Anthony Di Pizio, The Motley Fool
5 min read
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XRP creator Ripple has faced scrutiny from the U.S. Securities and Exchange Commission since 2020.
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The SEC just agreed to settle its case against Ripple and reduced the proposed financial penalty significantly.
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This is great news, but it won't necessarily lead to sustainable upside for XRP.
Many top cryptocurrencies are obtained through a process called mining, which involves using powerful computers to solve complex mathematical problems to help validate transactions on the blockchain. Miners play an important role in guaranteeing the security of the network, and they earn new coins for doing so.
But the XRP (CRYPTO: XRP) cryptocurrency is different, because it's issued directly by Ripple, the company that created it. In other words, it's far from decentralized.
This structure raised red flags at the U.S. Securities and Exchange Commission (SEC), and the agency ultimately decided to sue Ripple in 2020 alleging it was in breach of financial securities laws. The legal battle was ongoing until last week, when the SEC agreed to settle the case in line with President Donald Trump's promise to run a pro-crypto administration.
With this huge burden lifted off of Ripple's shoulders, is XRP poised for significant upside?
Sending money to banks in other countries can be a slow and expensive process. Not all of them use the same payment infrastructure, so they often need intermediaries to help them settle each transfer, which can add days to the process. Ripple developed the Ripple Payments network to solve that problem -- it allows banks to settle transactions between one another directly, which means they are basically instantaneous.
Ripple created the XRP cryptocurrency to standardize each transaction and reduce costs. Banks in two different countries can incur substantial foreign exchange fees when they send payments in their domestic currencies, so they might choose to send XRP to one another instead. Each cross-border transfer incurs just 0.00001 XRP in fees, which comes out to a fraction of a cent.
Therefore, unlike most other cryptocurrencies, XRP has a true use case in the real world -- but this was also the source of its regulatory troubles. XRP has a total supply of 100 billion tokens, but Ripple still controls 41.4 billion of them and issues them to institutions as needed to meet demand. Therefore, in its 2020 lawsuit, the SEC argued XRP should be classified as a financial security (like a stock or a bond), and thus subject to registration and disclosure requirements.
