SEC Unveils Ripple's Market Manipulation Tactics: Recruiting Institutions to Dump While Pumping with Positive News
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SEC Unveils Ripple's Market Manipulation Tactics: Recruiting Institutions to Dump While Pumping with Positive News
TechFlow dissects the SEC's 71-page lawsuit, detailing Ripple's alleged wrongdoing from the SEC's perspective: how Ripple allegedly manipulated the XRP market and profited over $1.3 billion?
Navigating Web3 tides with focused insightsOn December 23, the U.S. Securities and Exchange Commission (SEC) officially filed a lawsuit against Ripple, its CEO Brad Garlinghouse, and co-founder Chris Larsen in Manhattan federal court, accusing the defendants of raising over $1.3 billion through unregistered digital asset securities offerings since 2013.
Following this news, XRP dropped from 0.58 USDT to as low as 0.32 USDT within the past 48 hours, marking a maximum cumulative decline of 44.8%.
TechFlow dissects the SEC's 71-page complaint, detailing the SEC’s view of Ripple’s misconduct—how Ripple manipulated the XRP market to profit more than $1.3 billion.
XRP Has No Real Use
Ripple promoted XRP as a "universal digital asset" for cross-border bank transfers, but this use case has never been truly realized.
Ripple only began seriously testing ODL in mid-2018.
ODL is an enterprise-grade software product designed to manage daily and long-term financial operations for financial institutions, and to date, it remains the only product supporting XRP usage.
In using ODL, currency senders convert fiat into XRP, transfer XRP to recipients, and then convert XRP back into local fiat currency.
Typically, money transmitters do not directly hold XRP but instead convert XRP into local currencies, with XRP flowing in and out of transactions in about 90 seconds.
On June 21, 2018, Ripple CEO Garlinghouse stated publicly that, as of that date, no one was using XRP for cross-border payments. It wasn't until October 2018 that Ripple officially launched ODL commercially.
Since its launch, ODL has attracted very little attention, partly due to its high operational costs.
From October 2018 to July 26, 2020, only 15 money transmission services (none of which were banks) signed agreements potentially allowing them to use ODL. ODL transactions accounted for no more than 1.6% of total XRP trading volume in any quarter (often significantly less).
Furthermore, most ODL usage was not market-driven but rather subsidized by Ripple itself.
Although Ripple marketed ODL as a cheaper alternative to traditional payment methods, in reality, it was far more expensive. Without substantial compensation from Ripple, institutions showed no interest in adopting the product.
Specifically, from 2019 to June 2020, Ripple paid 200 million XRP to money transfer operators, who immediately sold the XRP on public markets upon receipt. These institutions disclosed earning over $52 million in fees and incentives from Ripple by September 2020.
Money transfer operators thus became another channel for Ripple’s unregistered XRP sales, giving Ripple additional benefits—namely, the ability to exaggerate the “utility” and trading volume of its otherwise meaningless XRP.
Meanwhile, starting in 2016, Ripple generated revenue by selling two software systems, xCurrent and xVia, promoting them as tools to penetrate financial markets. By 2019, these systems had earned approximately $23 million in revenue—but neither system used XRP or blockchain technology.
On July 2019, a senior vice president at Ripple emailed the CEO of a U.S. cryptocurrency exchange subsidiary, proposing collaboration to enable XRP trading.
In the email, the Ripple executive explained, “The primary current use case for XRP is speculation, and exchanges are the main drivers of this use case.”
Ripple’s Revenue Source: Selling XRP
From the beginning, Ripple CEO Garlinghouse publicly stated that Ripple would sell XRP to fund a shared enterprise.
Ripple made similar statements on the Ripple Wiki:
“Ripple Labs sells XRP to fund its operations and promote the network. This enables Ripple Labs to maintain a skilled team developing and promoting the Ripple protocol.”
Currently, Ripple continues to explicitly state on its website that it holds at least 54 billion XRP, making it by far the largest single holder of the asset.
