Analyzing Jed McCaleb’s departure and the ripple currency plunge (XRP)

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KEY UPDATE, 5/27/14: Ripple Labs has responded by saying that Chris Larsen has “authorized the creation of a foundation to distribute his donation of 7 billion XRP to the underbanked and financially underserved.” Ripple’s full response can be seen here.

Over the past few days, there have been a number of questions, pleas and comments within this forum and others related to Jed McCaleb and Jesse Powell. Unfortunately, there have also been a number of misleading and inaccurate statements that have stoked this ongoing conversation. We stand by the original statement made by Arthur Britto and the facts as presented in the letter to Jesse Powell.

The situation with Jesse has obviously escalated to the level that we have to respond formally and directly to him. However, we do not want that to distract from our pursuit of the larger Ripple vision. To that end, we will not comment on these issues with Jed or Jesse further in these forums. Instead, we will continue to use the forum as a way to engage in productive dialogue about the future of Ripple, Ripple Labs and the larger ecosystem within which we all exist.

Further, co-founder and CEO Chris Larsen has authorized the creation of a foundation to distribute his donation of 7 billion XRP to the underbanked and financially underserved. This plan has previously been in development but is now being accelerated and finalized independent of a formal agreement amongst all the original founders. He believes this is both the right thing to do and the best way to remove further distractions in pursuit of the broader vision of the company. Details of the foundation, its independent directors, and the giveaway will be forthcoming.

Finally, I would personally ask that we all remember that we are striving together to build something meaningful in Ripple. There will always be differences of opinion and we encourage constructive dialogue on those as a community, but it’s important that we remain committed to our larger vision for bringing about a more global, open and efficient financial marketplace through Ripple.

– Monica Long, Ripple

Arthur Britto’s statement:

I have been following this thread along with the rest of you today. I wanted to comment on behalf of the Ripple Labs team.

Ripple is unique. It is the only distributed protocol that enables value to move like information moves today. Our vision is for an inclusive value web, built by enterprise financial services firms and innovative developers. It greatly improves, rather than replaces, the incumbent system.

Many of you are concerned about what impact these sales will have on the market. What affects XRP price long-term is adoption of the protocol and growth of the ecosystem. As the value of the protocol (i.e. utility) increases, so does the value of XRP. The price of XRP doesn’t impair the functionality of the Ripple protocol or network.

Similarly, the short-term price of XRP does not hinder our ability to execute on the vision. Our company is well-funded. We’re not dependent on XRP.

A critical ingredient to Ripple’s success is regulatory compliance. We’re committed to support a compliant protocol and network. Expect significant developments from us on security and consumer protection features.

We’ve heard and shared your concern about the founders’ XRP allotment. Prior to today, we’ve been working on a founders’ XRP lock up plan, which Chris and I are participating in. You can rest assured that a dumping event like this won’t happen from other co-founders.

It’s heartening to see Ripple’s tremendous progress as of late. On the enterprise front, there are five Wall Street funds trading on Ripple, and the first bank, Fidor, signed on to use Ripple as its real-time settlement infrastructure. The news, along with the tireless efforts of our business development team, has led to very productive conversations with top 20 banks around the world.

On the developer front, we’ve established a dedicated developer relations program and engineering resources to create tools to make building on Ripple easy.

On the regulatory front, our compliance and risk chiefs have made lots of headway positioning Ripple as a real-time settlement system, solving fundamental deficiencies in finance. It was a big day when VP of the St. Louis Fed, David Andolfatto, expressed his view that “there’s room for beneficial coexistence [between central banks] and Ripple.”

Some of you have asked what Jed‘s intentions are with his sale, you’ll have to ask him. He hasn’t been on the operating team for about a year, and hasn’t been on the board since April.

In the near term, our team is focused on building a banking infrastructure on the protocol. It’s a necessary, foundational step to enable other types of applications and activity on Ripple (e.g. remittance, merchant solutions, etc.). We’re 54 employees strong and continue to hire.

Our purpose is to reinvent the foundation on which global finance is built. Your support and active involvement in building the value web is mission critical – thank you.

– Arthur Britto, Ripple Labs, Co-founder and Chief Strategist

KEY UPDATE, 5/25/14: Ripple Labs intends to sue Jesse Powell per Powell’s post on Reddit.

The ripple train wreck started yesterday at May 21, 2014, at 04:18 a.m. when Jed McCaleb logged onto XRPTalk’s forum and wrote that he’s planning to sell off his 9 billion XRPs.

