Risk Analysis of XRP: The Four Horsemen

Can a project moving from centralized to decentralized using a consensus mechanism other than proof-of-work be successful? This question has caused contentious debate within the crypto investment community and there have been numerous arguments for why XRP will fail. This analysis examines four of the major criticisms of XRP: 

1) US government regulatory threat

2) Lack of market adoption by financial institutions for cross-border remittance

3) Competition from Swift, the incumbent

4) Technological risk associated with the Ripple Protocol Consensus Algorithm (RPCA)


Using an empirical approach based on observations of key stakeholders on each issue, this analysis attempts to to qualify the threat of these criticisms to XRP adoption using two matrices. The first will contrast Current Unknowns – how much about this risk is unknown, vs. Threat Development Time – how long market participants will have time to make decisions based on new information. The second matrix explores the Probability that the threat will occur versus the Impact on XRP in terms of the severity if the threat materializes.

An example of a threat analyzed using this technique would be Ethereum Classic’s (ETC) recent 51% attack. The event was an acute, immediate threat that materialized with no previous warning. This was a known threat for all PoW cryptos that is very well understood, and has a relatively high probability for happening in a smaller network. Although this should have a very high impact on ETC’s immediate price and long term success, it hasn’t been immediately materialized with a complete crash.

1) Government and Regulatory Threat

Narrative:  The SEC will classify XRP as an unregistered security. 


Rather than rehash the debate, let’s examine activities by the regulators and legislature to use as guidance for potential scenarios. Actions taken by the SEC so far against crypto teams include the following.

A) Airfox and Paragon

Paragon was a blockchain startup in the cannibis industry, and Carrier EQ (Airfox) is focused on transfer of mobile airtime, data, and currency. Both ICOs were targeted by the SEC after the SEC made their official stance regarding ICOs:

“Both CarrierEQ Inc. (Airfox) and Paragon Coin Inc. conducted ICOs in 2017 after the Commission warned that ICOs can be securities offerings in its DAO Report of Investigation… We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities”  

                                                   – Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.(1)

The SEC orders imposed $250,000 penalties against each company and include undertakings to compensate harmed investors who purchased tokens in the illegal offerings.  Over 1,000 projects have offered ICOs over the last two years, but successful actions by the SEC has been limited to these two projects so far. This demonstrates that the SEC has a lot of leeway on who they choose to pursue and  level of punishment they impose.

B) Blockvest

Blockvest completed an ICO in the fall of 2018 and the project was an early target by the SEC as an unregistered security offering. The company was successful in their defense in Federal court despite a very questionable “Blockchain Exchange Commission” marketed by Blockvest to investors that could be interpreted as posing as the SEC. This case demonstrated that the SEC cannot unilaterally impose their will on a crypto company.

Stakeholders in the XRP Debate

Another piece of information to consider are the actions of individuals knowledgeable of Ripple, XRP,  and SEC regulatory compliance. There are three key groups that XRP holders can look to for this expertise- Ripple’s lawyers, venture capital investors, and customers.

Ripple Legal Counsel: Ripple has retained former SEC chair Mary Jo White and former SEC Director of Enforcement Andrew Ceresney to defend the company against potential allegations of XRP classification as a security. Assuming the following, this representation is a very good indication that Ripple will be successful.

1) They are knowledgeable about SEC regulations (somewhat of a given) 

2) They would not accept a case that they didn’t feel confident they could win, this representation is a very good indication that Ripple will be successful.

It should be acknowledged that these are attorneys who are getting paid to do a job. An attorney is not required to personally take the position of their client, but to represent them to the best of their abilities. Nevertheless, this is in Ripple’s favor to have these experienced experts willing and able to make their case.

Ripple Investors: XRP has been traded since 2013, so the potential for XRP to be classified as a security has existed since at least then. Since 2013, there have been three rounds of venture capital raised from 26 investors. In their due diligence, all of these firms were fully aware of the potential risk of Ripple’s strategy. If XRP were classified as a security, it would introduce a huge risk to their investment, with the worse case scenario of Ripple being shut down. Despite this, they decided to invest nonetheless. This is a strong indicator that these investors do not expect XRP to be classified as a security.

SERIES A 05/19/2015 IDG Capital $28M 12
SERIES A 10/06/2015 Santander $4M 3
SERIES B 09/15/2016 SBI Investment $55M 10

Data for this table from TechCrunch


Ripple Customers: Paul Dwyer is the CEO of Viamericas, a leading money transfer company primarily servicing Latin America. Viamericas is a Ripple client that has used XRP. In addition, Dwyer is the Corporation Chairman of  the Money Services Business Association (MSBA), a non-bank financial services industry organization that lobbies for the industry with federal and state regulators (2). Dwyer’s involvement suggests that he believes regulators will not pursue XRP as a non-registered security.

