Ripple, the custodial company to the open-source cryptocurrency XRP, owns 60 percent of all XRP ever created; these holdings are valued at $22 billion at current prices. Furthermore, company \u2018insiders\u2019 also hold a large percentage of circulating XRP. Could this wealth concentration adversely impact token holders?<\/p>\n
Bitcoin<\/a> and Ethereum<\/a> enthusiasts have viciously debated Ripple<\/a>-supporters over XRP\u2019s<\/a> alleged centralization. One of the main points of contention concerns XRP\u2019s concentration in Ripple\u2019s coffers.<\/p>\n The majority of XRP is owned by Ripple Inc. Furthermore, the founders of the company and its current executives hold influential amounts of XRP.<\/p>\n Because such large amounts of XRP are concentrated in the coffers of Ripple Inc., these holdings could result in unfavorable regulatory treatment<\/a> and pose a risk to token holders.<\/p>\n Regulatory bodies such as the Securities and Exchange Commission, FinCEN, and the Commodity and Futures Trading Commission could enforce a number of different rulings that may hinder the use or sale of XRP.<\/p>\n One of the larger concerns surrounding XRP is potential securities classification<\/a>. If such a classification was enacted, it would make XRP\u2019s use as a vehicle for remittances\u2014and the general purchase of the cryptocurrency\u2014much more difficult overall.<\/p>\n Another risk is increasing supply. Ripple needs to sell XRP from its coffers to expand, disgruntled business partners may decide to cash out<\/a>, and institutional clients<\/a> could flood the market after getting a bulk deal on the token. Whatever the reason, as XRP\u2019s circulating supply expands it puts downwards pressure on the price.<\/p>\n According to Ripple's official website<\/a>, XRP offers banks and payment providers an option to source liquidity for cross-border payments. Using XRP, banks can send payments without using pre-funded deposits of foreign currency (nostro accounts) held in other banks.<\/p>\n Ripple is a deflationary asset. The supply of Ripple is fixed, and each transaction incurs a small fee that is taken out of circulation.<\/a><\/p>\n XRP was created in January of 2013. A total of 100 billion coins were created.<\/a> Of those 100 billion, 80 billion were allocated to Ripple and 20 billion were split between the three founders in the early company.<\/p>\n According to BitMEX Research<\/a>, at the time of distribution, XRP was allocated to the founders as follows: Chris Larsen<\/a>, 9.5 billion<\/a>, Jed McCaleb<\/a>, 9.5 billion, Arthur Britto, 1 billion.<\/p>\n Contrary to BitMex\u2019s findings, McCaleb\u2019s wallet indicates total holdings of 5.2 billion<\/a>. There is little concrete evidence of Britto\u2019s holdings. Of the three original founders, Chris Larsen is the only one still actively involved with Ripple. He currently sits<\/a> as the executive chairman of the company\u2019s board of directors.<\/p>\n Newer participants in the company include Ripple\u2019s current CEO, Brad Garlinghouse<\/a>, and the company\u2019s CTO, David Schwartz<\/a>. It is unknown how much XRP these executives (or other insiders) hold.<\/p>\n Presently, Ripple\u2019s Q3 2018 report<\/a> shows that the company owns roughly 60 billion of the total XRP\u2019s total supply:<\/p>\n \u201cIn Q4 2017, Ripple locked up 55 billion XRP in a cryptographically-secured escrow account. Ripple created the lockup to create certainty of XRP supply at any given time. Due to that lockup, Ripple has access to only 13 percent of the total XRP in circulation. Ripple\u2019s sales were a tiny fraction of that amount.\u201d<\/p>\n<\/blockquote>\n There is roughly 41 billion circulating XRP. If Ripple has access to 13 percent of these coins then 5.3 billion coins available for immediate use. In total, that puts the company\u2019s holdings at roughly 60 billion XRP. The other 55 billion is locked<\/a> up in escrow, as asserted by Ripple.<\/p>\n As of January 2018, according to Forbes<\/a>, Chris Larsen<\/a> and Jed McCaleb<\/a> still own 5.2 and 5.3 billion XRP, respectively. Brad Garlinghouse and (possibly) David Schwartz, also own unspecified amounts of XRP.<\/p>\n These figures could suggest that upwards of 10 billion XRP in circulation are owned by company insiders. If the 5.3 billion coins that the company has for immediate use are included, then that suggests that over 37 percent of the circulating supply is controlled by a handful of parties.