Hi Everyone,

I started working on ripple in the summer of 2011. I soon hired Arthur and David to help me. In 2012, I met Chris Larsen. He joined us about 5 months before ripple was launched. Chris, Arthur and I kept 20 billion XRP, of which 9 billion were mine. We gave the remaining 80 billion to OpenCoin.

I have given away and donated some of my 9 billion XRP to charities such as MIRI, Literacy Bridge, Give Directly, Mission Bit and others. I plan to start selling all of my remaining XRP beginning in two weeks. Because I have immense respect for the community members and want to be transparent, I’m publicly announcing this before I start. So just fyi…. xrp sales incoming.

Thanks,
Jed.

Not much happened at first as people weren’t sure whether the post was authentic. Anticipating skepticism, Jed posted the message with a Keybase OpenPGP Signature and later made a transaction from a large ripple account to prove it was him. Ripple prices reacted by falling by more than 50 percent, and they haven’t shown any sign of abating.

Why the sell-off?

Interestingly, the price of XRP has plunged significantly and Jed hasn’t sold a single XRP yet! Per his message, he won’t start selling his XRP for “two weeks,” which we can assume means June 4, 2014. XRP investors see clouds on the horizon, and they’re running for the hills. Here are two theories on why:

  1. Investors are getting out before the XRP market size more than doubles.
  2. Investors could be assuming that Jed’s exit from XRP indicates that he doesn’t believe the platform will succeed.

Point No. 1 is rational. There are currently about 7.8 billion XRP trading on the open market. Jed didn’t indicate how many of his 9 billion XRP he’s given away, but let’s just pick a number of the air and say he’s given away half a billion XRP. That still leaves another 8.5 billion XRP that will soon flood what’s effectively a tiny market.

So, we’ve got the XRP market size going from 7,817,888,647 XRP to 16,817,888,647 XRP in the span of a few weeks (or months depending on how long Jed spreads out his sales).

Point No. 2 is more troubling. However, I believe fears over ripple’s future are unfounded. The company’s in the capable hands of Chris Larsen (formerly of Prosper.com), Arthur Britto and their team of 52 employees.

“The short-term price of XRP does not hinder our ability to execute on the vision,” Britto said today in a post on Ripple’s official forums. “Our company is well-funded. We’re not dependent on XRP.”

What does McCaleb’s sell-off mean?

Theory No. 1: He wants to move on and forget about ripple.

That’s something of a pattern for the entrepreneur. He started Mt. Gox in July 2010, then sold it March 2011 to focus on Ripple. By May of 2011, he was at work on Ripple, hiring Chris Larsen and building out the protocol. He left Ripple in July of 2013, and since then he’s been at work on a secret bitcoin project.

At this point, all we really know about McCaleb’s departure from ripple comes from a choppy video where he says “I left in the summer due to disagreements with the person I brought on to be CEO.”

I’m not sure McCaleb’s the kind of guy who likes to stick with one project for years, though. His sale of Mt. Gox is evidence of that, and I think it’s a trait that a lot of creatives share.

Theory No. 2: He doesn’t think ripple will succeed.

Why sell nearly 9 billion ripple if you think the currency could appreciate substantially and forever alter the global financial system? If he believes ripple will ultimately fail, selling now is a way to get value out of the 2+ years he spent working on ripple.

Theory No. 3: He’s low on cash or he needs to raise cash for his new venture.

Start-ups aren’t cheap. It’s not outside of the realm of possibility that he needs funds to hire programmers, pay lawyers or launch a marketing campaign for his new bitcoin project.

Theory No. 4: He thinks his latest start-up will kill off ripple.

If he’s come up with the next big idea in cryptocurrency (and if anyone could do that, I’d say it’s Jed), he might see the writing on the wall and assume ripple will be out-classed by his new “secret” project.

I’ve got an email out to Jed to see if he’s willing to share some thoughts with me in an interview, but in the meantime, all we can do is speculate.

If you want my unsolicited opinion, I’d say it’s a combination of all four theories above. Why? If Jed didn’t need the money, he’d probably donate the XRP to a worthy cause. He’s a tinkerer who likes working on new projects, and if he didn’t think his current project was the next big thing I doubt he’d be working on it (working on small, purely profit-driven projects doesn’t seem to be in Jed’s DNA).

What’s in store for ripple now?

As I mentioned above, the XRP market will go from 7,817,888,647 XRP to 16,817,888,647 XRP in the span of a few weeks. That’s more than twice the current market size, which means ripple prices should logically fall by more than 50 percent … and they already have.

