The Financial Times has a really interesting article about Ripple:
https://www.ft.com/content/f739f48e-f62a-11e7-8715-e94187b3017eBitcoin rival’s rise unnerves banking sector
In October, a five-year-old company called Ripple boasted that it was one of America’s “most valuable start-ups . . . after Uber, Airbnb, Palantir and WeWork”.
Although its core finance technology business has not done much disrupting yet, cryptocurrency mania was growing the value of XRP, the digital coin created by Ripple’s founders and whose supply the company still controlled. XRP’s price rose 36,000 per cent during 2017, challenging bitcoin’s market value, giving Ripple an XRP hoard worth $200bn by Christmas.
XRP is a cryptocurrency outlier. Unlike decentralised, rebellious bitcoin, created post-financial crisis amid distrust of banks, XRP is supposed to grease creaking banking infrastructure, part of the back-office finance technology offered by San Francisco-based Ripple. Brad Garlinghouse, its chief executive, called XRP “the global liquidity solution for payment providers and banks”.
But Ripple’s golden goose cryptocurrency, whose price has now sagged, raises awkward questions. While its separate technology solutions for fast payment settlement impresses some financiers, XRP’s volatility, and Ripple’s ownership of more than half the 100bn XRP ever created, has unnerved banks that evangelists hoped would adopt the asset as a bridge currency.
Ripple wants to supplant the international Swift network, which is owned by and connects about 11,000 banks. It promises to accelerate cross-border payments using distributed-ledger, or blockchain, technology that sends messages between banks, while offering XRP as a cheap and universal bridge currency, to short-circuit the expensive nostro and vostro accounts of traditional correspondent banking.
Think of XRP “like the oil you put in [a car] engine”, says Greg Kidd, Ripple’s former chief risk officer who runs Synthetic Liquidity, a liquidity provider that is trialling XRP by moving small amounts. Banks “really shouldn’t need that much”, he adds.
But some speculators are betting that banks will need a lot of XRP oil as a reserve currency, which, if correct, would see XRP loom large in the global financial system. But if banks are unconvinced that they need to own substantial amounts of XRP — which Ripple’s systems for sending and processing payments do not require — the now $60bn total market value of circulating XRP coins looks highly speculative.
The enterprise software start-up says more than 100 financial institutions have adopted at least one Ripple product.
Ripple recently announced another pilot project with money transfer group MoneyGram, which will involve XRP. But while it has touted live projects with Santander, a Ripple investor, and American Express, others have hesitated to move beyond tests.
The Financial Times spoke to 16 banks and financial services companies publicly linked to Ripple (two more declined to comment). Most had not yet gone beyond testing, but some were using Ripple’s systems for moving real money. For instance, Sweden’s SEB bank says it used Ripple software for fast cross-border payments between accounts held by some of its corporate clients; soon, Santander is expected to launch a cross-border payments app using Ripple’s technology to clients in Europe and America.
But none of the banks who spoke to the FT had used XRP.
Kansas-based CBW Bank was one of the first partner banks announced by Ripple in 2014. But Suresh Ramamurthi, CBW’s chairman, says it has shelved plans to use Ripple’s systems until regulatory guidance is clearer.
Some banks shy away from cryptocurrencies such as XRP for fear of being “the first casualty”, Mr Ramamurthi adds.
Hank Uberoi, executive chairman of cross-border payments specialist Earthport, works with Ripple to jointly offer their services to financial institutions. “Banks are hesitant to use XRP because they are unsure of the regulatory aspects of it. If money is in transition and the price of XRP collapses in that time, what happens then?” he says.
Ripple’s other problem, Mr Uberoi adds, was signing up enough banks to have the scale to seriously challenge Swift. “It is only of value if everyone is connected to the network — like a fax machine, if others don’t have one, then it is not much use,” he says.
Ripple says: “Enabling the internet of Value is not something we can do alone and it’s not something that happens overnight.”
A former staffer, who left last year, says Ripple was sometimes hasty to announce that banks were using its technology even if they were testing several blockchain solutions. The former employee describes this as a “survival tactic”.
A “vibrant and growing ecosystem of people and businesses . . . are interested in XRP”, says Ripple. It says Mexican bank Cuallix uses XRP.
The anxiety of bankers that Ripple might cash in its XRP hoard recently prompted it to lock up 55bn XRP and promise to regulate supply by releasing no more than 1bn XRP every month.
Regardless of whether banks use it, Ripple has benefited handsomely from XRP’s rise. Ripple sells XRP to institutions and through exchanges — $52.2m worth in last year’s third quarter, up 67 per cent from $31.3m the previous quarter. It advertises discounts for market makers who adopt early, to increase the pool of institutional buyers and sellers.
Some staff take XRP as part of their salaries, and Ripple’s founders are enjoying a boost. Forbes reported that Chris Larsen, co-founder and former chief executive, personally owns 5.19bn XRP. According to cryptocurrency tracker Coinmarketcap, Mr Larsen’s holding is at present worth more than $8bn.
Since Ripple compared itself to Uber and Airbnb, XRP’s price has hit $3.80 highs but also fallen to just above $1 before rebounding this week, the volatility reflecting speculative cryptocurrency markets.
When Coinmarketcap removed Korean exchanges from its market capitalisation calculations last Monday, Ripple’s market cap crashed from $124bn to $101bn, revealing South Korea’s upward influence on XRP and triggering a panicked sell-off.
XRP’s volatile price responded enthusiastically to dubiously sourced news, climbing in December amid later debunked rumours that XRP would be listed on a key cryptocurrency trading platform, and recently rising 20 per cent after an unsubstantiated, anonymous report suggested that Western Union might adopt Ripple technology.
XRP’s speculative price rollercoaster “seems to represent the perfect blend of cryptocurrency hype and optimism”, writes Eric Turner, S&P Global Market Intelligence analyst.
