By: Matt (Moon Lambo)
No company in the world is trying to do what Ripple is trying to do. That’s not to say they don’t have competitors — of course they do. But their competitors are going down a markedly different path. What is Ripple trying to do that is so different than anyone else? Who are Ripple’s competitors? Why are their payment and liquidity solutions inferior when compared to the future that the team at Ripple envisions? Why isn’t anyone else attempting to do that? I’ll unpack all of this in today’s blog.
On a high level there are two primary pain points for financial institutions when it comes to cross-border money transactions: Payments & liquidity. It’s important to distinguish between the two because the problems associated with each, and solutions to each, are dramatically different. Insofar as payments are concerned, Ripple has been able to modernize the system without the need to implement a digital asset (cryptocurrency) in the solution. Ripple’s xCurrent platform is capable of processing payment transactions in a matter of seconds, rather than days, while lowering operational costs. This technology makes entire layers of human management obsolete, and eliminating this labor expense is one way that Ripple is able to save banks large sums of money. In fact, Ripple’s xCurrent is capable of reducing international payment infrastructure costs by up to 33%.
Critics like to point out that Ripple solved the payments problem without any need for XRP. This is true, but such a comment is a red flag that the critics in question don’t understand the purpose of XRP. The truth is that XRP was never intended to solve a payments problem; it exists to solve a liquidity problem. Why is liquidity an issue? Enter nostro/vostro accounts.
A nostro account essentially references “my money in your bank” while a vostro account means “your money in my bank.” These accounts are what banks use today to source liquidity for cross-border payments, and at any given moment more than $27 trillion is parked in these accounts in the form of every fiat currency you can imagine. XRP was designed as the solution to this liquidity nightmare. This digital asset can be used as a replacement for all nostro/vostro accounts. To be clear, this means that one digital asset, XRP, eliminates the needs for banks to have multiple accounts in various fiat currencies all over the world.
This is important for a few reasons:
- Sourcing liquidity the old fashioned way can add roughly an extra day to the transaction process and requires labor for processing which is expensive. XRP transactions take mere seconds and require almost no human interaction.
- If you’re a bank with a nostro account in a foreign country, the capital you store in this pre-funded account is dormant. It sits idle just in case it is needed for money transfers. Leaving funds dormant is certainly not the best use of liquid money. It would be better purposed if it were invested or otherwise utilized.
- Highly inflationary foreign currencies are a problem. Consider that in December of 2015, one United States dollar was worth 10 Argentine pesos, and two years later it was worth 19 pesos. This real world example shows that if you’re a bank with a nostro account storing the Argentine peso, your money has lost a substantial amount of value over time compared to more stable fiat currencies such as the U.S. dollar. Without question this is a rather unappealing proposition, yet a necessary evil in today’s world.
There is a better way to do this.
An Audacious Plan
Miguel Vias, Head of XRP Markets at Ripple, once stated that his employer’s mission sounds “audacious.” I must admit I fully agree with him. Ripple seeks to make the transfer of money as quick and seamless as it is to send an e-mail today, and they call that the “internet of value.” I believe that the most bold part of their plan is what Ripple is doing to position XRP as the standard source for liquidity of all global money transfers. When I opened this blog by stating that no company in the world is trying to do what Ripple is trying to do, this is what I was talking about. No other business is positioning any digital asset as a global solution for today’s liquidity woes.
Can you imagine hatching such a plan? Acknowledging that it’s “audacious” barely scratches the surface when you consider what is necessary for Ripple to achieve their goals. First, Ripple had to create xCurrent, a payment technology that is so vastly superior to the system and processes that are in place today that banks would have no reasonable recourse but to adopt the new technology. Next, Ripple has to be a cheerleader for the use case of XRP as a pool of on-tap liquidity for cross-border money transactions. Keep in mind that Ripple does not own the XRP ledger system because XRP is a decentralized digital asset, but still they’re fostering an environment in which XRP markets grow and gain actual value. Rather than attempting to force banks to source XRP for liquidity, they seek to prove to banks and financial institutions that XRP is the only real solution for the global liquidity problem they face. In fact, a bank that utilizes both xCurrent and XRP can save upwards of 60% in costs.
Trillions of dollars are transferred around the world on a daily basis. That means that if XRP does one day replace nostro/vostro accounts, it’s market cap will need to be in the trillions. Ripple has not blatantly stated that they have a goal of XRP one day reaching a market cap in the trillions, but it seems obvious to me that is what they’re aiming for. That is what makes Ripple’s plan seem audacious, but it’s also the reason that it is truly visionary.
