Cryptocurrency XRP aka “Ripple” has gotten arguably the most mainstream media attention outside of bitcoin. Some say it’s not even a real cryptocurrency. Some say it’s the best implementation of cryptocurrency ever. What do I say?
I’m in no position to debate the technicals. I’m interested in whether XRP will succeed as a global currency. Looking at it from that perspective, XRP has a very simple proposition: if banks find it convenient, it will succeed. If not, it will fail.
This is regardless of anything that happens to its company, Ripple Labs, which built its payment network on the XRP blockchain. That network, RippleNet, has over 200 customers, including MoneyGram, Mercury FX, and SBI. Ripple will be fine. What about XRP? Will its price go up? Should you buy it?
If you’re only interested in making money off the change in XRP’s price, you have an interesting investment case. Theoretically, if Ripple gets a lot of business, XRP’s price will rise simply from usage of the network. As the number of transactions rise, demand for XRP will rise, too. Ripple holds a lot of XRP in escrow with a fixed schedule for releasing new coins. As a result, XRP’s price will rise simply from being used by Ripple’s customers, regardless of whether anybody else buys it for themselves. You’re betting on whether Ripple’s blockchain will see enough activity to drive up the price of XRP.
If we ever have another crazy 2017-esque speculative cryptocurrency boom, XRP could lead the bull run because it has name recognition and it’s actually being used, which creates a perception of legitimacy that most cryptocurrencies lack. Speculators will pour in.
Even if we don’t get another boom, banks or speculators may still hold XRP as a hedge or reserve. XRP serves a very specific (but lucrative) niche: international money transfers. Sending money internationally is a nightmare and ridiculously expensive. You have transaction costs, settlement risks, geopolitical risks, sometimes your recipient needs to pay a bribe to get their money, and you can never be sure the amount you send will be worth what the receiver gets. Plus, it takes 3–5 days for the money to arrive and banks need special arrangements called nostro and vostro accounts to keep local currency on hand in the places where they operate. XRP eliminates these costs, risks, and annoyances.
Banks can still save 40–70 percent using Ripple’s blockchain as a service for near-instant settlement of financial transactions, rather than hold XRP themselves.
I’ve used Ripple’s gateway. It’s very simple, basically a crypto wallet with some extra features. Banks do not need to own XRP to use the gateway, which helps banks transition to the new system.
The tech has real benefits, the brand is known, the interface works, and the token solves a compelling problem in finance.
The problem is, all cryptocurrencies can do what XRP does.
Banks and money transfer companies can create their own blockchain or their own cryptocurrency, making XRP irrelevant. Will banks take the trouble and effort and expense to do that?
Yes, some will. This is already happening:
JP Morgan rolls out first US bank-backed cryptocurrency to transform payments business
Will more banks take JP Morgan’s “do-it-yourself” approach? Will they use Ripple? Or will they take some other approach?
We shall see. Check who’s using and testing Ripple’s payment services to see how it’s going.
Unlike other cryptocurrencies, XRP’s success depends entirely on whether banks use it. If banks use it, XRP will boom, especially if Ripple’s Codius smart contracts take off or XRP replaces nostro-vostro.
If banks don’t use it, XRP will be worthless.
Related post: JP Morgan Created a Cryptocurrency. No Biggie.
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Mark Helfman is a cryptocurrency commentator and author of Consensusland, a novel about a country that runs on cryptocurrency.