In our blog “Blockchain’s Napster Moment,” we highlighted the importance of separating the utility of blockchain from the fervor of cryptocurrencies. Since then, XRP made headlines as its value skyrocketed and minted Ripple’s cofounders as the world’s newest billionaires.
Ironically, the hype of XRP stole thunder from the product itself, which deserves far more attention. The product is RippleNet, and more specifically its xCurrent software, which enables near instantaneous cross-border payments between banks. It’s a decentralized private network in which banks—the nodes on this network—exchange payments using proprietary blockchain technology called Inter Ledger Protocol (ILP), which Ripple developed and open sourced to the public. There is no mining on RippleNet: Transaction consensus is achieved through encrypted hashes sent directly between exchanging nodes, and Ripple doesn’t hold a master ledger of transactions.
Because only banks are on the network, they also serve as liquidity providers. Members initiating a transaction first request an FX quote from the network, and can limit the request to counterparties that fit a specific profile, like regulatory standing and rating. Network participants are still beholden to KYC/AML compliance rules, specifically their transaction monitoring obligations. And it’s also straightforward for banks to integrate Ripple with their infrastructure: xCurrent connects to a bank’s core systems through a translation layer that accepts message formats like SWIFT and ISO, leaving a small footprint on the bank’s technology stack.
The best part of the pitch is that payments settle in about two seconds. Calling this a “disruption” is an understatement: The technology is legitimately rendering antiquated international payment systems like SWIFT obsolete. Ask any treasurer about the pain of international money transfers and they’ll all use similar language to describe it: Agonizingly slow, with transactions taking days to settle; too many middlemen complicating the process; and an inordinate amount of risk (float, credit, and liquidity) for something so conceptually mundane as a bilateral electronic transfer of funds. As of now, over a hundred banks are using Ripple, and it seems inevitable that number will grow.
So where does XRP fit into RippleNet’s success? It doesn’t. The cryptocurrency is part of a different product called xRapid, which is like xCurrent but manages the counterparty FX exchange by converting funds into XRP first. For example, if we wanted to send $100 USD to the UK, xRapid would convert our USD to XRP over an exchange, make delivery to the beneficiary in XRP, then use the same exchange to convert XRP to GBP.
In theory, xRapid could make cross-border payments even faster and eliminate the need for banks to maintain nostro accounts. But in practice, it’s difficult to envision how this could work given the volatility of cryptocurrencies generally. Like xCurrent, there is no mining and the total XRP count is capped at 100 billion “Ripples”. Still, it hasn’t stopped speculators from driving the price from just a few pennies in December to over $3.60 in January, only to see it plummet back down to around $1 this past week. Crypto volatility exposure is probably why xRapid hasn’t gained the adoptive traction that xCurrent has. Moneygram recently announced a partnership with Ripple, but as a pilot for XRP and xRapid. It’s a test, not a commitment.
As long as cryptocurrencies flounder in proving themselves as reliable stores of value, the proposition to use XRP as a transfer medium for real, far less volatile currencies will remain challenging at best. Banks embrace xCurrent because it saves them time, money, and above all, reduces risk. It checks all of the boxes for the strongest selling points of blockchain technology. But again, at least for now, cryptocurrency isn’t a viable part of the business solution.