A Perfect Storm
How could it ever be possible for Ripple to clean up the train wreck that is the global money transfer system? It’s thanks to a blend of fortuitous timing and incredible technology. XRP was created in 2012; just three years after blockchain technology was introduced to the world via Bitcoin. Since it’s inception, the value of Bitcoin has soared because enough people have decided that it does in fact have value. It can be argued that on the day that Bitcoin inventor Satoshi Nakamoto launched his invention, Bitcoin had no value. It wasn’t until the world began to adopt the platform and individuals converted their fiat currencies into Bitcoin that it really had any value. Similarly, XRP had no real value on the day that it was launched, yet today it enjoys a market cap of roughly $37 billion because people & businesses have come together and decided that is what it’s currently worth. The idea of creating the digital asset XRP, which initially had no value, and then convincing people to give it value by investing money in it to solve a liquidity problem, is incredible. The fact that Ripple is making this idea a reality is even more incredible.
Ripple came along with the right solutions at the right time, and they started marching down this path before most people had ever heard of Bitcoin or blockchain technology. Nothing like this has ever been attempted before. While Ripple’s plan may sound pretty wild to most, I believe they have a real shot at making their vision a reality.
Deeply Misguided Competitors
Let’s take a moment to consider the entities that are competing with Ripple. Examining all competitors would be outside the scope of this blog, but suffice it to say most are banks and financial institutions. Their technology solutions (I use the term “solutions” loosely) have two primary components. They utilize blockchain or familial technology for payments, and bank coins for liquidity.
Component 1: For comparison’s sake you can think of their blockchain or familial technology for payments as being equivalent in concept to Ripple’s xCurrent. That’s an oversimplification, but it works for explanatory purposes.
Component 2: The aforementioned bank coin. The term “bank coin” can be broadly used to define a digital asset created and used by a bank, or alliance of banks, which is intended to solve the same liquidity problem XRP was designed to solve.
Bank coins all employ the same general strategy, have the same market barriers, and the same tremendous shortcomings.
During the summer of 2016, UBS, Deutsche Bank, Santander and BNY Mellon announced their own bank coin. They call it the “utility settlement coin” which is a digital asset intended to solve the liquidity problem that XRP also seeks to solve. Ripple CEO Brad Garlinghouse promptly wrote an article citing the development of this bank coin as “deeply misguided.” He was quick to point out a glaringly obvious problem is that a bank coin can only efficiently settle between the banks that issued it.
A quote from Brad Garlinghouse’s article referencing two possible outcomes:
Scenario one: all banks around the world put aside competitive and geopolitical differences, adopt the same digital asset, agree on its rules, and harmoniously govern its usage. Fat chance.
Scenario two (the more likely scenario): banks not in the issuing group issue their own digital assets with their own sets of rules and governance.
Given that Brad’s second scenario is already happening with the advent of Citibank’s Citicoin and Goldman Sachs’ SETLcoin, it’s easy to see how pursuing the bank coin approach will only serve to further fragment an already fractured banking system. Banks with competing bank coins would need to make new markets in order to conduct business with one another. Does that sounds like a global solution to you? I don’t think so either. No level of bank coin interoperability could ever work as seamlessly as a globally adopted XRP.
As I previously mentioned, XRP is only used as a source of liquidity, not as a source meant for payments. This means that banks have a few choices when it comes to adopting blockchain, or familial technology, and digital assets:
- Utilize Ripple’s xCurrent for payments & XRP for liquidity.
- Create their own blockchain or familial technology for payments and use XRP for liquidity.
- Create their own blockchain or familial technology for payments and create their own centralized digital asset for liquidity.
A primary reason that XRP is attractive as a liquidity solution is that people and businesses have invested in it, and as such it has actual value. Any bank coin, upon inception, has no value. Bank coins are controlled by the banks that own them; they are not traded on open cryptocurrency exchanges. So, how can a bank coin with no actual value be used to solve a liquidity problem? The unfortunate answer is that it must be backed by multiple fiat currencies in order to have value. Mr. Garlinghouse points out the problem with this in referencing the utility settlement coin, which is a prime example:
Once backed by cash, it’s no longer an asset; it’s a liability. Trading liabilities then ultimately requires moving cash across borders, re-creating today’s system but adding more friction!
Which brings me to my next point.
