Ripple’s Jordan Belfort Moment

Ripple is a private company, therefore, it doesn’t have to disclose anything it does. But why does it behave like a public one?

If you’re reading this, you’ve probably seen Wolf of Wall Street, and you must remember the scene where Jordan Belfort (Leonardo DiCaprio) explains to his partners his idea for a new brokerage, “Stratton Oakmont, Inc.”:

“We’re a company our clients can believe in, a company that our clients can trust. A firm whose roots are so deeply embedded into Wall Street that our very founders sailed on the Mayflower and chiseled the name Stratton Oakmont right into Plymouth fucking Rock.”

Leonardo DiCaprio, “Wolf of Wall Street”

Indeed, Jordan Belfort knew that it was much easier to steal some of Wall Street’s reputation and trust, than to build its own. So does Ripple.

Ripple’s communication is tailored to the unsophisticated retail investor

Why does Ripple keep boasting about every new partnership, no matter how inconsequential?

Why does Ripple publish a quarterly report about how many XRP coins it has sold?

Why is Ripple’s communication directed at the masses, instead of the very specific niche of people working with inter-bank transfers? Does Ripple think that it will be able to find new leads for xCurrent and xRapid by posting videos on YouTube?

The answer to these questions is simple: Ripple isn’t really a private company.

In its fight to prevent XRP from being classified as a security, Ripple tries to get the best of both worlds. It currently has access to cheap capital from unsophisticated retail investors who don’t know anything about finance. At the same time, Ripple doesn’t have to disclose anything about its operations, or about its finances and interests.

This, of course, is against securities laws and a wide range of regulations.

Ripple takes advantage of the unsophisticated investors’ trust in the system

Ripple is exploiting the confidence that unsophisticated retail investors have in the system. This confidence was built by regulators over decades of arduous efforts to protect the little guy from predatory practices and straight-out scams.

This is why Ripple acts as a public company: it wants to look like one, to appeal to, and exploit, the reputation of regulated markets. It keeps boasting about its growth, in an attempt to create the appearance of a “growth company”, much like Amazon or Google. Unsophisticated retail investors know that anyone who has invested in Amazon or Google at their early stages has made a fortune. What they don’t know, however, is that XRP coins are already valued at $30 billion (more than Google’s valuation at the close of the day of its IPO).

They also don’t know that XRP coins are legally worthless - they confer no rights or claims on anything. If Ripple makes it big, a holder of XRP coins will reap the same benefits as someone who owns an ownership certificate of a parcel on the Moon. Neither of them has any legal value.

Unless, of course, a court of law rules that XRP coins are indeed securities - in which case Ripple will be liable in more ways than one. Such an event would greatly benefit XRP investors. (It is therefore very suspicious that the XRP Army is so adamant on pointing out that XRP coins aren’t securities. If they are indeed a grassroots movement of XRP investors, and not a group paid by Ripple, why would they invest so much of their time and energy in hurting their own interests?)

Ripple is not alone in this con game

Ripple is obviously not alone in acting like a regulated entity. The whole crypto ecosystem was built on the same foundations, with crypto exchanges using the same user interfaces as E*Trade, and TradingView listing Bitcoin and Ethereum and Ripple alongside the S&P500 index. Most of the crypto lingo was borrowed from the financial markets. All this Potemkin facade of regulation and trustworthiness, worthy of Jordan Belfort, was an attempt to confer to crypto the legitimacy of established markets. And it worked. Even today, retail investors down 90% on a coin that’s legally worthless, are still talking about a “bear market”, and strongly believe that “over the long run, it will bounce back”.

In reality, crypto is the exact opposite of financial markets. A real financial security has a positive carry - which means that it pays out dividends and coupons. As such, it can be valued on the basis of its expected discounted cash flow, where an investor can try and figure out the prospects of the underlying company, because its assets and employees will be put to work for the benefit of its shareholders and bondholders.

A crypto coin has negative carry. Bitcoin, for instance, burns $3 billion per year in electricity costs - these $3 billion must be paid up for by existing or new Bitcoin holders, or the price will crash. Over the long run, crypto is doomed to fail, unless it finds a way to pay for itself other than trying to find ever more bagholders. For the time being, the prospects of that happening look dim. On the contrary, crypto is still being used as a hail mary pass to raise money from unsophisticated investors without being liable for, or owing anyone, anything.

Crypto will destroy unsophisticated investors’ confidence in financial markets

The fact that regulators haven’t come down on crypto with the biggest hammer they’ve got, and haven’t punished the scammers for exploiting the good image of regulated markets, will haunt them for decades to come. The reputation of financial markets and real securities will suffer, as retail investors will equate shares and bonds with crypto coins, and think that it’s all the same fraudulent scam where they’re bound to lose all their money. And that will expose them to even more scams from con artists who will be eager to exploit their newfound distrust for finance, with newly minted get rich quick schemes.