In conclusion, many stakeholders with deep knowledge of SEC regulatory compliance, XRP, and Ripple have demonstrated behavior that indicates they do not believe XRP will be classified as a security. Using this information as guidance, below are potential scenarios of how the XRP security debate could play out.

SEC decides not to pursue classification of XRP as a security: They have already determined that Bitcoin and Ether are not securities, and have failed to make their case with one of the “low hanging fruit” they initially pursued with Blockvest. These actions indicate a likely direction they will go based on precedent. They may also choose to grandfather in all of the digital assets that existed prior to their 2017 guidance, as mentioned in their release regarding Airfox and Paragon.

Legislation determines that digital assets, including XRP, are not securities : This would be the ideal state for digital assets and the ultimate in terms of regulatory clarity in the US – an actual law. The SEC would not able to make a decision because it would be out of their court. The Token Taxonomy Act of 2018 (3) was proposed going into the end of the lame duck term and never really had time to be voted on, but will likely reemerge in the 2019 legislative agenda. However, Congressional and Executive coordination to pass a law for crypto (or anything) in the current political climate is a low, but not impossible, path forward in 2019.

SEC decides that XRP was a security at an earlier date, but the network is now sufficiently decentralized that it is no longer a security. This would be a blow to Ripple, but survivable and based on the previous penalties to the worst offenders it would likely be a fine. Keep in mind, financial institutions pay fines all the time and carry on with their businesses. Ripple previously paid a fine of $700,000 to FinCEN for acting as a Money Servicing Business (4). As FicCEN penalties go, this is fairly minor. For context, UBS Financial Services was leveled with a $14.5 million dollar penalty in January of 2019.(5)

SEC decides that XRP is currently an unregistered security. This would be a big setback to the use case of XRP as a cross border payment system and have secondary and tertiary consequences for the larger crypto markets, and US adoption of blockchain technology. Objectively, the threat is not 0%, but as illustrated above, there are other several other scenarios that are more likely.

There are relatively high unknowns because regulators have not given direct indication about their position on XRP. In addition, the SEC could make an announcement without any previous indication. The decision could be argued in court, but from the market’s perspective the threat would have already materialized. However, using the empirical evidence of market participants, stakeholders, and regulators previous behavior, the probability is low despite the high impact this would have on XRP.


2) Market Adoption and Competitive Response

Narrative: Financial institutions will only use XCurrent and not transition to Xrapid in order to use XRP. 

The documentation of actual customers and timeline for future usage has been well documented. Brad Garlinghouse, CEO of Ripple, was very clear in the roadmap for customer acquisition.

“By the end of this year, major banks will use xRapid as a liquidity tool. By the end of next year, I would certainly hope that we will see…in the order of magnitude…of dozens. But we also need to continue to grow that ecosystem…grow the liquidity.”   

                                                – Brad Garlinghouse, June 2018 (6)


This projection has been fairly accurate. xRapid is currently being used or trialed by Cuallix, MoneyGram, MercuryFX, Cambridge Global Payments, IDT, Western Union, Viamericas, and Currencies Direct. Furthermore, there are statements from actual customers.


“With Ripple, we can source liquidity through XRP and complete the cross-border payments in seconds.” 

                                                – Nicolas Palacios,CFO of Cuallix (7)

“We believe that digital assets like XRP will play a key role in the future of cross-border payments, helping to safely address some of the structural inefficiencies of legacy settlement infrastructure.”

                                                                   – Paul Dwyer CEO Viamericas Corporation( 8)

These testimonials are really significant when compared to other digital assets. Other than bitcoin, very few crypto assets have product market fit with their actual target market. Investors should keep a close watch on the timeline for XRP adoption. The advantage of crypto is that it is venture capital with liquidity. Investors can reevaluate and adjust their portfolios accordingly as developments progress, or fail, in the market. Investors in XRP have a clear path to look forward and benchmark their investment risk tolerance based on Garlinghouse’s timeline. 

Because of Ripple’s steady announcements of new institutions and verification by those customers, early traction in the market is well documented. Financial institutions are onboarding XRapid and verbalizing the intent to utilize XRP. There is a lack of data on retention and level of use by these early clients. Adoption to fulfill Ripple’s vision for financial institutions utilizing XRP as a bridge currency for international remittance is a long game, and likely to be unresolved either way in the short term.