Decentralization is Key
Bank coins are centralized systems which means that the owner of each individual system will ultimately enjoy the most benefits. The owners of each bank coin will fight against each other to be the dominant competitor in the marketplace. As written in a Recent “Ripple Insights” article by Richard Crook, decentralized systems offer these desirable attributes:
- Resiliency — no single point of failure
- Cheaper — no middle-man or monopoly to create fees or pricing power respectively
- Agile — no need to move at the speed of the central component
- Private — data cannot be resold or mined by the central party
Beyond these facts, I believe it’s likely that XRP will ultimately be adopted on a global scale because it levels the playing field. Consider the fact that smaller banks have it rough when conducting cross-border money transactions for their customers. Small banks don’t have the large capital reserves that bigger banks do, and as a result they can’t afford to pre-fund nostro accounts all over the world. Instead they pay bigger banks outrageous fees to tap into their liquidity, and these fees are then passed along to the customers of the smaller banks. Doesn’t that sound a bit upside down to you? The smaller banks are literally giving their money to larger competitors.
XRP is decentralized so everyone’s interests are in play. No one owns the ledger.
First Mover’s Advantage
It’s no stretch to say that Ripple is light-years ahead of competitors. Ripple is the only company in the world with production ready enterprise solutions for banks, while competitors are still designing or trialing their products.
While some banks will continue to fight for their own personal dominance by developing bank coins, not all will resist the future. Consider that Yoshitaka Kitao, CEO of SBI Holdings, has publicly stated that he strongly believes XRP will become the global standard in digital currencies. In May of 2016 SBI Holdings launched SBI Ripple Asia, a consortium over over 60 banks which includes the top bank in Japan. They began using Ripple technology for both domestic and cross-border payments. Mr. Kitao stated recently that they are increasingly interested in using XRP for payments. The Bank of England is currently a customer of Ripple. Royal Bank of Scotland embraces decentralized ledger systems and supports what Ripple is doing. On February 7th this year Brad Garlinghouse publicly stated that a yet announced central bank is also working with Ripple.
Compare the first mover’s advantage XRP has and the fact that it’s a truly global solution against bank coins coming late to the party and being closed systems. There is no comparison.
There is one other company competing in the cryptocurrency realm, and I’d be remiss if I didn’t mention them. I’m speaking of the non-profit entity Stellar Development Foundation which created a copycat cryptocurrency called XLM. Their cryptocurrency is a fork of the XRP ledger, and as such it shares a lot of code and attributes.
Is Stellar and XLM a threat to Ripple and XRP? At present, not really. Stellar has a vastly different business plan than Ripple and is seeking out a different customer. Ripple is positioning XRP as a global solution for liquidity while the mission of Stellar is to utilize XLM in countries such as Nigeria where the average citizen doesn’t have a bank account. Even if the technology is similar they aren’t a great threat to each other right now. Once XRP becomes the standard source for global liquidity there is no reason that XLM ever could, or would, take that position away from XRP.
Why is no other business trying to position a decentralized digital asset as a global liquidity solution? All of the banks that are developing their own blockchain technology to improve payments and liquidity are doing so out of self interest. And that’s fine; banks are businesses and should do what they believe is in their best interest. They don’t feel incentivized to create a global payment system. Instead they believe that a closed system they control would be most profitable. Of course, if XRP becomes extremely dominate, banks in closed systems will be less desirable by customers that do cross-border money transactions. This could negatively impact their market share. For now though, banks will fight within the marketplace to retain as much power as they can.Conceptually, what Ripple is doing to position XRP is such a radical concept that it’s not hard for me to accept that no one else is taking the same approach. It would be an impossible task to successfully launch a new decentralized digital asset in competition with XRP at this stage in the game. Ripple has been at this for 6 years, and if XRP really does become the standard I wouldn’t be surprised to see it stay that way for decades or longer. Only new technology that is equally disruptive as blockchain would ever have a chance at changing the industry to this degree. Technology like that only comes along every once in a great while.
There are currently over 100 banks using xCurrent, so it’s safe to say that Ripple is succeeding at implementing their plan. Ripple’s software that utilizes XRP is called xRapid and was launched in late summer of 2017. Given the newness of the technology and the fact that sales pipelines take time to develop, only several xRapid customers have been announced by Ripple to date. I think that you should expect a lot more to come in 2018 and beyond. Remember that every Ripple customer that uses xCurrent is a potential xRapid customer.
The bottom line is that if you’re not competing against XRP with a globally oriented, decentralized digital asset, then you’re not really competing.
DISCLAIMER: I am not a financial adviser. None of what has been written here should be considered financial advice; it is not. Do your own research before investing in any digital asset, and understand that investing in any cryptocurrency is inherently risky. If you do, you need to be prepared to lose your entire investment.
Click to access xrp_cost_model_paper.pdf