<\/p>\n That said, these insiders are likely contractually bound to how much XRP they are allowed to sell at any given time. For example, McCaleb is restricted<\/a> to how much XRP he can sell based on a settlement with Ripple after leaving the company<\/a> to start Stellar in July of 2013.<\/p>\n \u201cThe remaining 5.3 billion XRP as of February 2016 are in a custody account at Ripple and are meted out to him on a monthly basis. Since the agreement was reached, he has been allowed to sell less than 1% of average daily volume on one exchange that now itself accounts for only 1%-2% of all XRP trading volume.\u201d<\/p>\n<\/blockquote>\n Early on, Ripple made it clear that it is taking steps to actively preserve and increase the value of XRP. In a November 2014 document<\/a>, the company stated:<\/p>\n \u201cRipple Labs plans to retain 25% of all XRP issued to fund operations (and hopefully turn a profit) and distribute the rest to incent the participation of market makers, gateways, and consumers to utilize the protocol. Given that there is a finite number of XRP, [and] as demand for XRP grows, the value of XRP should appreciate. In this manner, Ripple Labs believe that its incentives are aligned with those of protocol\u2019s users\u2013both want the protocol to reach its full potential and scale.\u201d<\/p>\n<\/blockquote>\n Given Ripple\u2019s majority ownership of the cryptocurrency, these steps make sense to preserve XRP\u2019s long-term value. A February 2015 excerpt from Ripple\u2019s submission to the Conference of State Bank Supervisors<\/a> iterates the company\u2019s early emphasis on price preservation:<\/p>\n \u201cRipple Labs holds a substantial amount of XRP, which it sells from time to time… Through these sales, Ripple Labs is able to monetize these assets to fund its operations, specifically the development and adoption of the protocol. This exposes Ripple Labs to the market risk of XRP\u2019s value. Ripple Labs has taken numerous steps to identify, monitor and mitigate sources of market risk. Ripple Labs has established legally-binding agreements with insiders and owners of large amounts of XRP that protect against a large scale sell-off of the asset.\u201d<\/p>\n<\/blockquote>\n As XRP and stakeholders in the company continue to increase the circulating supply, the value of the token will experience strong downwards pressure. Further exacerbating this risk is XRP has relatively low trading volume compared to Bitcoin and Ethereum. As explained by Investopedia<\/a>, this makes XRP more vulnerable to price drops:<\/p>\n \u201cOne risk of low-volume stocks is that they lack liquidity, an important criterion in stock trading. Liquidity is the ability to be easily bought or sold in the market without a change in price.\u201d<\/p>\n<\/blockquote>\n For December, XRP\u2019s 24-hour trading volume fluctuated between $300 million and $1.7 billion. XRP\u2019s trading volume sits at roughly an eighth of Bitcoin\u2019s and a fourth of Ethereum\u2019s.<\/p>\n Lower trading volume is usually a sign that a cryptocurrency\u2019s books are thinner than its competitors. If a large token holder was to dump their XRP, it would likely cause a greater drop in price than if someone were to sell the same percentage of total coins for either BTC or ETH.<\/p>\n As mentioned above, those such as McCaleb are regularly selling their holdings of XRP. Some even worry that McCaleb could single-handedly \u201cdecimate the price\u201d:<\/p>\n Jed McCaleb is selling more XRP than he is supposed to according to the 2016 agreement he has with Ripple Inc<\/p>\n Jed is the the single largest individual holder of XRP. He can absolutely *decimate* the price if he chooses, and he has motivation in the form of Stellar to do so https:\/\/t.co\/NgOyO3yUXq<\/a><\/p>\n — Kyle Samani (@KyleSamani) September 24, 2018<\/a><\/p><\/blockquote>\nRisks of Wealth Concentration<\/h2>\n
Primer on XRP<\/h2>\n
Who Are the Stakeholders<\/h2>\n
Ripple\u2019s Current XRP Holdings<\/h2>\n
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Insiders\u2019 Holdings<\/h2>\n
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Ripple\u2019s Incentives to Increase the Value of XRP<\/h2>\n
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XRP Vulnerable to Supply-Side Pressure<\/h2>\n
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