Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Can the SEC Kill Ripple (XRP)?

The US Securities and Exchange Commission (SEC) could kill the fourth-largest cryptocurrency Ripple (XRP) with a lawsuit.

The organization behind Ripple; Ripple Labs, violated federal law by selling unregistered securities, an SEC press release alleges. In the suit, the SEC asks the United States District Court for the Southern District of New York (Manhattan) to block the distribution of the Ripple (XRP) and Flare (FLR) cryptocurrencies.

“From at least 2013 through the present, Defendants sold over 14.6 billion units of a digital asset security called “XRP,” in return for cash or other consideration worth over $1.38 billion U.S. Dollars (“USD”), to fund Ripple’s operations and enrich Larsen and Garlinghouse,” the SEC’s complaint alleges. “Defendants undertook this distribution without registering their offers and sales of XRP with the SEC as required by the federal securities laws, and no exemption from this requirement applied.”*

Garlinghouse is Bradley Garlinghouse; RIpple’s current CEO. Larsen is  Christian A. Larsen, the company’s co-founder, executive chairman of its board, and former CEO.

Lawsuit shows the SEC wants to Regulate Cryptocurrencies

I think the lawsuit is an attempt to establish the SEC’s authority over cryptocurrencies so it can regulate digital tokens and blockchain products.

In the suit, the SEC claims Ripple (XRP) is a security. In the United States, they must register all securities with the SEC. The registration allows the SEC to review and approve the securities. Hence, the SEC wants to establish its authority to review, approve, and regulate cryptocurrencies.

Thus, the SEC is alleging Ripple Labs, Garlinghouse, and Larsen violated federal law by issuing and distributing a cryptocurrency. I think the suit could be a game changer.

How the SEC could destroy the Cryptocurrency Markets

If the courts uphold the lawsuit, I think the SEC could gain the ability to regulate all cryptocurrencies.

If a federal court rules Ripple is a security that needs SEC registration. That will give the SEC the power to declare all cryptocurrencies securities and regulate or ban them. Theoretically, the SEC could gain the authority to ban Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Litecoin (LTC), and EOS (EOS).

Hence, one court decision in Securities and Exchange Commission vs. Ripple Labs Inc., Bradley Garlinghouse, and Christian A. Larsen could destroy the market for all cryptocurrenices. To explain, the SEC could gain the power to block the distribution of any unregistered cryptocurrency in the United States.

That could create an unfamiliar environment that could favor large institutional cryptocurency creators such as EOS maker and ironically, Ripple Labs. To explain, those organizations have the money to hire lawyers and lobbyists to fight for registration and approval.

How the SEC could Destroy a Cryptocurrency’s Value

Notably, Coindesk claims liquidations for XRP futures soared after the SEC filed the lawsuit. To explain, SEC sued on 22 December 2020. By Christmas Eve 2020, two days later, speculators had liquidated $1.5 billion in Ripple futures.

I think speculators are liquidating Ripple because they fear it could soon be worthless. Similarly, Ripple’s Coin Price fell from 63.9¢ on 17 December 2020 to 33.9¢ on 25 December 2020. Furthermore, CoinMarketCap estimates Ripple’s (XRP) Market Capitalization fell from $29.044 billion on 17 December 2020 to $15.198 billion on Christmas Day, 2020.

Consequently, I think SEC actions could lead to a crash in all cryptocurrency markets. For example, what will happen if the SEC declares Ethereum (ETH) or all ERC20 tokens “unregistered securities” and bans them? That could destroy the blockchain industry because estimates there were over 200,000 ERC20 Tokens in October 2019.

To elaborate, ERC20 Tokens are cryptocurrencies built on the Ethereum blockchain. Ethereum is the most popular blockchain.

Obviously, I think speculators could make money by identifying cryptocurrencies the SEC plans to regulate and shorting them. Therefore, all cryptocurrency speculators need to watch Securities and Exchange Commission vs. Ripple Labs Inc., Bradley Garlinghouse, and Christian A. Larsen and read it.

Why the SEC wants to Regulate Cryptocurrencies

I suspect the SEC’s regulators fear the development of an enormous unregulated market for blockchain securities and equities. Notably, promoters have plans for gold, real estate, and stock backed cryptocurrencies.

The fear at the SEC is the Commission could have no control over those products. Hence, the SEC could have no means of stopping the distribution of fraudulent or worthless cryptocurrencies.

For example, a real-estate backed ERC20 token that is not backed by real estate or by swampland. Or a mortgage-backed cryptocurrency backed by NINJA (no-income, no job-no asset) loans.

A more destructive product could be a US dollar stablecoin not backed by US dollars. To explain, a stablecoin is a cryptocurrency that contains a digital robot. The robot makes payment in fiat currency held in a trust account.

If there is no money in the trust account, the stablecoin is worthless. There needs to be some agency to check the trust account and make sure the dollars are there.

What happens if a stablecoin’s trust accounts are empty? I think the entire stablecoin market could collapse if one stabelcoin fails to pay in fiat currency

The exposure of such products as worthless or fraudulent could bring the entire market or economy crashing down. Remember, the exposure of mortgage-backed derivatives as worthless helped the trigger the Great Financial Meltdown in 2007 and 2008.

Exposure of frauds or worthless securities can lead to panics, and selloffs that can trigger market crashes. For instance, some historians believe the exposure of British corporate raider Clarence Hatry’s company as fraudulent on 20 September 1929 was one cause of the Great Crash of 1929 and the Great Depression.

Thus, the SEC is trying to do its job and protect the cryptocurrency market from fraudsters and itself. Without regulations, fraudsters gain the ability to wreck the markets.

The Real Danger from Digital Investments

The SEC’s lawsuit exposes what I consider the real danger from digital financial instruments such as cryptocurrencies and stablecoins.

To explain, the blockchain, apps, and the internet can put dangerous next-generation financial products few people understand in everybody’s phones. The 2007-2008 financial crisis began because investment bankers relied on a new financial product they did not understand mortgage-based derivatives.

The markets melted down because some of the most well-informed, highly intelligent, and sophisticated investors could not understand what they were trading. Now, the blockchain could put what Warren Buffett calls financial weapons of mass destruction into everybody’s hands.

Ordinary people could put their savings into derivatives and not realize it. Hence, the real danger from digital financial products is not “grandma starving to death because the supermarket refuses to accept her paper cash” as many Luddites in the media think.

Instead, the true danger is grandma investing her Social Security payments in dangerous next generation financial products. Grandma could gain the ability to wipe herself and everybody else out.

Hopefully, the SEC and other regulators can figure out some way of preventing that nightmare scenario.