Understanding Ripple, XRP and the SEC Suit

We explain the difference and connections between Ripple and XRP and the history and the state of the SEC's case against Ripple.

AccessTimeIconMar 29, 2022 at 9:21 p.m. UTC
Updated Apr 10, 2024 at 2:28 a.m. UTC

Ripple and XRP are back in the news after a three-year court battle between Ripple and the U.S. Securities and Exchange Commission (SEC) over whether the XRP token is a security. Complicatedly, the judge overseeing the case in the U.S. District Court of the Southern District of New York ruled that XRP is a security when Ripple sold it to institutional clients but isn’t a security when XRP is sold to the general public through crypto exchanges.

Ripple’s chief legal officer, Stuart Alderoty, declared the decision “A huge win” on Twitter. Others characterized the ruling as a partial win, albeit a significant one.

To understand what this ruling means and how we got here, we’ll have to step back a bit and break down the history of Ripple, the cryptocurrency XRP and the years-long path to the federal ruling.

Ripple’s History

The technological concepts behind Ripple reportedly predate Bitcoin by four to five years. In 2004-2005, Ryan Fugger, a Canadian computer programmer, developed RipplePay as a way to provide secure payment options to members of an online community via a global network.

But it would take another six years before the blockchain-based payment system known as XRP and its founding fintech company, now known as Ripple, were started.

The XRP Ledger is an open-source, public blockchain that was first created in 2011 by developers Arthur Britto, Jed McCaleb and David Schwartz to solve the inefficiencies of cross-border remittance and payments in traditional banking. (The three, along with the addition of Chris Larsen as CEO, would later found the company now known as Ripple.) The XRP Ledger serves as the rails on which the decentralized XRP cryptocurrency runs.

Distinct from the XRP asset, the Ripple transaction protocol, known as RTXP, was officially launched in 2012, and that was followed shortly by a rebranding of the company (originally known as OpenCoin) to Ripple Labs in 2013. That company changed its name again to Ripple in 2015https://ripple.com/insights/a-new-chapter-for-ripple/.

Although Ripple and XRP are inherently related, they are still separate entities – at least, on paper. Ripple is a centralized fintech company that builds global payment products and that developed the XRP payment system, which the firm describes as decentralized. XRP is an independent digital asset used for things like online payments and currency swaps, and as of July 2023, it had a market cap of about $37 billion – making it the fourth-largest cryptocurrency.

Still, Ripple uses XRP and XRP's public blockchain to power its products.

What is Ripple, exactly?

Unlike the public nature of Bitcoin and Ethereum that seek to disrupt legacy finance, Ripple focuses on improving the existing and fragmented traditional banking system.

It does that by unifying a network of independent banks and payment providers with a standardized protocol to communicate and send low-cost, immediate payments worldwide.

Co-founded by McCaleb, who later became the chief technology officer of Stellar, a rival project with similar aims, and Chris Larsen, the company initially introduced three main products for money transfers between banks.

Those products included xRapid, a liquidity product; xVia, a payment application programming interface; and xCurrent, a real-time settlement system. In 2019, xCurrent and xVia were combined and rebranded to RippleNet. xRapid was also renamed "On-Demand Liquidity" (ODL), which is a product used to speed up the transfer and exchange of fiat currencies between countries.

How does Ripple work?

There are two main components that comprise Ripple:

  • Ripple: In its entirety, Ripple provides a real-time gross settlement system (RTGS), currency exchange and remittance network. The platform, which is supported by its blockchain payment protocol, uses RippleNet to facilitate instantaneous transactions between financial entities.
  • RippleNet: RippleNet is the distinct network of payment facilitators and global banks that helps streamline communication and allows participants to send and receive payments seamlessly through Ripple’s distributed platform.

Like the standardized HTTPS, which is used as a common protocol for information transfer across the internet, RippleNet provides a framework and a set of rules called the Ripple Transaction Protocol (RTXP) for all network participants to follow, thereby reducing bottlenecks in transactions.

Applications can connect to the XRP Ledger through HTTP or WebSocket APIs. They can also use a library in various programming languages, including Java, JavaScript, Python, and more.

While anyone can connect to the ledger, only a few trusted validators approve transactions, and those are mostly well-known banks and financial institutions. In March 2022, the network could process up to 1,500 transactions per second with a fee of $0.0007. That is faster than Ethereum, which completes around 10 transactions per second, and Bitcoin, the original and largest blockchain, which can handle four to five transactions per second. One reason the XRP is so much faster is because it relies on a smaller network of operators, reducing the latency that comes with greater decentralization.


Gateways provide an entry point for external people or entities who want to join the Ripple network. The gateway acts as a trusted intermediary – usually in the form of banks – to help two parties complete a transaction. They provide a channel to transfer funds in fiat and cryptocurrencies using the Ripple network.

How does XRP work?

XRP is the native cryptocurrency of the XRP Ledger, a public blockchain that relies on something called the “federated consensus” algorithm to secure and confirm transactions. It differs from the proof-of-work mechanism used by Bitcoin, and from Ethereum’s proof-of-stake.A key difference is that, unlike the bigger public blockchains, participants in the Ripple network are known and trusted by each other, based mainly on reputation. As of July 2023, there were more than 150 validators on the network and over 35 on the default unique node list (dUNL) – a list of nodes that a network participant trusts.

