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Ripple: Davos man no longer



Back in 2016, within the taupe-coloured finishings of the main Davos conference centre used by the World Economic Forum to shut down the Swiss ski resort every year, this reporter and the FT’s Gillian Tett met with Chris Larsen, then head of Ripple Labs.

It was January 22, the last formal day of the week-long Alps fest.

A low-key Larsen told us over he had come to Davos — his first time — because he felt it was a great place to network and spread the news about his new payment system. The mainstreamness of Davos didn’t bother Larsen. Unlike the rest of the crypto space, which famously eschewed traditional financiers, Larsen wanted Ripple to be seen as one of the grown-ups; as a serious offering that bankers would want to work with. That’s why it made sense to be at Davos.

Just a couple of years later Larsen would briefly become the fifth-richest man in the world, in paper terms, due to the soaring value of Ripple’s underlying tokens, known as XRP, he had come to Davos to indirectly pitch by promoting his system.

At the time of our Davos meeting, Ripple was still an obscure system not many outside of the “crypto space” had really heard of. And even within it there wasn’t much love for it because, unlike the rest of the world of crypto, Ripple Labs had controversially embraced centralisation — operating a bit like a central bank with its own supply.

While the crypto world remained suspicious, the banking community was more open-minded to dealing with a crypto firm that promised to behave like an adult. What began in Davos ended with a number of high-level financial institutions embracing “proof of concepts” using Ripple technology, the most of prominent of which was Santander.

Ripple’s charm offensive went so far as to open the door to a project with the Bank of England. A freedom of information request to the BoE about the project in 2019 received a response noting that: “in 2017 the Bank undertook a proof of concept (‘PoC’) exercise with Ripple which was one of a number of PoCs which it undertook with several companies.” How much it paid Ripple for the deal was undisclosed, due to confidentiality provisions.

Even so, most of these types of experiments went nowhere.

“Unlike its competitor R3, it struggled to gain traction among financial institutions which, according to my friends in the City, had regulatory compliance concerns about Ripple’s public token component,” Preston Byrne, a partner at US-based Anderson Kill specialising in crypto advocacy, told FT Alphaville on Tuesday.

This week, nearly five years after that Davos tour, the Securities and Exchange Commission revealed it had filed an action against Ripple Labs Inc including Ripple co-founder Chris Larsen and current CEO Brad Garlinghouse for “raising funds beginning in 2013 through the sale of digital assets known as XRP in an unregistered securities offering to investors in the US and worldwide”.

The suit goes on to note:

Ripple also allegedly distributed billions of XRP in exchange for non-cash consideration, such as labor and market-making services.According to the complaint, in addition to structuring and promoting the XRP sales used to finance the company’s business, Larsen and Garlinghouse also effected personal unregistered sales of XRP totaling approximately $600 million. The complaint alleges that the defendants failed to register their offers and sales of XRP or satisfy any exemption from registration, in violation of the registration provisions of the federal securities laws.

Critics of Ripple, especially the legally minded, had always claimed the organisation could find itself in hot water for having conducted an illegal security sale. Ashton Kutcher’s prominent giveaway of Ripple on the Ellen DeGeneres show in 2018 was flagged as a particular concern. Watch for yourself, it’s quite a moment:

Ripple Labs, in anticipation of such challenges, has for a long time been committed to a PR offensive that has hotly contest any connection between itself and XRP. This has focused on building a narrative that control of the underlying token-infrastructure was impossible because of its decentralised support structure. It’s a narrative that was echoed in its official Wells response this week:

XRP transactions take place on the XRP Ledger (“XRPL”), a decentralized, cryptographic ledger powered by a network that is not controlled or owned by any one party. The XRPL has successfully recorded hundreds of millions of transactions for over eight years without error or dispute.

In 2016 it was clear the organisation was trying to take steps to reduce its dependence on XRP — increasingly pushing technological solutions focused around ledger interoperability so as to better woo and hook the banks on its systems. “Banks don’t have to use XRP and to date they haven’t,” a Ripple PR summed up for us after our meeting with Larsen. “We’re first focused on creating existing fiat currency liquidity on Ripple. We see this as the foundational layer – make the world’s banks interoperable so money moves inexpensively and instantly around the world.”

But as Byrne notes, the contradictions seemed ever-present:

For nearly a decade it [XRP] has hovered in the top ten cryptos by market capitalization and even now, even after this lawsuit has been filed, ranks only behind Ethereum and Bitcoin in terms of importance to the markets. It has also been the envy of companies everywhere who wonder why Ripple should be permitted to print money when they cannot. For a time, Ripple was a contender to win the “blockchain” game. In 2013-14 it counted itself among one of perhaps half a dozen choices major banks could adopt for enterprise blockchain experimentation.

And even in 2016 there was vagary about who exactly was representing XRP. In a follow-up email, Chris Larsen’s PR confirmed to us that XRP units were majority-owned by Ripple management, with 66bn XRP held by Ripple and 33bn by others, adding that “we continue to distribute it every week to institutional investors and market makers”. She also noted XRP was “fundamental to the existence of the Ripple network”, adding that they were developing an incentive programme to offset market makers’ costs “when they were providing liquidity against XRP” as part of their longer-term plan to make XRP a key bridging asset in FX transactions.

In the end, Byrne notes, banks’ compliance concerns appear not to have been misplaced, as is laid bare by the SEC’s complaint. The regulator, he says, is arguing that at all relevant times, starting in 2013 when XRP was first created and up to and including parts of 2020, XRP itself “was an investment contract and therefore a security subject to the registration requirements of the federal securities laws”.

The implications of the case are profound for crypto. If the SEC action is successful it would set a precedent that all widely traded cryptocurrency should be redesignated and regulated as a security, something the agency has hesitated to establish up until now.

This may concern other cryptocurrencies such as Ethereum and Eos, which unlike Bitcoin were pre-sold to the public in a similar fashion, notes Byrne.

The SEC is a law enforcement agency so its allegations are allegations and must be proven in court. It appears from this complaint that the SEC seeks to end XRP. American regulators have so far not been persuaded by arguments from cryptocurrency professionals that investor protection laws should be disapplied to novel crypto offerings. Although cryptocurrency technology development – protocol dev, consensus engineering and layer 2 – will continue in the United States, this action signals that the U.S. is likely to be hostile to ICOs unless and until legislative change takes place.

2016, of course, turned out to be a funny year at Davos. It was the first year that Klaus Schwab, the head of WEF, officially went big on the idea of an incoming Fourth Industrial Revolution that would change the entire global system. Talk of robots, platforms and joblessness was everywhere. Talk of crypto — or more specifically blockchain — was also doing the rounds. High-level celebrity presence included Leonard DiCaprio, Will.I.Am and Kevin Spacey. On the political front, it was Justin Trudeau’s big year and even Joe Biden popped over to say hi.

Despite all of the networking and all of the hype, absolutely nobody seemed to foresee the two major events that would shake the world that year: Brexit, and the election of Donald Trump. It feels apt, perhaps, that it was also the year Chris Larsen managed to ripple his way through the conference without so much as a query about the legal fundamentals of his system from the high-level financiers there.

Related links:
Ripple is being sued by the SEC – FT Alphaville
Blockchain hype storms Davos – FT Alphaville
The art of redefining success, MoneyGram and Ripple edition (Updated) – FT Alphaville

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Wall Street stocks follow European and Asian bourses lower




Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday

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US regulators launch crackdown on Chinese listings




US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.

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Wall Street stocks climb as traders look past weak growth data




Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.

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