What is XRP (ripple) and why it might change the banking industry

If you’re not sure what XRP is and what makes it so special, you have arrived at the right place. To begin with, the popular wisdom has it that  Ripple is a blockchain based cryptocurrency, and that’s hardly news if you know a thing or two about the world today.

Things are more complicated than that actually: Ripple is more than a cryptocurrency. Unlike, let’s say Bitcoin, Ripple is also a fast money transfer network, and take a load of this: this network was already accepted by a number of banks as a genuine money-transfer system. Initially called Opencoin, Ripple was founded in San Francisco, and the network went online in 2012. Led by Brad Garlinghouse, the company’s CEO, Ripple raised $100,000,000 (that’s one hundred million) in funding and it currently offers two main products: xRapid and xCurrent; the former’s token is XRP, yet most people refer to all the company’s products as Ripple, which may become quite confusing.

As an interesting factoid, even if the Ripple network went online in 2012, the concept originated back in 2004, way before Bitcoin’s inception (2009). To quote Stefan Thomas, Ripple’s CTO:

“Since its creation in 2012, XRP Ledger has been operating as a next-generation alternative to the proof-of-work concept that was originally introduced by Bitcoin. As the root ledger for the digital asset XRP, XRP Ledger is an enterprise blockchain supporting the institutional use case of cross-border payments.”

But What is Ripple?

To make it very simple, XRP is to Ripple what Bitcoin is to the Bitcoin-blockchain or what ether is to Ethereum. The company itself describes the XRP as being a settlement token, and that’s because XRP is very different from Bitcoin in some regards. For example, since its inception, the XRP was designed as a utility, not as a public digital cryptocurrency, like Bitcoin is. Ripple’s products allow financial services companies and banks alike to settle transactions and to send/receive international payments way more faster and cheaper, compared to the actual (and outdated) SWIFT system( Society for Worldwide Interbank Financial Telecommunications). Another difference between XRP and Bitcoin is that new Bitcoins are created by “miners”, while there will never be any new XRP coins created, as their number is fixed: there are 100 billion in existence since the beginning, of which 60 billion are owned by the company itself. It’s worth mentioning  that the 60 billion XRP owned by Ripple are not included in XRP’s market cap. Since XRP transactions clear on average in less than four seconds, the Ripple network became incredibly appealing to banks, as it gives them the ability to move large sums of money (internationally that is) very cheaply and quickly, hence the immense success of Ripple. In 2017 alone, the XRP’s value exploded, rising by 32,000 percent (from one hundredth of a cent to 1 US dollar). Yes, you got that right: thirty two thousand percent, compared to Bitcoin’s 1,221 percent (as per 2017 figures). Another cool feature of the XRP is that it cannot be seized nor frozen, there are no chargebacks and payments are irreversible. XRP payments are processed automatically (no intermediaries/third parties), can be authorized only by the account holder and they’re cyrpto-secured and algo-verified. However, keep in mind that the value of the XRP does not necessarily reflect Ripple’s payment-network success. Also, just like Bitcoin, Ripple uses distributed ledger technology, yet it’s cheaper and faster to send on the network (4 seconds for Ripple vs one hour to send around Bitcoin). It’s important to understand that the Ripple network doesn’t require banks to use XRP. However, XRP, the cryptocurrency/token issued by Ripple Labs, uses the Ripple network and it can be sent anywhere in the world with low fees and extremely quickly. When you see Ripple gaining value compared to the US dollar, it’s the cryptocurrency (the XRP) issued by Ripple, the protocol is another matter altogether. While the Ripple protocol is exclusively used by financial institutions (banks and the like) to transfer assets/currencies, the XRP is a cryptocurrency that can be traded freely on exchanges such as Poloniex and other places to buy XRP

Top Reasons Why Ripple Can Change the Banking Industry

I already told you about SWIFT, the transfer-protocol used currently by banks worldwide for their currency transactions. Ripple’s xCurrent system is the most widely used now and by using it, banks can save over 30 percent of their fees compared to SWIFT, while xRapid, Ripple’s second system may save up to 60 percent of their fees over SWIFT. The thing about the SWIFT protocol is that is very outdated, being created almost 40 years ago. Since the seventies, it only saw minor improvements. The internet changed everything, yet the banking industry still uses “ancient” technology. Back in 1970, most TV sets were black and white, imagine that. Ripple was built and designed for the internet era and uses blockchain technology, therefore being way more faster and safer than SWIFT.

Ripple’s xRapid system is solving a 20 trillion dollar problem of dormant capital, parked in various accounts all around the world. Ripple’s network can make the global commerce more efficient, and it will solve the liquidity problem that banks are currently facing. Under current laws, banks are required to hold billions of dollars in reserve (sleeping money) waiting to be used for transactions. When a bank wants to send money to another country, it cannot send it directly; as it has to use the cash, it is holding at the receiving bank to make the transaction. This is described as a nostro-vostro relationship. This cash is basically wasted, and this system comes with risks and management issues. Ripple can put an end to that, and free up to 20 trillion dollars in the process.

Ripple is awesome for small banks, as the banking industry is currently dominated by a handful of “too big to fail” banks (HSBC, Citi etc) , which are making billions of dollars annually in profit (in fees mostly) from the rest of the smaller banks. Ripple systems are designed to be easily integrated with banks and payment providers. For example, it takes for up to 9 months for a bank to build a nostro-vostro relationship from one country to another. Using Ripple, those aren’t even necessary, yet the company respects the current banking regulations, as it doesn’t aim to disrupt the banking system, like other cryptocurrencies do. Also, Ripple systems can be applied to local transactions, in the same country that is, to make the transactions faster and cheaper. There are already over 63 banks in Japan covering 40% of all Japanese accounts using Ripple’s system. Keep in mind that Ripple is currently used and supported by banking giants like American Express, UBS and RBC.

Final note

The lesson to be taken home is this: while Ripple’s system makes sense for banks and big corporations, it doesn’t mean much for the average consumer, at least for now. The thing about Ripple’s transaction protocol is that it may replace some day, sooner rather than later, the old SWIFT system, thus simplifying payments for banks and corporate entities. Moreover, unlike Bitcoin, Ripple is completely centralized, and it’s designed to improve efficiency for the global financial system, while Bitcoin is aimed at circumventing the irresponsible and untrustworthy banking institutions (and governments), thus facilitating anonymous trade between individuals.