Three entities – Ripple, the XRP Ledger Foundation and Coil (a Ripple-funded entity) – publish lists of recommended validators based on aspects like past performance, verified identity and secure IT policies. As more validators join the network, participants have more flexibility to choose who they add to their UNL, although that provides a level of risk because not all validators carry the same level of trust and performance.

In contrast to conventional methods of overseas payments (a process that can take one to four business days), XRP can be used to provide on-demand liquidity or act as a bridging currency to settle cross-border transactions in less than five seconds and at a fraction of the cost of traditional money transfers.

To cover the cost of transaction fees, a small amount of XRP – about 10 drops, which are units of XRP worth 0.00001 XRP each – is destroyed. While the cost of sending XRP varies depending on network activity, all related transactions are executed and settled on the XRP Ledger.

Unlike other cryptocurrencies, XRP can't be mined, and no new tokens will ever be created. That is because the founders issued the entire supply of 100 billion XRP tokens upon the ledger’s launch in 2012. To help the business scale, the founders allocated 80 billion tokens to Ripple and pocketed the remaining amount.

Additional XRP can still be circulated on secondary markets whenever Ripple decides to sell coins from its pre-mined supply. For example, in 2017, the company transferred 55 billion of its 80 billion XRP tokens into an escrow account from which it could sell a maximum of 1 billion tokens per month. That was organized to help improve the transparency and predictability of XRP sales.

XRP tokens held in escrow are deemed “undistributed,” with the rest accounting for the circulating supply. Any unsold tokens are returned to the escrow and re-distributed at a later date.

In March 2022, the escrow account held 46.1 billion XRP tokens. Data regarding the total XRP held and distributed by Ripple can be found on its website.

How can you buy or sell XRP?

Until the ruling in July 2023, U.S. exchanges had either delisted or temporarily halted the ability to trade XRP while the SEC suit was ongoing. Shortly after the ruling, Coinbase, Kraken and others listed XRP or announced plans to re-list for trading, though there are some restrictions still in place. For instance, New York residents were unable to buy XRP on Coinbase as of writing.

Residents outside the U.S. were able to trade XRP on exchanges like Binance, eToro and Kraken, which continues unaffected.

Pros and cons of XRP

Although it uses the open nature of blockchain to decentralize its bookkeeping and keep transactions transparent, XRP is more centralized than Bitcoin or Ethereum in that no public entity or person outside of Ripple can determine the issuance of new coins.

That is largely because XRP is ostensibly more a tool for transferring value across borders via Ripple products than it is a speculative investment vehicle – although to the SEC’s mind, it had unquestionably functioned as an investment, which led the regulator to charge Ripple in 2020 with illegally raising $1.38 billion from investors in what the SEC regarded as an “unregistered securities offering.” We’ll get more into the suit below.

Here are some advantages of Ripple and XRP:

  • Fast, efficient, and transparent payments with an added liquidity tool to help streamline the settlement process.
  • XRP settlement speed is faster than Bitcoin's or Ethereum's.
  • Ever-improving scalability – the XRP network can handle up to 1,500 transactions per second.
  • The cross-border currency payment system has attracted more than 100 financial institutions including banks to its network.

Here are some of the drawbacks:

  • RippleNet is not wholly decentralized compared with other public blockchains.
  • Because its products are tailored for big financial institutions, there is little practical relevance for retail users, although that hasn’t stopped its rabid fans, known as the XRP Army, from pumping the coin on Twitter.
  • Because a large majority of XRP is held by Ripple, the token's price could be easily manipulated or negatively influenced by saturating the market with large sales.

Understanding the Ripple vs. SEC Case

The battle between Ripple and the SEC is one that’s been watched closely by the crypto and financial industries as it has been seen as a bellwether for other regulation and ongoing cases with the SEC.

As noted earlier, the SEC filed its case in 2020 against Ripple alleging that the XRP token was an unregistered security that the company sold in violation of U.S. law. The case put forth that the sale of $728.9 million of XRP in direct institutional sales set the expectation that those investors would profit from Ripple’s work, which is a tenet of the Howie Test.

Ripple used those funds to "promote and increase the value of XRP by developing uses for XRP and protecting the XRP trading market," according to the court order.

The second half of the ruling however, went in Ripple’s favor as the court found that “programmatic sales” of XRP through exchanges or algorithms did not set the same expectations, as there was no definitive proof that retail investors expected to profit from the efforts of others.

The ruling has been called a ‘landmark’ judgment by broker Bernstein in a research report released following the decision, writing that it shifts the “regulatory cloud over the crypto industry.” JMP Securities similarly lauded the decision as a “milestone win” but also noted that it isn’t the end of the crypto’s regulatory fight. The SEC can appeal the ruling and will likely pursue similar cases in the future.

UPDATE (July 14, 2023): Makes edits throughout following the U.S. District Court of the Southern District of New York ruling.

This article was originally published on Mar 29, 2022 at 9:21 p.m. UTC


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Mason Marcobello is an Australian writer who has written for The Defiant, Decrypt and CoinDesk.

Toby Bochan

Toby Leah Bochan was the Managing Editor of Web3 and Learn at CoinDesk. Toby holds BTC.

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