 10 times the reported amount required to move the needle on markets. (Ripple disclosed sales were executed daily in its Q2 2017 report, although no information has been given about the rate of purchases)
Ripple has openly telegraphed its buys. And, for what it’s worth, token buyback schemes are common in crypto markets. Crypto exchange tokens often acquire and burn their own tokens; crypto lender Nexo has been running buybacks for years, a move that has carried over to buzzy projects like BitDAO.
(Ripple doesn’t burn XRP directly, instead its ledger automatically burns a small amount for every transaction).
Token buybacks, while an unregulated process, mimic stock buybacks seen in traditional equities markets (which are all securities). Meta just announced a $40 billion buyback scheme which appears to have heavily influenced its recent 27% rally, despite somewhat lackluster earnings.
Stock buyback schemes are intended to return capital to shareholders. They can present their own concerns, including executive compensation gaming and destroying long-term value propositions.
Whether XRP is a security has yet to be determined. A ruling is expected sometime this year.
On Dec. 22, the day SEC filed charges against Ripple, co-founder Chris Larsen and CEO Brad Garlinghouse, the latter stated in a blog: “Unlike securities, the market value of XRP has not been correlated with Ripple’s activities. Instead, the price of XRP is correlated to the movement of other virtual currencies.”
Crypto prices across the board indeed tend to correlate. But based on Ripple’s own disclosures, it’s clear the firm has been busy directly maintaining the “health” of XRP markets throughout its battle with the SEC — to the tune of billions — all while attempting to disprove its influence over XRP.
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Source: https://blockworks.co/news/ripple-xrp-sec-lawsuit-markets