Over the seven years from 2013 to now, Ripple has sold 14.6 billion XRP, generating $1.38 billion in proceeds.
Approximately $780 million was used for investments and business operations, though no details were disclosed regarding purposes or payments. Even institutional investors receive only selectively released information from Ripple.
Institutional sales have been the dominant component of XRP’s external sales. Ripple views institutional sales as a strategic pillar to stimulate speculative interest among retail investors.
As Ripple stated in a document published on its website on January 24, 2017, “Ripple’s institutional sales of XRP 'demonstrate broader capital market potential for XRP.'
At the same time, Ripple also gains credibility through endorsements from well-known institutions via these institutional sales.
Since 2013, Ripple has sold XRP to at least twenty-six institutional investors, with at least seven purchasing XRP at discounts ranging from 4% to 30% below market price.
Ripple’s institutional sale agreements typically do not restrict buyers’ ability to resell XRP, imposing only short lock-up periods—usually three to twelve months—or limiting the quantity of XRP that can be resold.
By selling at discounted prices, Ripple incentivizes buyers to sell their XRP on public markets for guaranteed profits.
For example, on September 24, 2018, Ripple entered into an agreement with Japanese institution C, which described itself as “operating sales and exchange services for crypto assets, providing secure and reliable crypto asset trading for as many people as possible.”
Under the agreement, Ripple committed to supply up to $1 billion worth of XRP for purchase by institution C between November 1, 2018, and November 1, 2021. Of this, $800 million worth was priced 15% to 30% below the market rate, depending on the total volume purchased. Institution C agreed to limit its sales or transfers of XRP to no more than 10 basis points (one basis point = 0.0001 or 1% divided by 100) of XRP’s average daily trading volume.
From 2018 to the end of 2019, Ripple sold over $170 million worth of XRP (approximately 719 million XRP) to institution C. By the end of September 2020, Ripple had sold about 361 million XRP to institution C, with at least 20 million XRP remaining as of around December 15, 2020.
Ripple Manipulates the XRP Market
After being sued by the SEC, Ripple CEO Garlinghouse publicly responded that XRP is not a security, arguing that XRP’s market value is unrelated to Ripple’s activities and instead correlates with broader cryptocurrency market trends.
However, the SEC’s complaint provides detailed evidence showing how Ripple manipulated the XRP market.
From the outset, Garlinghouse publicly committed to making significant and meaningful efforts to support XRP, meaning that XRP’s value depended directly on Ripple as a company.
In a 2014 promotional document, Ripple stated, “Ripple Labs’ business model is based on the belief that ‘if the Ripple protocol is widely adopted, demand for XRP will increase, leading to price appreciation.’”
At least since 2014, Ripple has promised to create and maintain a secondary market for XRP.
For instance, Ripple stated on its website, “We will engage in investment strategies expected to result in stable or rising exchange rates of XRP against other currencies.”
The most critical part of this strategy was listing XRP on more exchanges.
In 2017 and 2018, Ripple signed agreements with at least ten cryptocurrency exchanges, none of which were registered with the U.S. SEC, including at least two primarily operating in the United States.
Ripple paid these exchanges in XRP to allow XRP trading and sometimes offered additional rewards for meeting trading volume targets.
For example, in May 2017, Ripple paid a U.S.-based cryptocurrency exchange 17 million XRP for listing fees and up to $60,000 per month in rebates for transaction fees over three months.
Between October 2016 and October 2017, Ripple distributed approximately 28 million XRP to these platforms, valued at $6.8 million at the time.
Additionally, Ripple intervened in the XRP secondary market through various means.
Throughout the distribution process, as directed by Garlinghouse and Larsen at different times, Ripple made extensive efforts to monitor, manage, and influence the XRP trading market—including XRP’s price and trading volume. These efforts included:
(1) Using algorithms to determine the timing, amount, and pricing of XRP sales into the market;
(2) Paying rewards to certain market makers when trading volumes reached specific thresholds.
