Every day, companies and consumers around the world send more than $76 billion in payments through a vast network of banks. Without the flow of money, container ships stay in port, workers don’t get paid, and supply chains break down. For the past six years, Ripple, a tech company in San Francisco, has vowed to use the blockchain wizardry behind Bitcoin to rewire this global circulatory system with what it calls an “internet of value.”
That in itself would be a fairly interesting business story. But then Ripple became a part of the great cryptocurrency melt-up of late 2017. The company owns a lot of a digital token called XRP. From late September to early January, XRP saw an astonishing 1,300 percent increase in value, blowing away the gains of rival virtual currencies Bitcoin and Ether and turning its executives into paper billionaires. One rationale for buying XRP is that unlike Bitcoin, the token has one narrowly defined but clearly useful purpose: to help banks move cash from point A to point B faster and more cheaply, especially across borders.
The problem is that banks say they have no interest in using XRP. Current and former executives at seven global banks—some of whom have partnered with Ripple—say there was scant chance they would ever entrust their corporate clients’ payments to a cryptocurrency. The executives requested anonymity.
“It’s bewildering,” says Joseph Lubin, the founder of ConsenSys, a startup that develops applications based on the Ethereum blockchain, the technology used for Ether. “Effectively it’s a totally useless token except that it is being used by that company to make a lot of money to fund some of their activities.” There are 100 billion of the tokens and, according to Ripple’s website, the company holds about 61 billion—with a value of $1.31 each on Jan. 25, or about $80 billion total. Most are held in escrow and can be sold only in limited chunks over time to avoid crashing the market. Ripple has sold more than $185 million in XRP since September 2016, according to reports the private company publishes.
Chief Executive Officer Brad Garlinghouse says Ripple is working with more than 100 banks to overhaul the way they handle payments for their clients. “Ripple is trying to be a catalyst to mature a whole industry,” he says. “The current system is fraught with friction and is measured by a lack of transparency and speed.” There’s a difference, however, between Ripple, the company, and XRP, the token. XRP is “absolutely at the core of what Ripple is doing,” says Garlinghouse, but at the moment the company’s main product, RippleNet, doesn’t rely on it.
RippleNet takes on an entrenched competitor, the Brussels-based Society for Worldwide Interbank Financial Telecommunication, or Swift, a messaging system that acts like an air traffic control system for money as it moves across the globe. It connects about 11,000 financial companies. “This is a relatively standard David vs. Goliath Silicon Valley story,” says Garlinghouse. With trillions of dollars of asset flows at stake, the competition between the two companies is fierce.
Ripple set out in 2012 to create a streamlined, decentralized payments system using technology inspired by the blockchain. From the outset, it hoped XRP would be an important part of it. For example, the token could be used as a bridge currency—pesos in Mexico City could become XRP, which could then be turned into baht in Bangkok. Having a lingua franca of payment could help banks avoid the hassle and expense of tying up money in different currencies in accounts at other banks.
Banks, however, balked at XRP. They said there was no way they could use an instrument that regulators may never approve, according to an executive in the cross-border payment industry familiar with Ripple’s business. Moreover, the real power in the cross-border payment system wasn’t banks but the big companies that used it for their cash needs around the world. A corporate treasurer for a Fortune 500 company wasn’t going to tell its bank to use a startup with a digital currency, the person says.
So Ripple pivoted away from XRP and focused on RippleNet, which is similar to Swift in that it’s primarily a messaging system that tells banks where to send the money. It also has a service that helps banks settle transactions.
Ripple has signed a lot of banks onto its network and sold equity stakes in itself to Standard Chartered Plc and Banco Santander SA. Influential names from Wall Street such as Zoe Cruz, the onetime co-president for institutional securities and wealth management at Morgan Stanley, joined Ripple’s board. Of the more than 100 companies, though, Garlinghouse would specify the transaction volume of only one, Stockholm-based Skandinaviska Enskilda Banken AB, which he said moved just shy of $1 billion in payments over RippleNet. Even investors Standard Chartered and Santander haven’t taken the plunge and are only testing the technology.
Which isn’t to say it’s not working. Santander’s U.K. division has been testing an app that uses Ripple technology to send payments internationally from mobile phone apps in just a few seconds. In November, Standard Chartered started a program to send payments between Singapore and India for its corporate clients. Even though neither bank plans to use XRP in these projects, both are optimistic about Ripple’s technology.
Ripple isn’t the only company trying to innovate payments. Earthport Plc, a London company that manages a payment network in 65 countries used by TransferWise Inc. and other customers, has been steadily building volume. Nor is Swift taking the challenge lying down. It recently rolled out its own major upgrade called Global Payments Innovation, or GPI. It allows banks’ corporate customers to make payments in a couple of hours and to track transactions on their journeys the same way FedEx Corp. customers can. “This is a giant leap forward,” says Harry Newman, head of banking at Swift. “Is there another giant leap that someone else has made? I don’t think so.”
Shirish Wadivkar, the global head of correspondent banking products at Standard Chartered, says RippleNet was one of the first entrants to make payments traceable across a network. But GPI does this, too.
As a consortium owned and managed by the world’s banks, Swift has a home-field advantage. The one-year-old GPI system, which uses cloud computing but not blockchain, already has 36 banks using it to make more than $1 billion in cross-border payments. Ripple’s Garlinghouse says comparing GPI to his company’s offerings is like racing a horse and buggy against a car. “What GPI is basically trying to do is use the existing architecture to try to make it go faster,” he says. “And can you whip a horse faster to make it go as fast as an automobile?”
As for XRP, it’s been used by at least one financial company. Cuallix is a credit and payments processing provider based in the U.S. and Mexico. Since October it’s used XRP in 10 to 12 transactions to send money between the two countries, says Nicolas Palacios, the company’s chief financial officer. Each of those has averaged from $500 to $1,000, he says. On Jan. 11, Ripple announced that MoneyGram International Inc. would begin testing the currency for sending remittances. Two more remittance companies have signed on to test XRP since.
XRP has fallen 55 percent from $2.92 in early January. Swift’s Newman says such volatility is bound to turn off bankers and their clients. “If the value of a cryptocurrency is going up and down like a yo-yo, this isn’t a serious medium of exchange,” he says. “It adds unnecessary complexity. The solution is worse than the problem.” Garlinghouse says XRP’s first adopters won’t be big banks, but companies sending money in less common currencies.
The subtleties of the global bank payment system may be lost on traders who just want to get in on anything crypto. “It’s important for investors to be aware of the qualitative differences between XRP and other cryptocurrencies,” says Angela Walch, a research fellow at the Centre for Blockchain Technologies at University College London. Among them: Ripple’s outsize role in XRP.
Ibrahim Alkurd, a university student in Wales, scooped up some XRP at under $1 in December after he heard rumors it would be listed on Coinbase, the big U.S. exchange. That didn’t happen, but Alkurd also liked that Ripple had partnerships with banks. The likelihood of XRP “doubling or more when it was at 30¢ was far more probable than Bitcoin doubling,” he says. Michael Jackson, a partner at Luxembourg-based Mangrove Capital Partners and a cryptocurrency investor, has a different take on XRP’s rise: “I haven’t found anyone who gets it.”
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