The Ripple saga

The Motley Fool
Ripple Lawsuit: What's at Stake for the Crypto Company?
A fight between players in the payment facilitator could be worth billions of dollars.

Dan Caplinger (TMFGalagan) Mar 19, 2018 at 4:16PM
Bitcoin first drew attention to the cryptocurrency world, but once in, investors haven't hesitated to look beyond it. The rise of high-flying alternative crypto tokens has in some cases left bitcoin's returns in the dust.

One key player in the budding cryptocurrency market is Ripple Labs, which is seeking to revolutionize the way that people make global payments. Its payment system works without crypto tokens, but it offers speed advantages in conjunction with its XRP token, which many simply refer to as ripple. Some believe that ripple has one of the best chances of becoming an accepted form of cryptocurrency, but there's currently a lot of controversy surrounding it because of a lawsuit between Ripple Labs and a former partner. Following key events in the lawsuit within the last week, some investors are growing increasingly nervous about the potential impact that the litigation could have on ripple.

Blue circles and rays on black background celebrating XRP 5th anniversary.
IMAGE SOURCE: RIPPLE LABS.

The story of Ripple Labs and R3
According to Ripple Labs' state court filings in California, an entity called R3 held itself out as a potential partner to the crypto company. R3 allegedly said that it could get access to a consortium of banking institutions and promote the use of ripple to its contacts. Based on those claims, Ripple Labs agreed to an option agreement that gave R3 the right to buy 5 billion ripple tokens at a price of $0.0085 per token.

Ripple Labs argues that R3 misled it about R3's ability to make good on its promises. It claims that R3 didn't pay attention to its obligations under its contracts with Ripple Labs and banks in the R3 consortium left the group, diminishing its value. Therefore, Ripple Labs terminated the agreements in June 2017, and it's seeking to have the option agreement declared invalid in addition to seeking further damages from R3 for what it says were fraudulent misrepresentations.

Meanwhile, R3 filed suit against Ripple Labs in New York state court, asserting breach of the option agreement. It sought equitable relief to declare Ripple Labs' efforts to terminate the option contract unilaterally as null and void, and it hopes to force Ripple Labs to honor the option agreement.

What's at stake
The reason the lawsuits are such a big deal at this point is that the value of ripple tokens has skyrocketed. Even at the time of the lawsuit, R3 stated a recent value of roughly $0.21 to $0.23 per token for ripple, which would have put the value of the option at more than $1 billion. When ripple briefly jumped above the $3 mark earlier this year, the lawsuit suddenly had more than $15 billion at issue.

With 100 billion ripple in existence -- more than half of which is locked in escrow at the moment -- a 5 billion ripple payout could shake the entire market. Although general nervousness about the cryptocurrency market has played a key role in pulling down prices of popular crypto tokens recently, ripple's drop to between $0.65 and $0.70 per token is also in part due to uncertainty about the resolution of the lawsuit and the potential for a flood of option-related ripple to come onto the open market.

Two strikes against Ripple Labs
So far, Ripple Labs hasn't had much success in its efforts. The California court chose last week not to hear Ripple Labs' appeal of the dismissal of its lawsuit. With a previous suit in Delaware also having been dismissed late last year, that leaves the sole remaining proceedings in R3's home state of New York -- far from Ripple Labs' San Francisco home.

If Ripple Labs loses the case, then it wouldn't necessarily lead to an immediate puncturing of the market for ripple. R3 knows just as well as Ripple Labs does that dumping billions of ripple onto the market will send the price plunging. With the option not expiring until September 2019, R3 would have plenty of time to gauge the timing of its move.

Some investors still believe that the use of ripple is one of the best practical applications for cryptocurrencies in the young market. Until this lawsuit gets resolved, however, investors will always be looking over their shoulder in fear that an R3 victory could create massive and lasting disruptions in the supply and demand dynamics for the ripple market for the foreseeable future.

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Dan Caplinger has no position in any of the tokens or stocks mentioned. The Motley Fool has no position in any of the tokens or stocks mentioned. The Motley Fool has a disclosure policy.