In the 24 hours since Jed’s announcement, ripple prices fell 53 percent from $0.006 to $0.0026 – and Jed hasn’t sold a single XRP! That means, look out below. We could see a plunge upwards of 90 percent or more once Jed starts selling in earnest. If that happens, look for XRP prices around $0.0006!

Prices are going to keep falling. And once they stabilize, I plan to buy more XRP. I’ll buy more because I believe in the protocol and its requisite currency. Until bitcoin gets transaction times down to seconds rather than minutes or a new, more impressive peer-to-peer payments system that handles multiple currencies is unveiled, I’m sticking with what’s already been released, enjoys a growing user-base and has the capital to continue operations well into the future. If Jed launches a bitcoin-based competitor that improves upon ripple’s functionality, I may very well sell my XRP and move on. Right now, though, I still believe XRP is in a class of its own.

Before I go, too, I want to point out two big takeaways from all this. First, Jed made a rather stand-up move by pre-announcing his sale of XRP. I’m not sure everyone would have done that. Secondly, I believe that this shake up has made it clear to Ripple Labs that they need to be more transparent with their XRP distribution model. Indeed, they had this to say:

“We’ve heard and shared your concern about the founders’ XRP allotment. Prior to today, we’ve been working on a founders’ XRP lock up plan, which Chris and I are participating in. You can rest assured that a dumping event like this won’t happen from other co-founders.”

Even beyond the founders allotment, though, we need some sort of rough timetable for the release of the other 72 billion XRP that Ripple Labs controls. Until that happens, investors can’t be sure whether their investment in XRP will steadily rise or tumble 50 percent in a day. That sort of volatility scares away not just investors but the institutions who might adopt the ripple protocol as well. A commitment from Ripple Labs to release between (x) and (y) percent of their ripple holdings annually would go a long way toward stabilizing the currency.


Ripple soap opera continues with board member’s resignation

KEY UPDATE, 5/27/14: Ripple Labs has responded by saying that Chris Larsen has “authorized the creation of a foundation to distribute his donation of 7 billion XRP to the underbanked and financially underserved.” Ripple’s full response can be seen above.

Update on 5/25/14: It now appears that Ripple Labs could sue Jesse Powell for defamation among other things. Powell posted his response to Ripple’s corporate counsel here. Powell posted originally posted the link on Reddit in a post titled “Ripple Attack Dogs Descend on Resigned Board Member.” The saga continues!

5/24/14: In the wake of Ripple co-founder Jed McCaleb’s announcement that he was selling off nearly 9 billion XRP, Ripple Labs got more bad news on Friday (May 23, 2014) when another co-founder, Jesse Powell, announced he was resigning from Ripple’s board. Powell, the CEO of cryptocurrency exchange Kraken, posted his announcement on Reddit:

Hey ya’ll. Jesse from Kraken here.

Today I have submitted my resignation from the Board of Ripple Labs. While I care about the people who work there and I wish the company the best, I cannot personally continue to support the business.

I believe that the technology and the protocol hold great promise, and have since the beginning, which is why I was the company’s first investor. Since Jed’s departure, the management of the company has taken a different direction. Sadly, the vision Jed and I had for the project in the early days has been lost. I’m no longer confident in the management nor the company’s ability to recover from the founders’ perplexing allocation to themselves of 20% of the XRP, which I had hoped until recently would be returned. Prior to Jed’s departure from Ripple, I had asked the founders to return their XRP to the company. Jed agreed but Chris declined—leaving a stalemate. This afternoon, I revisited the allocation discussion with the pair and again, where Jed was open, Chris was hostile.

As an investor, of course, I hope that Ripple Labs will overcome its hurdles and prove my lack of confidence misplaced. Unfortunately, unlike the founders, I don’t have swathes of XRP to dump if I don’t think it’s working out.

Obviously, things have come to a head. The founders and CEO have different views on how and where ripple should go. Let’s hope it’s just standard-issue growing pains for a high-tech start-up aiming to change the world. Interestingly, this is the first time I’ve heard that the founders intended to give back their XRP. It makes one wonder why they agreed to split 20 billion XRP in the first place. Something doesn’t add up, and I suspect we’re not getting the whole story.

XRP prices have remained fairly steady in the wake of Powell’s announcement. The real trouble for XRP will begin on June 4, 2014, though, when Jed McCaleb begins selling his nearly 9 billion-XRP stake.

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