Taking Apart the Ripple Conspiracy

In my three years of investing in crypto, rarely have I seen such a vociferous opposition to a particular coin. Don’t get me wrong – I’ve been known to indulge in the odd conspiracy myself. I’m certainly not of the school of thought that Conspiracy Theorist = Nut-Job. However, all conspiracy theories are just that – theories – until proven. And even before they’re proven, they have to bear some relation to the facts on the ground.

For example, it remains most unlikely that John F. Kennedy’s head was thrown backwards by a bullet striking him in the back of the head.
It remains highly unlikely that simple fires brought down the three WTC buildings on 9/11.
It remains highly unlikely that a Boeing 747 squeezed through a 16-foot hole in the wall of the Pentagon on that day, without even breaking windows on either side.

These all still remain officially unproven conspiracy theories, but they do at least have the facts on the ground on their side.

The Ripple Conspiracy Theory (henceforth RCT, as we love acronyms in crypto!) seems to divide into four parts.

1. Ripple is a ruse by the banks to destroy the crypto market, having previously failed using fake news stories about the dangers and pitfalls of crypto.
2. Ripple is not a true crypto coin because it’s centralised, not decentralised.
3. The banks own and control the bulk of the Ripple coins, and they are forcing the market up now in order to generate massive profits for themselves.
4. The banks are manipulating us to give them our ‘real’ cryptos, BTC and ETH, in exchange for hyped XRP, which they will then subsequently crash to zero, thereby bankrupting us all.

(I may be over-egging that last one a bit, but you get the basic picture).

My overall take on these is that have been dreamt up by people who a) know little about the history of Ripple, b) have not read any of the Ripple white papers or protocol documents, c) know little about how banks operate, and d) are not thinking through, in any realistic way, the consequences of some of these ideas, and what possible motivation could lie behind them.

Let’s take them apart, one at a time, and have some fun along the way.

Ripple is a Ruse!
This one is generally expressed in rather breathless tones, to imply that the banks are rushing headlong into this Ripple thing, in a blind panic, determined to head off the crypto threat at the pass, having failed in all previous attempts. There’s all sorts of holes in this one, but let’s just focus on two.

The first big hole here is that banks are looking for ways of embracing distributed ledger technology, of which the blockchain, the bit that records a transaction, is a part. Why wouldn’t they? It would mean near real-time processing and would, by industry estimates, create a saving of some $20 billion a year. They’re hungry to get some of that, but also realistic; it’ll take time for the technology to be mature and robust enough to be rolled out into transnational banking at any scale (though UBS have a limited rollout planned for 2018, as do the Australian Stock Exchange).

We all hold ETH in high regard. But remember, their network was hacked and some $60m of ETH was stolen. This prompted a hard fork, in effect a reset to fix the underlying issue. Banks need to see these issues ironed out in the relatively small and risky crypto arena now, before they dive in fully. Can you imagine the chaos if a similar hack happened on, say, the HSBC distributed ledger, and a hundred times that amount was stolen?

The second big hole is the fact that Ripple-the-company is coming up to its 14th birthday. That’s positively ancient in crypto!! Suggesting that the banks are rushing on to the attack now is ludicrous. They’d have seen the writing on the wall back in 2004, when RipplePay was launched. Are we saying that they’ve sat on their hands for close to 14 years, knowing what was coming, and suddenly swung into action now? I don’t think so.

Ripple is Centralised!
This is true. Or at least, it’s designed to be centralised, which is not quite the same thing. And, interestingly, it’s designed so that it doesn’t need Ripple-the-company to be its centre.

I think this one comes from a basic misunderstanding of what centralised means here.

The beauty of the entire crypto eco-system is that it’s all based on the distributed ledger; a database that is distributed across hundreds, thousands, millions of machines, making it impossible to hack (in theory, though Ethereum and others have occasionally found reality to be somewhat harsher than that) and creating agreement (consensus) across all versions of the ledger. The downside, as were seeing with Bitcoin and others, is that reaching this agreement puts relatively massive time lags into the system, causing delays in completing transactions. The time lags are also necessary to avoid soft forks creating havoc in the ledger, but we’ll leave that issue for another time.

(Ripple, incidentally, get around the delays caused by the time it takes to reach consensus by creating sub-networks within the larger distributed network. A sub-network can reach trusted agreement much faster than the whole, and overall agreement can be reached much faster by the sub-networks agreeing, as opposed to every individual node. It’s safer, too, which it needs to be for banks to be adopting it).

So Ripple uses its own version of this exact same technology and infrastructure which is, by definition, decentralised.

What the RCT people are getting their panties in a bunch over is the fact that Ripple has (gasp) a CEO, and a board of directors. In the management and running of the show it is, therefore, under central control.

Is this, in and of itself, a bad thing? I don’t honestly know. What I do know is that it’s a model that’s worked pretty well for hundreds of years, certainly since we started incorporating companies in the UK in 1844, and likely a good while before that. Companies with CEOs and boards have created huge wealth for millions of people – think Apple, Microsoft, Google, Amazon, WalMart, BP, Exxon, Shell, Boeing, Airbus – I could go on for hours. And if you look at a fully decentralised model, like BTC, yes you see growth (on a rapidly aging technology, as we all know), but you also see multiple hard forks that are broadly viewed as being less than helpful.

There’s a balance to be struck here, clearly, but don’t go thinking that Ripple is tearing up the crypto rulebook (who wrote that, by the way, and who forgot to return it?) by moving away from the decentralised ledger model. They’re not.

The Banks Own Most of the Ripple Coins!
Errr…no.

