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SEC vs. XRP – The Great Summation! LetMe Bottomline it For You.

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Transcript:

Hello All, and welcome to THE GREAT XRP SUMMATION. In the next ten minutes I will impart all my XRP knowledge upon you and then, having nothing more to give, I will fall into a coma for 100 years.

Let us begin.  Today, I am going to hopefully clear up some confusion surrounding XRP and in general what a security is, explain why the exchanges have halted sales, and FINALLY (at the end, always at the end) I will summarize the legal position of Ripple/XRP for you, what the most likely outcomes are, and then tell you why buying XRP NOW at these prices, to me, is an excellent SPECULATIVE investment with prices and timeframes – everything!

First, I apparently have to say that none of what I say is legal advice, do not rely on my opinions here, AT ALL.

Also, do not ever take what I say as financial advice – lawyers go to school specifically because they are no good with numbers.

Okay, got that out of the way, let’s start by discussing a problem with the way I see people thinking of a “security.”  I read all the Comments in my videos and other guys vlogs – I’m like a Comments stalker – but I do it to understand where people are not quite understanding some of the legal issues involving XRP so I can address those and I’ve even seen some people worried that they’ll get in trouble if they sell their XRP because it might be determined to be a security.  I also see some people over-emphasizing the need for a “determination” that XRP is not a security.  SO, the truth is that there can never be a blanket “determination” that XRP is or isn’t  because a determination of “security” status is made by a snapshot in time – mainly at the time of sale.  The SEC enforces “Sales” of securities and so the determination is made at the time of the sale that the SEC is enforcing.

I actually think the former Head of the SEC Clayton made a good analogy at a speech in 2018:

SEC Chief Touts Benefits of Crypto Regulation – CoinDesk

In his speech Clayton said that if someone sells you a token to allow you to use their laundromat, that is not a security.  BUT if someone sells you and ten other people tokens they can use at a laundromat that is still being built and then uses the proceeds of the sale to build the laundromat and you expect to be able to sell the tokens to another guy with for more money once the laundromat is completed, THAT is a security.  But once the laundromat is built, any sales of tokens at that time are not sales of securities – those are just a kind of currency.  So as Clayton says at the bottom of the story “Just because it’s a security today doesn’t mean it’ll be a security tomorrow … .”

And I think that’s exactly what we are seeing with the sales of XRP – as the use cases for XRP evolve and increase and become more decentralized, the less likely that XRP is a security.  But it’s not static, it’s changing. 

And I would take it even one step further and say that it also depends on who is selling to who.  Can you sell an XRP coin to me right now?  Or would you get sued by the SEC?  Of course you can – because there has to be an investment contract between us for the sale to be of a security because by definition a security consists of the buyer (me) relying on the seller’s work and skill to grow the investment – the coin I just bought and obviously I’m not relying on you for any work I just want you to transfer the coin to me.  So remember that to say that XRP can be deemed a security is not accurate.  XRP can be deemed a security only for certain transactions at certain times.

Which leads me to my next topic – and if you are smart you have probably already thought this.  So, if you have to rely on other peoples work in order to have a sale deemed a security, why did the exchanges stop trading of XRP?  They certainly can’t get in trouble because they are definitely not selling securities either right?– they have no investment contract and actually they aren’t even selling XRP usually – just putting buyers in touch with sellers and you are absolutely correct – Coinbase is NOT selling securities – at all. But let’s answer the question by asking what does the SEC stand for?  The Securities and Exchange Commission – emphasis on Exchange.

Taking a quick look at Title I, Section 2:

COMPS-1885.pdf (govinfo.gov)

Congress in 1934 gave the SEC power to regulate “all securities exchanges” including those like the New York stock exchange and like ANY exchange that allows trading of securities.   So even if there’s no investment contract between myself and Coinbase, if Coinbase sells me XRP from Ripple it could potentially get in trouble by failing to register as a Securities exchange..and THAT is why the exchanges all got nervous when the lawsuit was filed and halted trading.  They have to register if they are involved with any securities.

And as a brief aside, while everyone is focused on the Ripple lawsuit let me throw out a hypothetical question to you.  If you wanted to control an industry that involves over a thousand different companies many of which are decentralized and difficult to control – which is the more efficient way to control it?  Suing each company individually or by controlling the handful of large markets where those companies goods are traded?  I’ll leave that there because I’m not ready to go down that rabbit hole.

Okay, I’m running out of energy here so let me get to the heart of the matter – the Great Summation. As you know I’ve only really got into XRP and Ripple since the lawsuit back in December and I bought in last weekend and I want to sum up the last month for me because I spent a LOT of time figuring things out.

First, I started by reviewing the SEC v. RIPPLE lawsuit and read it – twice. 

https://www.sec.gov/litigation/complaints/2020/comp-pr2020-338.pdf

If you remember, there was no request for a Declaration from the Court that XRP was a “Security” which the SEC could have requested from the Court but didn’t. That clued me in that the effect of this lawsuit was going to be limited to monetary damages and effect only the XRP in escrow.  That was the first realization.

Also, I didn’t reach any conclusion as to who would “win” the lawsuit for two reasons: 1. No one really knows because there’s absolutely no admissible evidence out there yet and 2. With these types of lawsuit there’s often no clear winner; for example, if the initial offerings from 2013-14 are held to be illegal sales but not the sales thereafter, is that a “win” for the SEC?  You might say it is but if it doesn’t halt what Ripple is doing currently and brings some clarity and confidence to the market now, isn’t really a win also for Ripple and XRP?  So, win and lose are also phantom concepts in this litigation – like most litigation; it’s not black and white.

