Ripple Escrow Reporting: Creative Accounting or Much Ado About Nothing?

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Blockchain analysis firm Coin Metrics points to discrepancies in Ripple’s escrow accounting. Is there a basis to the claim?

On May 16, 2019, Coin Metrics released a report detailing discrepancies in Ripple’s escrow reporting system. The Blockchain analysis firm described these discrepancies as contradictions that required some explanation.

As per usual, any story concerning Ripple is going to come in for some polarizing viewpoints, with strong opinions on both sides of the matter. On the one hand, Ripple says the discrepancies aren’t so much a financial issue as they are a timeline adjustment. Critics of the company, on the other hand, see it as a further ground for criticism of Ripple’s operations.

How Ripple escrow works

Back in mid-December 2017, Ripple published a document detailing the mechanisms by which its XRP escrow account worked. According to the report, 1 billion XRP would be released once every 55 months, with all unused XRP returned to the escrow account at the end of each month. The purpose of this process was to create a total cap of new XRP tokens introduced into circulation every month.

At the time, Ripple revealed that the escrow’s main purpose was to introduce a level of predictability to the XRP supply. The company also revealed that, moving forward, the 1 billion XRP released per month would also be used for projects aimed at improving the overall XRP ecosystem.

Coin Metrics reports on discrepancies in Ripple escrow

As previously reported by Cointelegraph, Coin Metrics discovered some inconsistencies in Ripple’s escrow reporting system. These dissimilarities, according to the blockchain analysis company, can be found by comparing Ripple’s publicly disclosed escrow management and the information recorded on the XRP ledger.

Coin Metrics distilled these findings into three key summary statements:

  • “Two quarterly markets reports under-reported the number of XRP released from escrow by a total of 200 million XRP ($84 million at current prices)
  • The ‘escrow queue’ is implemented differently than announced, leading to a faster future release of escrowed funds compared to the announced schedule
  • Other party/parties, potentially associated with Ripple, have released 55 million XRP from an unknown escrow address not connected to the main Ripple escrow account.”

The first issue raised by Coin Metrics lies in the variance seen in Ripple’s quarterly reports for the third quarter of 2018 and the first quarter of 2019. For both periods, the amount returned to escrow as detailed by the quarterly reports exceeded the amount recorded on the XRP ledger by 100 million XRP.

This dissimilarity means that the quarterly report for both periods underreported the number of XRP released into the market. Such a move could have a profound significance when examined from a monetary inflation and liquidity point of view.

Cointelegraph spoke to Fernando Nieto, a developer and cryptocurrency advocate, about the implications of Ripple’s underreporting. He said:

“Coin issuance schedule has an impact on market price. The greater the amount of new coins put in circulation; the more capital is required to flow into the currency every day to keep the price. Monetary inflation consumes liquidity, so currencies with high inflation will tend to be less valuable and more volatile.”

The next bit of inconsistency, as reported by Coin Metrics, comes from the manner in which Ripple implemented the return of the unused escrow amount. Per its own guidelines published in 2017, every unused XRP released from escrow on a monthly basis would be returned to the escrow account from the back of the queue.

An excerpt from the report detailing this exact point reads:

“Any additional XRP leftover each month will be placed into a new escrow to release in the first month in which no escrow currently releases.”

Two months into its operation, Ripple changed the queuing format for unused XRP, no longer returning them to the back of the queue but instead locking them in such a way as to perpetually maintain a 1 billion XRP supply schedule per month. According to Coin Metrics, this new paradigm significantly accelerates the XRP release schedule.

The third issue raised by Coin Metrics focuses on 200 million XRP not associated with Ripple’s escrow account. The Coin Metrics report traced 55 million XRP from this scheme going mostly to Bitstamp — a Luxembourg-based cryptocurrency exchange platform.

Simply a timeline issue?

Cointelegraph contacted Ripple for comments regarding the matter but was instead pointed to a Tweet by David Schwartz, the chief technology officer at Ripple:

Schwartz went on further to point out how the altered timeline changed the company’s escrow reporting, while promising to make subsequent quarterly reports include language that would make the change more apparent, saying:

“We tweaked the timeline in 2018 to reflect transactions that happened each month of the quarter rather than linking returns to date of initial escrow release. Ex: a March escrow release returned in April is considered a Q2 event, not Q1. We plan to add some additional language in future markets reports in our continued efforts to be the most transparent in the industry.”

Schwartz’s explanation would mean that there is always a 100 million XRP unspent balance that is carried forward from the end of one quarter to the other. Thus, at the time of Ripple publishing its quarterly report, it will be 100 million XRP behind, even though the balance exists on the on-chain Ripple ledger as having already returned to the company’s escrow.

There, however, lies a problem with Schwartz’s argument, which becomes apparent when examining the total escrow reporting since Dec. 16, 2017 to the latest released quarterly report on April 24, 2019. According to Coin Metrics, the total net amount returned to escrow so far as recorded by on-chain data and the various quarterly reports differs by 200 million XRP.

Of the 17 billion XRP released from escrow since Dec. 16, 2017, on-chain data shows 12.5 billion XRP returned to escrow. Meanwhile, Ripple’s quarterly reports show 12.7 billion XRP.

If the tweaked timeline explanation is all there is, then the variance between both reports ought to be only 100 million, since the only difference would be the month-ending XRP balance not being represented in the accounting shown for the quarterly report.

Speaking to Cointelegraph on the alleged discrepancies, Joe DiPasquale, the CEO of cryptocurrency hedge fund BitBull Capital, declared:

“The alleged discrepancies in Ripple’s escrow reporting may impact XRP’s price negatively unless Ripple publicly explains them in due time. One of the pitfalls of a centralized system is a lack of transparency and Ripple’s control over XRP is an example of this. If Ripple wants XRP to gain global adoption it needs to work towards building trust and transparency is the first step towards that.”

Ripple’s monthly escrow releases supplement the total XRP market liquidity, which in turn contributes to the token price control mechanism. By controlling supply, Ripple effectively plays a great role in determining the price of XRP. The question, though, still remains about whether these discrepancies are simply a timeline issue or an example of creative accounting on behalf of the company.

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