There are 100 billion pre-mined XRP in existence. Just short of 40 billion of those are currently available in the open market. The company have frozen a further 55 billion into a smart contract that allows for the sale of up to 1 billion into the market every month. The proceeds from these sales cover the working capital of Ripple-the-company, paying salaries, growing the business and so forth. The company don’t actually need that much money every month, so the coins they don’t need to sell get fed back into the pool. What this means is that, though the 55 billion would last for 55 months, beinging realeased at 1 billion a month, the reality is that, given that those unsold get fed back in, the 55 months could easily extend to 65 month or more.

Banks who are clients of Ripple-the-company (80+ and growing) are given an amount of Ripple-the-coin as an incentive to join the Ripple network, but I think it’s fair to say they are not really interested in the coin itself. Their interest, as discussed above, is in the underlying infrastructure.

I think this reveals another fundamental misunderstanding.

Consider the ICO. Now, I’ve heard crypto experts like David Levine go to great lengths to explain why coins are not anything like stocks and shares, and broadly speaking, he’s right. You don’t own a part of Ripple-the-company by owning a bunch of Ripple-the-coin. The one place there is a close similarity, though, is in the ICO.

ICO – Initial Coin Offering – the illegitimate lovechild of the Olde Worlde IPO – Initial Public Offering.

In an IPO, a company decides to sell a portion of their stock to the Great Unwashed. They bring in lawyers to write the offer documents, and banks to roadshow the offering, and also to underwrite the offer, meaning they agree ahead of time to pick up any unsold stock. The stock is finally listed on a recognised stock exchange in their chosen jurisdiction. And the company get charged massive fees by all and sundry.

What’s the point of such an exercise? Simply to raise funds, either for R&D, for organic growth, for growth through acquisition, for the personal enrichment of founders and directors, and so on.

An ICO is a lot simpler, a lot cheaper, and currently completely unregulated (though this will change, sooner or later) and, as stated earlier, does not lead to the Great Unwashed getting a stake in anything. It just leads to them (us) owning their digital tokens, otherwise known as coins.

However, the end result for the issuer is identical – to raise funds to grow the business. A white paper in the ICO world is like a business plan in the IPO world! We buy into an ICO because we find the business plan promising and compelling, because it solves a real-world problem, and because it is written by people who know what they’re talking about. An ICO is, in effect, a form of crowdfunding.

So Ripple-the-coin exists to help fund Ripple-the-business.

As we said earlier, the banks primary interest is in running some or all their interbank transactions on the Ripple distributed ledger platform, saving themselves an estimated $20 billion a year in transaction costs alone, let alone the savings involved in cutting transaction times down from hours and days to seconds and minutes.

There’s also the fact that banks charge each other fees for these transactions, plus all banks that have cross-border relations with each other have to maintain foreign currency balances in nostro and Vostro accounts, and there’s a cost to that, too, which Ripple can make disappear.

In summary here, Ripple-the-company own most of Ripple-the-coin, while the banks are paying customers of Ripple-the-company, looking to use the Ripple infrastructure. All the XRP out in the open market are there to fund further development of that infrastructure.

Which leads nicely on to…

Ripple is a Massive, Bank-Led Pump-and-Dump Scheme!
This one makes the least sense so far, in my opinion.

Ripple-the-company hold most of the XRP, so why would they ever want to see the value of that holding collapse? It would bankrupt the company.

The banks are using the Ripple infrastructure to save themselves $20 billion a year, some years down the line. Why would they want to bankrupt the very company that is bringing them this technology?

Even if the banks and Ripple between them are actively cornering the market, manipulating it, manipulating us, what’s the point? Are they really going to value short-term pump-and dump-profits over a $20-billion-a-year-saving that could continue for decades? I think not.

The Banks Want Your BTC and ETH in Return for Soon-to-be-Worthless XRP!
Well….maybe. But I highly doubt it.

Look, I’ve worked with bankers. I consulted to Royal Bank of Scotland for over a year. I spent three years working at one of the new UK ‘challenger’ banks, helping them get their UK banking license. I’ve seen how bankers operate, how they think, how they scheme and manipulate, so I’m not some innocent here, thinking their all lovely people. Not at all.

But, for the most part, they’re nowhere near as clever as they like to think, or as they portray themselves. Look at Jamie Dimon’s comments on bitcoin in the past year as a case in point. And this part of the RCT implies that the banks know enough about the future to effectively bet on BTC and ETH, and against XRP. That’s an extremely tough case to make right there!

We’ve already established that the banks are a lot less interested in XRP than they are in the underlying Ripple network. The network is where the real value lies for them. If they’re betting against XRP, they’re also betting against Ripple as a whole, including the very infrastructure which could deliver $20 billion a year in cost savings. They’re not clever, on the whole, but nor are they stupid, and certainly not stupid enough to squeeze a single, one-off golden egg out of a golden goose by throttling the thing to death!

In conclusion, I’m not here to try to convince you. In the nicest possible way, I really don’t care what you think.

What I DO care about is seeing the good name of conspiracy theories (!) being dragged through the mud by people spinning a series of somewhat interconnected tales that have nothing more than a tenuous link to reality, and simply don’t stand up under scrutiny.

Those who have not been swayed by my arguments here, I see you. There you are, sitting at your computer (bought with a credit card), in your home (for which the rent or mortgage is paid directly from your bank account each month), lit by the electricity and warmed by the heating that you also pay for from your bank account each month, planning the downfall of the global banking system by simply refusing to buy Ripple. That’s your right, your prerogative. Just don’t expect the banks to notice.

By way of full disclosure, I do own a small amount of Ripple, plus holdings in around 14 other coins.