Customer testimonials are significant when compared to other digital assets traction. Other than bitcoin, very few crypto assets have target market testimonials. Investors should keep a close watch on the timeline for XRP adoption. The advantage of crypto as venture capital with liquidity allows investors to reevaluate and adjust their portfolios accordingly as developments progress, or fail, in the market. Investors in XRP have a clear path to look forward and benchmark their investment risk tolerance based on market adoption in the coming years. 

3) Competitive Response

Narrative: Swift is the incumbent in the international bank transfer industry and XRP is unlikely to replace their system for remittance.

International money transfer has been targeted as an obvious blockchain use case and  an industry ready for disruption. From a technical perspective, the technology appears to be well positioned to compete with Belgian based Swift. However, the US government has a major incentive to keep Swift in place to impose sanctions against other governments. In a recent standoff with Swift (9), the US was able to successfully leverage the organization to cut Iranian banks out of international money transfer as part of the renewed sanctions against Iran (10).  Ari Paul articulated this well on the Anthony Pompliano Off the Chain (11) podcast – “Swift is the military wing of the US Treasury Department.” (time 53:10)


Hypothetically, Swift could attempt to leverage the US government as a competitive response to Ripple. This appears to be a much bigger threat to XRP adoption for remittance than a technology advancement by Swift. It would be a non-market threat outside the control of Ripple if the US perceived XRP as a hindrance to leveraging sanctions, which would be interpreted as a threat to national security.

3) Internal Technology Threat

Narrative: The XRP Ledger may have technical flaws in Ripple Protocol Consensus Algorithm (RPCA) that will fatally compromise the blockchain validity. 

This was noted as a risk by Multicoin Capital (12) and cites the following three technical reviews.

    • Peter Todd,  Ripple Protocol Consensus Algorithm Review,  May 11th 2015  (13)
    • Jo Lang, R3 Review: Ripple Labs May 2015 (14)
    • Frederik Armknecht et al., Ripple: Overview and Outlook, Trust and Trustworthy Computing, 14 August 2015 (15)

Working under the assumption that this would be a failure of Ripple’s product, consider the due diligence by the tech investors who have invested in Ripple. Several have deep experience in the crypto industry including Digital Currency Group, Digital Ventures, Accenture, and Blockchain Capital.

The second A round closed in October of 2015 and the B round closed in September of 2016 (see table above). These technical reviews were available to the investors during the due diligence on Ripple and they still invested. Furthermore, bank customers have extensively used xCurrent and early adopters are using xRapid. R3 has since partnered with Ripple and is utilizing XRP. 

The significant unknowns associated with the technical aspects of RPCA are mitigated by the behavior of investors and customers who have conducted due diligence on Ripple and the XRP ledger. However, presumably there would be very little warning prior to a failure. This would be catastrophic, but is a low probability occurrence that becomes less likely as more time passes. 

In conclusion, investing in any crypto asset carries risk. XRP is no exception. Three of the major risks presented here have singular events that would be catastrophic. However, based on the empirical evidence presented, these risks are mitigated and Ripple has found product market fit with clients that will use XRP for international remittance.

This is not financial advice. I hold XRP and bitcoin.


1) https://www.sec.gov/news/press-release/2018-264

2) https://www.msbassociation.org/about/

3) https://www.coindesk.com/us-lawmakers-file-bill-to-exempt-cryptocurrencies-from-securities-laws

4) https://www.fincen.gov/news/news-releases/fincen-fines-ripple-labs-inc-first-civil-enforcement-action-against-virtual

5) https://www.fincen.gov/news/news-releases/fincen-assesses-145-million-penalty-against-ubs-financial-services-anti-money

6) https://ethereumworldnews.com/over-dozens-of-banks-to-use-xrp-powered-xrapid-by-2019-says-brad-garlinghouse/

7) https://www.financemagnates.com/cryptocurrency/news/cuallix-uses-ripple-cross-border-payments-u-s-mexico/

8) https://www.bizjournals.com/losangeles/businesswire/press_releases/California/2018/05/10/20180510005148

9) https://www.nytimes.com/2018/10/12/business/dealbook/swift-sanctions-iran.html

10) https://www.nytimes.com/2018/11/05/business/dealbook/swift-iran-sanctions.html


12) https://multicoin.capital/2017/08/31/xrp2017/



15) https://link.springer.com/chapter/10.1007%2F978-3-319-22846-4_10