Ripple, the so-called decentralized payment network, has frozen funds worth more than US$1 million that belong to the company’s former co-founder Jed McCaleb.
Since their initial launch, Ripple has represented themselves to the public as a payment network of “decentralized” gateways that convert different assets or types of payments—such as bitcoin or Paypal—into IOUs tradeable in the Ripple network.
On August 1, 2014, Ripple introduced a feature called “Balance Freeze” which allowed the network’s gateways to freeze and prevent funds from being traded, an action that they claimed was necessary to protect the gateways’ wallets from being compromised, or in the case that Ripple would be “called upon [freeze funds] by the authorities.”
Ripple introduced two different methods for the “freeze protocol extension.” The first method is known as the “global freeze” and allows gateways to freeze all of their issued funds. The second allows the gateways to freeze funds of a particular user, while the frozen funds are sent back to the gateway.
As explained in a Ripple Labs document, this feature gave Ripple permission to freeze accounts in the following circumstances:
- They notice “suspicious or unusual activity is noticed on an individual account.”
- Funds are being held during a dispute resolution.
Ripple Takes Advantage of the Feature
Ripple Labs asked Bitstamp, one of their many payment gateways, to place an “individual freeze” on the funds of McCaleb on March 21, after the company discovered that the former co-founder tried to trade 96 million XRP.
McCaleb and Ripple signed a contract in the earlier days of Ripple that basically stated that McCaleb was only allowed to sell or trade weekly batches of XRP worth at most US$10,000. According to Ripple, however, McCaleb tried to trade 96 million XRP worth around US$1 million in a single batch, which they claim broke the agreement. Ripple instantly demanded Bitstamp reverse the funds and return all 96,342,361.6 XRP to McCaleb.