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Third Lawsuit Served To Ripple On Allegations Of Artificially Inflating The XRP Token

Third Lawsuit Served to Ripple on Allegations of Artificially Inflating the XRP Token

Reading Time: 2 minutes by on July 5, 2018 Altcoins, Business, Finance, News

Blockchain-based payments processor, Ripple, was served a court notice in June 2017 for potential security fraud, their third notice in three months.

Ripple Hit by Lawsuits

The latest suit reveals that an investor in Ripple’s native token, XRP, holds the company responsible for insider-trading, inflating the value of their token, and maintaining their stance on not being involved in XRP while profiting from price increases all the time.

As alleged, XRP’s token model is unlike many other cryptocurrencies, which rely on mining or a Proof-of-Stake/Contribution model to confirm transactions and ascertain a value. Instead, XRP follows a mining-free, distributed, and seemingly centralized token structure.

Due to these reasons, the lawsuits claim that XRP is simply a method of fundraising for the parent company, with one lawsuit in April calling it a “neverending, year-long ICO.” By these measures, Ripple may have raised over $19 billion by selling the XRP, as per data collated on CoinMarketCap.

While the XRP token remains unclassified as a security in the U.S. market, all three lawsuits demand a thorough audit of the role XRP plays in Ripple’s business model. Unsurprisingly, a report by The Recorder in June 2018 noted that proceeds from selling XRP “dwarfed any other source of revenue at Ripple.”

Howey Test to Determine XRP’s Status?

In case the court decides to apply the famous Howey Test, a regulatory framework to determine security status, to the XRP, Ripple may face a grim legal scenario and cause unprecedented panic among amateur investors. The Howey Test, which is based on a precedent set in a 1946 court case, observes that “a transaction is a security if it is an investment of assets, there is an expectation of profits from that investment, that investment is in a common enterprise.”

If illegal operations are proven, the San Francisco-based Ripple Labs and its board of directors are likely to be held responsible for facilitating the unauthorized sale of a security token for several years, raising billions of dollars in the process.

Ripple Utilized Several Tactics to Drive Price

Interestingly, the June 2018 lawsuit mentioned Twitter as a substantial source of generating hype for the XRP token, citing these tweets. Also in June 2018, BTCManager reported a research paper that found a clear correlation between a coin’s price, Twitter activity, and project development.

The court documents stated:

“Ripple’s publicized move to place 55 billion XRP tokens in escrow as a means to ‘ensure certainty of total supply’. This was seen as a means of reassuring investors that Ripple’s majority control of the total circulation would not be abused by sudden, large sell-offs – instead, it is alleged they were just selling tokens slowly and quietly.”

Meanwhile, Ripple Labs have brought in Mary Jo White, former Securities and Exchange Commission (SEC) chair, and her enforcer, Andrew Ceresney, to prime their legal defense.

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