Ripple Gateways Can Freeze Users’ Funds at Any Time

Ripple has been the talk of the town lately thanks to its rocketing value and growing market capitalization that’s making eyes at bitcoin. $1,000 of XRP bought a year ago would be worth half a million dollars today. But away from the price action, there’s an issue bugging ripple that just won’t go away. It’s been alleged for years that Ripple Labs has the power to freeze the balances of account holders. If true, it would be a major cause for concern, especially for proponents of decentralized currency.

The Big Freeze
The origins of the Ripple freeze go as follows: In August 2014, Ripple quietly introduced a feature called Freeze. It was put to the test a few months later when Ripple cofounder Jed McCaleb tried to cash out some of his billions in XRP after leaving the company. He’d previously signed an agreement to sell no more than $10,000 of XRP a week, only to attempt to clear $1 million worth through Bitstamp in one go.

Ripple Gateways Can Freeze Users’ Funds at Any TimeUpon learning of McCaleb’s actions, Ripple intervened and prevented him from doing so, utilizing its Balance Freeze feature. Built into Ripple gateways such as Bitstamp by default, it enables the company to stop the movement of XRP. During the brouhaha that followed, Bitstamp, caught in the middle, filed a lawsuit to settle the dispute between McCaleb and Ripple Labs.

2015 was a lifetime ago in cryptocurrency, and a lot has happened since then to all of the players caught up in the spat, and to the industry as a whole. Bitstamp, Ripple, and McCaleb would all aver that they’ve moved on to bigger and better things: the former reporting record turnover and trading volume, and McCaleb launching Stellar, whose market cap has quadrupled in a matter of days, catapulting it into the top 10. And then there’s Ripple, which is going great guns.

The Case for the Defense
Ripple’s transformation from sluggish cryptocurrency into the hottest ticket in town has been rapid: three months ago, no one wanted to know. Now, traders of all genders, demographics, and territories are invested in ripple, and not just financially, but emotionally too. Anyone who buys an unfancied coin and then watches it moon can’t help but feel a sense of vindication, and a newfound appreciation for the project. At this stage, anything that threatens the coin’s upward trajectory – such as negative news – risks being shot down.

In a report on ripple’s meteoric rise this week, news.Bitcoin.com mentioned the “big freeze”, linking to another recent article on the site which explains this in more detail. Ripple’s defenders hotly dispute the facts of the matter, though, highlighting a sentence on Ripple’s Freeze page which states: “No one can freeze XRP”.

So what’s the truth of the matter? Can Ripple freeze users’ funds or not?

An Uncomfortable Half-Truth
The answer to Ripple’s capabilities lies in a document the company released in 2014 introducing Balance Freeze and stating:

The freeze protocol extension gives gateways the ability to…freeze funds issued to a particular user. Frozen funds may only be sent back to the gateway who issued them. The global freeze feature allows a gateway to freeze all balances issued by it.
When you purchase cryptocurrency on an exchange, your account is assigned a virtual balance – a token essentially – correlating to your holdings. Buy 1 BTC, for example, and nothing moves on the blockchain. All that happens is that your USD and BTC account balances are updated. It’s only once a user makes a withdrawal request that an on-chain transaction takes place.

Ripple uses a distributed ledger called the Ripple protocol which each Ripple gateway – essentially a bank – keeps a record of. Bitstamp, Gatehub, and The Rock Trading are some of the major gateways partnered with Ripple. Purchase ripple on Bitstamp, for example, and the transaction won’t show up on the Ripple protocol. The ledger will only record the movement of funds when they are withdrawn from the Bitstamp wallet to the customer’s XRP wallet.

The phrase “No one can freeze XRP” is thus a half-truth. Ripple does not possess the power to magically remove the funds from a customer’s personal XRP wallet. For example, it can’t plunder the funds that a holder has stored on their Nano S. If those funds are stored with a Ripple gateway that hasn’t opted out of Freeze, however, they can be locked up. Not only can the XRP be frozen, but so can the account balances associated with its sale, such as USD.

Ripple Gateways Can Freeze Users’ Funds at Any TimeRipple’s defenders claim that in this respect, ripple is no different from any other cryptocurrency. If Ethereum’s Vitalik Buterin had 10,000 ETH stolen from him and sent to Bitstamp, for example, he could probably pressure the exchange into freezing that ether while the matter was investigated. The difference with Ripple is that the company has developed a special relationship with its gateways which gives these “banks” unprecedented powers to freeze individual counts on a whim, or on the say-so of Ripple, law enforcement, or regulators.

Not only does Ripple encourage the XRP of suspicious accounts to be frozen, but “The financial institution should also freeze the counterparty in any other systems the financial institution operates that are connected to the XRP Ledger”. Your bitcoin; your litecoin; your euros; anything connected to a Ripple gateway can be locked down. No other cryptocurrency has a similar framework in place, which grants exchanges unprecedented powers to lock up funds at the drop of a hat.

A Frosty Reception for Centralized Currencies
No one is suggesting that Ripple Labs has a desire to freeze anyone’s funds. That’s not good for business. Nevertheless, a cryptocurrency which enables a centralized authority to freeze funds at the touch of a button defeats the entire purpose of cryptocurrency. Most people have no objection to stemming the funding of terrorists and money launderers. Once a kill switch is created, however, it leads to a slippery slope in which anyone suspected of misbehavior can have their funds seized.

Ripple Gateways Can Freeze Users’ Funds at Any TimeAs Ripple explains, the feature provides the ability “to freeze individual accounts issuances in order to investigate suspicious activity”. Owning XRP in a country that is hostile to cryptocurrency; possessing an unusually large amount of XRP; signing up to a Ripple gateway exchange from a banned country: all could be grounds for freezing your account.

If law enforcement suspected a cryptocurrency holder was engaged in criminal behavior, they could try to obtain a subpoena granting permission to seize that individual’s exchange balance – and would be required to submit evidence to show there was probable cause for doing so. But if that exchange happened to be a Ripple gateway, they could simply pick up the phone and ask for the Big Button of Freeze to be pressed. And that’s the difference between ripple and other cryptocurrencies.

Keeping so much as 1 XRP on a gateway exchange would technically be enough to see all of your fiat and crypto balances frozen. There are ways to obtain and transact XRP without going near a gateway that possesses special powers. In a world of decentralized cryptocurrencies, however, purveyors of financial freedom may prefer to look elsewhere.

Do you think Ripple’s freeze function is a cause for concern? Let us know in the comments section below.