Internally, Ripple described these strategies as aimed at maximizing fundraising during distributions or achieving “greater speculative buying volume,” while externally, Ripple claimed these actions were intended to protect public investment in XRP.
To ensure steady price increases, Ripple maintained an internal “XRP Markets Team” responsible for monitoring XRP’s price and trading volume and regularly coordinating with XRP market makers on sales strategy. Typically, the amount of XRP sold did not exceed a certain percentage of daily trading volume—generally between 10 and 25 basis points.
Starting no later than 2017, Ripple co-founders Larsen and Garlinghouse began attending meetings of the XRP Markets Team.
A common market manipulation tactic employed by Ripple was synchronizing price pumps with positive announcements.
In September 2016, Ripple instructed market makers to actively trade XRP around the time Ripple released monthly performance updates. On September 20, the finance VP emailed market makers, instructing them to spend the full $300,000 allocated for buying XRP within 24 hours after the announcement.
In an email dated August 12, 2017, sent to company executives, Garlinghouse instructed certain Ripple employees to proactively generate positive XRP-related news to boost speculative trading value.
In June 2020, Ripple employees provided an internal report to Garlinghouse and Larsen, highlighting that since early May 2020, “XRP had started underperforming Bitcoin,” partly due to Ripple’s own XRP sales. Employees proposed a “supply restriction strategy,” such as repurchasing XRP. Subsequently, Garlinghouse approved the buyback plan.
After Garlinghouse’s decision, Ripple disclosed in its Q3 2020 market report on November 5 that it had purchased $45 million worth of XRP, after which XRP began a sharp upward movement.
Two Executives Profited $600 Million
Ripple’s two executives—CEO Garlinghouse and Executive Chairman Larsen—earned approximately $600 million collectively from selling XRP.
The SEC report reveals details of the executives’ XRP sales.
Between April 2017 and December 2019, CEO Garlinghouse sold over 321 million XRP received from Ripple to market investors, earning approximately $150 million.
Meanwhile, between 2015 and March 2020, Larsen and his wife knowingly sold at least 1.7 billion XRP into the market—despite awareness that XRP might constitute a securities offering—netting over $450 million.
In 2015 and 2017, Ripple issued at least 2 billion XRP to Larsen’s other organization, “Ripple Works,” which was ostensibly created to invest in XRP-related projects.
However, RippleWorks effectively served as a representative market maker, helping Ripple sell XRP to the public. Since mid-2015, RippleWorks has sold approximately 693 million XRP to the public, amounting to about $176 million.
Larsen, as Ripple co-founder, previously faced litigation from the SEC.
Chris Larsen, Ripple co-founder and current board chairman, co-founded a company in 2005 and served as its CEO until 2011. In November 2008, the SEC sued this company for violating Sections 5(a) and (c) of the Securities Act.
Public records show this 2005-founded company was Prosper Marketplace, the first P2P lending platform in the U.S. PROSPER faced numerous lawsuits from investors over “unqualified securities,” eventually settling with customers for $10 million to resolve disputes.
Defined as a Security
The SEC defines XRP as an “investment contract”—a type of security. Ripple only holds a virtual currency business license, not a securities license. This is one of the SEC’s primary allegations against Ripple.
Ripple conducted institutional sales through its wholly-owned subsidiary XRP II. XRP II applied to NYDFS (New York State Department of Financial Services) for a license to conduct “virtual currency business activities,” specifically selling XRP to “institutions and other accredited investors” for speculative purposes.
If XRP is a security, what obligations should Ripple have fulfilled?
Section 5 of the U.S. Securities Act prohibits any unregistered securities offering. If a security is not offered to the general public, registration may be exempted; otherwise, registration is required, along with periodic public disclosure of financial reports and material events, ensuring informed decisions by both initial investors and secondary market buyers.
