After enjoying a successful and peaceful second half of last year, controversy has returned to Ripple as its conflict with early backers takes on a new form.
Last spring, it was a dispute with Jesse Powell, an early Ripple backer, who alleged that CEO Chris Larsen possessed an unfair share of Ripple’s XRP currency. Ripple threatened legal action and sent Powell a Cease & Desist letter, which he posted online. Days earlier, Jed McCaleb, the creator of the modern version of Ripple, abruptly announced his plans to sell his entire XRP stake. He later went on to found a competing protocol, Stellar, itself based off the Ripple protocol.
This spring, controversy has returned. Ripple reportedly ordered bitcoin exchange Bitstamp, which operates a Ripple gateway, to freeze the funds of McCaleb when he attempted to sell 96 million XRP, worth roughly $1 million.
To “avoid and mitigate irreparable harm and damages” to the value of XRP, a Ripple Labs member reportedly placed an offer for McCaleb’s XRP. After the transaction went through, Ripple demanded that Bitstamp use its gateway power to freeze McCaleb’s account to prevent him from withdrawing the cash.
Ripple claimed that McCaleb’s was selling “Founder tokens”, for which the parties had agreed that McCaleb can’t sell at a rate of more than $10,000 worth per week. McCaleb argued that his XRP were acquired by his family prior to the agreement.
Legal Risk Factor Beneath Ripple’s Lawsuit from SECGo to article >>
Ripple then requested to have McCaleb’s trade reversed, but this was complicated by McCaleb having already used proceeds of the sale to buy some Stellar (STR) currency. Bitstamp has reportedly requested legal intervention to settle the dispute.
Bitcoin loyalists have ridiculed Ripple for its apparent ability to control the flow of funds, a telltale trait of centralized systems such as the traditional banking world. The saga is in addition to an announcement by Ripple last week that it will begin requiring identification documentation for its Ripple Trade wallets in the future. Bitcoiners will also point out that all of XRP’s currency is “pre-mined”, with large stakes retained by company executives and the company itself.
Monica Long, VP of marketing and communications at Ripple Labs, told Bitcoinist.net, “The Ripple protocol allows each gateway to decide its own policy so users have a choice between using a freeze or no-freeze gateway, depending on their preference. It is a necessary legal requirement for a gateway to operate in most jurisdictions. It also supports a healthy ecosystem by reducing risks and protecting users. If a user thinks his or her funds were unjustly frozen, he or she can take legal recourse through the appropriate channels.”
The protocol also gives a gateway’s operator the flexibility to deactivate its ability to freeze funds, and is technically required to inform users if they have not done so.
The saga is the latest example of bad blood between the rival protocols. Several months ago, McCaleb’s Stellar blamed a flaw on its parent Ripple’s protocol, claims which Ripple vehemently denied. Ripple pinned the blame on Stellar’s implementation of the protocol. Stellar has since reworked its core codebase, called the Stellar Consensus Protocol (SCP), and released a white paper.