So, I concluded that this litigation is likely to end in settlement so then I began looking at possible settlement scenarios because I wanted to see what the worse case scenarios looked like. https://www.sec.gov/litigation/admin/2018/33-10574.pdf

 I first looked at the Paragon coin settlement and that  was a monetary settlement and a reiteration to cease and desist violation of securities laws.  This clued me in that even a bad settlement would only effect the XRP held by Ripple in escrow and that was probably the sticking point in settlement negotiations.

Next I looked at the Kik Interactive judgment which was really a worse case scenario of a case that was litigated to a conclusion with Kik completely losing.  https://www.courtlistener.com/recap/gov.uscourts.nysd.516941/gov.uscourts.nysd.516941.90.0.pdf

The judgment against Kik was interesting because it showed that even in a worst case scenario there would still be a mechanism for sale of XRP held in escrow that might allow Ripple to continue expanding the use of XRP while limiting “dumping” of XRP by Ripple on the market. The Kik case was also instructive because after the case was lost – 100% lost – Kik the company was able to continue and the Kin token as well.

So, at that point we knew what the likely worst case scenario is from a litigation standpoint.  It’s a significant disruption in Ripple’s business model.  The best case scenario is a complete victory at summary judgment in Court and none of the sales are deemed a sale of securities.  I think you all know what that would do for XRP, that’s easy – MoonLambo would become MoonBughati.

So at this point I have to take off the lawyer hat and do some speculative investor discussion.  Right after the SEC lawsuit was announced XRP fell from bouncing around in the 50-70 cents range to the 20-30 cent range and the ONLY reason for this was the lawsuit, which is the reason I became interested because you could say the lawsuit was artificially holding the price down in a sense and that’s something I could bring some special knowledge to analyze.

My conclusion was that the MOST likely outcome of the SEC lawsuit would be a settlement involving a large fine or penalty for sales from 2013-14 and maybe 2015 and some sort of control or limitation on the sale of the escrowed XRP.  And that’s a conservative conclusion on my part.  That conclusion would hurt Ripple no doubt but would by no means be a deathblow.

I am also a believer in the market and I knew and everyone knew into 2020 that Ripple was having issues with the SEC and I believe that some of that was already priced into the valuation of XRP going into 2020 and also the uncertainty of the rules in general was already priced in to the numbers and it was the excitement of the Flare Network which in large part led to the bump up into the 50-70 cents range which you can see on the price chart.  Nothing has changed there since then as Flare is moving forward as expected – here’s the headline from January 9 this year.  Flare Networks Announces Litecoin Airdrop, Plans To Bring DeFi and Smart Contracts to LTC and XRP | The Daily Hodl

SO, here comes the price and time conjecture.  With the thesis that we are currently at an “artificially” low price I then do the investment analysis – risk vs. reward.  XRP right now is in a slingshot and a favorable outcome of the litigation removes the uncertainty that’s been hanging over XRP for years now and ALSO removes the fear of the litigation from the price – a good resolution of the litigation (which I expect) takes the price up PAST the 70cent high it hit last year.  A “decent” resolution takes it at least back into the 50-70 cents range.  And I say slingshot because this will happen very quickly – days.

Now I’m not here to hype XRP – I do think it’s a conservative call to think the price goes up 2-3 times at the end of the litigation QUICKLY and from there I don’t know.  On the downside, XRP dwindles to zero and you lose everything.  This XRP coin  is all or nothing.  How does the coin price go to zero?  The litigation ends poorly and the SEC is able to strangle Ripple’s ability to fund operations and Ripple is forced to shut down with no other entity taking its place.  And do I think that scenario is likely?  I don’t think so because we’re not talking about Amazon here – you know, Ripple is not a company that’s business involves warehouses and vans and distribution centers.  Ripple is a technology company and IF necessary Ripple will become Ripple Malta or Ripple Singapore, Inc. because its assets are its ideas, its people, and its technology.  No doubt that scenario is a doomsday but even then I’m not sure XRP dies – it’s too far ahead of most of the competition.  It just suffers a major setback as Ripple has to pay millions of dollars in fines, has to stop dealing with U.S. based investors, and goes through a complete re-incorporation.

But the bottomline of the Great Summation is that in my opinion the Upside to XRP, especially in the short-term, greatly outweighs the downside by at least 2-3 times. I bought at under 30 cents as much as I can afford to lose because that’s how to approach speculative investments.  As for a timeframe, I expect the XRP price to be artificially suppressed for 6-9 months, perhaps a year.  The Kik Interactive case went pretty far into the litigation and it was concluded in a little more than a year so that is my long-term scenario and 6 months for a settlement to be reached on the short side. But we’ll know more about timeframes after the Feb. 22nd pre-trial.

And there you have it, the Great Summation of what I have been investigating over the last month. The remote remote possibility of a complete loss of XRP with a likely 2-3 x return in 6-9 months.  What are your thoughts? Good scenarios for XRP?  Bad scenarios?  I only do crypto vlogs once a week so I read ALL your comments so please leave one because I learn from you as you hopefully learn from me.

Jeremy Hogan
Jeremy Hogan
Attorney Jeremy Hogan is a partner at Hogan & Hogan.