However, Ripple never filed a registration statement, nor did it provide annual sales data to investors or regularly disclose financial and managerial information.
Ripple monetized XRP without obtaining valid registration, exploiting information asymmetry in the market for personal gain while exposing investors to significant risks.
The defendants—Ripple, Larsen, and Garlinghouse—engaged in conduct violating provisions against illegal offers and sales of securities under the Securities Act. Larsen and Garlinghouse further aided and abetted Ripple’s violations.
Ripple Knew the Risks Eight Years Ago
As early as 2012, Ripple received legal advice indicating that under certain circumstances, XRP could be considered an “investment contract”—and thus a security under federal securities law. Nevertheless, Ripple did not halt its “illegal securities issuance,” failed to register XRP sales with the U.S. SEC, and did not seek exemptions.
Ripple sought legal counsel from an international law firm regarding the legal risks associated with XRP distribution and monetization. The firm issued two memoranda in 2012.
The memoranda noted that under federal securities laws, there was a real risk that XRP could be deemed an “investment contract” (and therefore a security), depending on various factors. If individuals bought XRP for “speculative investment purposes,” or if Ripple personnel promoted expectations of price increases, Ripple would face heightened risk of XRP being classified as an investment contract (and thus a security).
Under the Commodity Exchange Act, XRP was unlikely to qualify as “currency,” because unlike “traditional currencies,” XRP lacks backing from a central government and is not legal tender.
Both memoranda advised Ripple and Larsen to contact the U.S. SEC to clarify whether XRP qualified as a security under federal securities law.
However, Ripple and Larsen ignored this legal advice.
In a 2014 email, Larsen explained that the XRP he received upon Ripple’s founding was compensation for personally bearing the risk of being treated as a securities issuer.
That is, Larsen knowingly dumped large quantities of XRP despite awareness of the risk that XRP could be defined as a security.
Garlinghouse was repeatedly warned, both publicly and privately, and understood that XRP exhibited “security-like” characteristics.
On March 11, 2017, Ripple’s then Chief Compliance Officer wrote to Garlinghouse: “XRP certainly has some ‘security-like’ features, and we really need to revise our external messaging.”
In a February 2018 interview with Yahoo Finance, Garlinghouse admitted: “If there’s no real application, then it [XRP] is a securities offering. And if it’s a securities offering, there’s no regulatory uncertainty. It should be regulated as a securities offering.”
The legal memos also pointed out that, unlike Bitcoin, there is a specific entity—Ripple—responsible for XRP’s sales and for promoting and marketing the Ripple network.
In an internal email dated April 26, 2018, equity investor A questioned whether the XRP Ledger would be vulnerable to a “51% attack” like the Bitcoin blockchain. He concluded: “Given the current stakeholders’ incentives, this seems more like a long-term issue, meaning Ripple has incentives to protect the XRP Ledger.” Another employee agreed: “That’s always been the key issue. Ripple is controlled by one entity, not a distributed network like Bitcoin.”
SEC’s Legal Requests
The complaint states that unless the defendants (Ripple, Larsen, and Garlinghouse) are permanently restrained and enjoined, they will continue engaging in the aforementioned acts, practices, and business operations.
Pursuant to the U.S. Code and the Securities Act, the SEC respectfully requests the Court to enter a final judgment:
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Permanently enjoining the defendants and their agents from directly or indirectly violating the Securities Act, including delivering XRP to any person or taking any other steps toward any unregistered offer or sale of XRP.
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Disgorgement of all ill-gotten gains during the period of violation, plus prejudgment interest;
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Prohibition from participating in any digital asset securities offering;
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Civil monetary penalties pursuant to Section 20 of the Securities Act;
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Any other equitable relief the Court deems just and appropriate for the benefit of investors.
*TechFlow reminds all investors to beware of high-risk speculation. The views expressed herein do not constitute any investment advice.
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