The Anatomy of a FUD article – A response to the recent Messari XRP post

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I cannot tell if this post by Ryan Selkis is a FUD article or an honest misinterpretation of the data – largely because I can’t imagine that someone who runs a service advising people on cryptocurrency investments is capable of this kind of selective reading. At any rate, Selkis states:

We’ll go for a two-fer today since Elliptic just released a report tying $400 million of illicit activity to XRP (vs. $829 million for bitcoin).

In other words, for all that centralization, corporate treasury shenanigans, and silver-tongued bullshit, you’re still getting a network that is pound for pound “shadier” than bitcoin, despite what Ripple execs might have regulators believe.

If you visit Selkis’s article, you’ll notice that there’s no link to the BTC study, whereas the XRP article is properly sourced. Why might that be? Well, I dug it up, or an older version of it, from January 2018. You’ll notice that the data Selkis is referencing refers to 2019 transactions. I could not find that version, so I’ll link a quote directly from Ellipitic on how the data compares between XRP and BTC on a measure of illicit transactions that they were able to capture on the blockchain.

“The overall proportion of transactions that we’ve identified as illicit on XRP is much lower than Bitcoin. So, the 400 million dollars represents about 0.2% of all XRP transactions. If we compare that with Bitcoin, what we found this year is that just purchases on dark marketplaces alone accounts for 0.5% of all Bitcoin transactions. What is also different is the type of illicit activity that we found in XRP. So, in Bitcoin it’s dominated by dark marketplaces and also thefts from exchanges. In XRP we didn’t really see that much dark marketplace activity. The illicit activity we found was dominated by scams such as ponzi schemes.”

This quote was from a video interview of an Elliptic representative hosted on a publication called Cheddar that discusses the most recent XRP related article.

If we look at the authors of the study from 2019, which you can find in a footnote in the article that talks about the Elliptic Bitcoin study, you’ll notice that the authors of the 2018 study linked above are the same as those from the more recent study. I’m not certain how much the methodology has changed, or even if there’s an updated journal article, but the 2018 article, like the Elliptic quote from the interview above indicates that: “We aggregated total volume of bitcoins going into conversion services and also identified the amounts coming directly from addresses flagged by Elliptic as belonging to illicit entities, such as various types of darknet marketplaces, ransomware, and fraudulent activities.” Furthermore, the study indicates: “Our data should not be interpreted to assess or estimate the full amount of illicit Bitcoin transactions which may have occurred on the Bitcoin blockchain. The actual volume of illicit Bitcoin transactions is almost surely to be significantly larger than represented in our sample.”

We have only considered Bitcoin flows directly from illicit entities to conversion services in order to simplify the analysis. Large volumes of illicit funds may pass through intermediate, unidentified entities before being sent to conversion services; however, the focus of this study was not to capture the totality of illicit Bitcoin transactions, but to track the transactions flowing directly from addresses associated with known illicit actors to conversion services. The data set of illicit transactions does not include flows which may originate from intermediary addresses.”

How much larger would the full amount of illicit Bitcoin transactions be than a limited measure of illicit darkweb Bitcoin transaction activity that specifically hit currency exchanges? A study from the Review of Financial studies argues:

As indicated by Elliptic, only 0.5 ($829 million) percent of annual darkweb transactions are directly hitting exchanges, but the total value of illicit BTC transactions are said to be valued at $76 Billion which, according to the study linked above, amounts to 46% of annual Bitcoin transactions.

The Elliptic XRP study may be measuring a more complete capture of illicit activities that have hit currency exchanges; XRP has very little dark web activity, so criminal entities may be trading to fiat or other cryptocurrencies in a more transparent fashion than they are with BTC. A drug dealer or a user selling illicit images on the darkweb for BTC has much more to worry about than a fake Brad Garlinghouse currency swap scammer when it comes to dealing with currency exchanges. As a consequence of this, BTC criminals may be using intermediary addresses at a higher frequency than criminals using XRP. The journal article from the Review of Financial studies indicates that dark web transactions make up a significant amount of total illicit BTC activity, but as we see from the Elliptic data, not many of those transactions are hitting exchanges without any obfuscation. The Elliptic press release didn’t provide a link to the actual XRP data, so I have no idea which one of these is the case. At the very least, as indicated by Elliptic in the above interview, illicit activity on the XRP ledger is much lower proportionally than BTC’s exchange to darkweb activity alone, which directly contradicts Selkis’s statement that XRP is “pound for pound “shadier” than bitcoin.” It very clearly indicates the opposite of what he said is true.

Charitable Works

As for Selkis’s criticism of Rippleworks being a corporate tax shelter, most charitable donations by corporations, the ones funded by entities like Ripple and Coinbase included, are all methods of reducing tax burden. Even individuals can make tax free charitable donations to registered charities. This is largely because these donations have a net benefit to society as it encourages profit-seeking entities to share a portion of wealth with charities. They’re also methods of advertising, both for people and corporations in the cryptocurrency community. My opinion is that real charitable giving should be anonymous. You cannot read intent into the creation of a charitable foundation with a corporate or individual name and logo attached to the foundation. Is the founder establishing the charity because of legitimate interest or as a means of tax shelter and advertisement? It’s tough to discern individual intent in a situation like this. However, if this kind of advertising and tax shelter behavior results in a net benefit for society and is absent any harm, there isn’t anything ethically wrong with it, unless you wish to pathologize something normal in the corporate world because you have an axe to grind with a company or individual.

Selkis also indicates that Rippleworks hadn’t donated any money from their foundation. This statement is also misleading as Ripple’s charitable organization does not give out money directly; it sends prominent individuals to provide their expertise to firms in developing nations.

Rippleworks sent Neil Day, who has experience as CIO of Walmart and CTO of Sears, to consult with a Brazilian healthcare provider called Dr. Consulta:

Pushkar Modi, engineering manager at Netflix, consulted with Farmerline, a tech company that connects farmers in Ghana:

A variety of experts consulted with firms operating in developing countries all over the world. I saw names from companies like Visa, Amazon, Expedia, all sent to help local firms solve specific problems they were having with their corporate structures. Expertise by executives of this caliber can have a transformative effect on employment across these nations. It could very well help lay the scaffolding for the establishment of successful firms operating out of countries like Brazil, Ghana, or any of the other locations Rippleworks has sent advisors to consult in.

Selkis prefaces his article, the focus of which is Ripple’s charitable foundation, with a measure of criminal activity on the XRP blockchain. I cannot fathom the reason to place these two very different things together unless you want to make the reader immediately think Ripple is a shady organization. He further misrepresents these numbers in a way that makes the measure of criminal activity on the chain look comparable between the two cryptocurrencies, and his sentence, “What the company is doing with its affiliated foundation may actually be worse…” is an indication of his intent to associate these two very different things. Worse than what? Worse than laundering money on a blockchain? Worse than the measure of criminal activity? Worse than the Ponzi schemes? Worse than the people pretending to be Brad Garlinghouse and advertising fake XRP airdrops? Or worse than articles by consulting companies that get almost every pertinent detail wrong?

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