Ripple aims to revolutionise international payments and replace SWIFT as the transaction provider for cross-border payments. In 2017, it surpassed the milestone of 100 financial institutions using its main product, Xcurrent, which facilitates international payments. Prominent institutions using RippleNet include American Express, which will route corporate payments through Xcurrent to Santander accounts in the U.K.
Each announcement of a new financial institution’s interest in using Xcurrent has fuelled speculative chatter about XRP, and helped spur tremendous price rises. This speculation appears to be based on some confusion, as payments made through Xcurrent are not required to use XRP. Nevertheless, Ripple’s head of strategic accounts, Marcus Treacher, told CNBC ‘The XRP currency will come into play later’. Ripple’s vision is for financial institutions to eventually use XRP as a bridging currency for international payments, bypassing fiat currency hopping, and, according to Ripple, dramatically reducing costs.
Fiat Currency hopping is often necessary in markets for smaller currencies. The market for exchanging Tongan Pa’anga for Turkish Lira is illiquid compared to the USD to Lira market. Therefore, it is often necessary to convert the Pa’anga into USD and then covert into Lira, Ripple’s goal is to replace the USD with XRP in this equation.
Calls to diminish the importance of the USD in international transactions are nothing new. The IMF has claimed replacing it with ‘Special Drawing Rights’ pegged against a basket of global currencies would enhance global economic security. Other states including Russia and China have expressed an interest in alternative currencies as a way of curbing U.S. economic influence. However, unlike many cryptocurrencies, XRP is acutely controlled by Ripple labs, their unique system of 'validators' is more vulnerable to a regulator forcing them to blacklist unregulated gateways. This presents a significant obstacle as many countries are looking to remove third party control after America’s historical political movements with regards to SWIFT.
A replacement of the USD by a cryptocurrency would be advantageously cheaper for the banks when conducting transactions. Currently Ripple estimates that 14% of international payment infrastructure costs arise from the inefficiency of using fiat currencies, which require the presence of nostro accounts with minimum holding fees, unnecessarily increasing treasury operations and liquidity costs. The replacement of incumbent bridging currencies with a single digital asset would remove the need for these fees. The technology powering XRP certainly places it as one of the most likely digital asset candidates. XRP takes 4 seconds to complete a transaction, faster than Ethereum’s 2 minutes, and Bitcoin’s (now) sluggish hour+.
The most important factor facing the adoption of a new bridging currency is liquidity. One of the limitations of using cryptocurrencies as a reserve currency is their slow adoption of typical currency functions including purchasing products. This limits liquidity as it is held more as an asset than as a medium of exchange. Ripple’s focus on providing services for banks may be a long run limitation for XRP as it lags alternatives such as Bitcoin, which while still extremely low, currently has higher payment functionality.
XRP may however have an advantage in increasing its usage on the backend of retail sales. Ripple’s prominence with financial institutions has led to much speculation that its next step will be an alliance with one or many of the ecommerce platform giants such as Amazon or Facebook. Ripple could speed up Amazon’s settlement process which currently takes 3-5 days, encouraging more businesses to sell through Amazon for this financial advantage.
If cryptocurrencies do continue their march forward, it will take more than the already mammoth task of convincing banks to join RippleNet for XRP to become an effective bridging currency. It will be the currency that is most transacted and accepted that would be in prime position to act as a new reserve currency, and at this stage, Ripple is still a long way behind.