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This article first appeared in The Edge Malaysia Weekly on February 12, 2018 - February 18, 2018

AMID the plethora of cryptocurrencies and digital assets that have popped up in recent times — most of them with vague use cases without a proper functional product or solution — enters Ripple, the company behind the XRP digital asset, which is focused on revolutionising cross-border remittances with nearly instant transactions.

Ripple, which is represented as XRP on cryptocurrency exchanges, has seen its popularity rise, not only among speculators — which pushed its price to an all-time high of around US$3.30 per unit last month — but its willingness to work with established players in the financial sector has seen the company gain significant traction among institutions and central banks around the world.

According to Ripple India managing director Navin Gupta, the company is focused on enabling the Internet of Value, to make sending payments as easy as sending email via the internet.

“The internet has democratised information. You can send an email or surf the web and it doesn’t matter where the information is in the world. We are doing exactly the same thing with payments.

“If you want to buy kimchi from South Korea, or a football from France, we believe that you should be able to do exactly that without any resistance and at a fraction of the usual cost,” he tells The Edge in a recent interview.

 

Facilitating bank-to-bank transactions

Ripple’s solution comprises two parts. First, it allows banks around the world to transfer money through its network — known as RippleNet — almost instantly, compared with the existing system that can take several days before the amount is reflected in the beneficiary’s account.

This solution facilitates the direct transfer of fiat currency between financial institutions in different jurisdictions, without using any cryptocurrency or digital asset.

Apart from its lightning-fast speed, Ripple’s solution improves the transparency of transactions. The sender can see the exact amount the beneficiary will receive as information on the banks’ transaction fees and the foreign exchange (forex) rate used to convert the currency will be provided prior to the transaction.

If a person in Japan wants to transfer money to a beneficiary in Thailand, for example, the sender would be able to see the fee — in yen — that the issuing bank will be charging for the transaction, the yen/baht forex rate as well as the receiving bank’s fee. This tells the sender the exact amount — in baht — that the beneficiary will receive.

Using the conventional method of transferring money overseas, the bank would not be able to disclose the forex rate prior to the transaction as it would only be known once the back office does the conversion. The fee charged by the receiving bank would not be visible either.

“So, you would not know exactly how much your friend in Thailand will receive in terms of baht. And it may take four hours or four days, no one knows exactly how long it will take for the money to be transferred,” Navin says.

He adds that if any issues arise — say an incorrect account number or the misspelling of the beneficiary’s name — the transaction is rejected and the arduous process has to start all over again.

“In the case of Ripple, when the money is about to be transferred, we verify the name and account number before debiting your account. Your account will not be debited until there is a corresponding credit, hence, it is much safer as your transaction is delivered straight through, versus the previous experience where much is left to chance,” he says.

A number of financial institutions are trying out this solution, with Ripple currently working with about 100 banks across the globe, including UBS Group, Banco Santander and Standard Chartered.

The company is also in discussion with banks, exchange houses and regulators in Malaysia, says Navin, adding that the res-ponse has been “very positive” so far.

 

P2P transactions through XRP

The second part of Ripple’s solution is targeted at facilitating peer-to-peer (P2P) transactions, which is where the XRP comes into play. Similar to how most cryptocurrencies facilitate the transfer of money between users, the sender would have to convert his or her fiat currency into XRP and send it to the receiver’s digital wallet, with the receiver converting it back to his or her fiat currency at any time.

What sets XRP apart from other cryptocurrencies, like bitcoin (BTC), is that an XRP transaction takes on average 3.4 seconds to be completed, at a cost of a mere fraction of a cent. Ripple says the technology behind XRP is also highly scalable.

In comparison, transactions via BTC can take anywhere from 30 minutes to over 16 hours, especially when the network is congested. This is largely due to the difficulty in scaling up BTC’s technology to handle a large number of users.

This is in addition to BTC’s expensive transaction fees, the unsustainable amount of energy used by miners to keep the BTC blockchain running and the price volatility, which raises numerous questions over its viability as a store of value.

“This can be done either purely P2P or through [financial] institutions. For example, SBI Remit in Japan offers the functionality for users to transfer via the exchanges as well. We are also doing some pilots with MoneyGram, which offers the same product to its users,” says Navin.

 

The volatility issue

As with every other coin and asset in the crypto space, XRP is not exempted from experiencing volatility. The currency spiked to an all-time high of about US$3.30 on Bitfinex — one of the larger cryptocurrency exchanges — on Jan 4, a huge jump from its range of 14 US cents to 35 cents over the latter half of last year.

XRP was briefly the second largest cryptocurrency by market capitalisation, overtaking Ether, the digital asset of Ethereum. XRP has since plunged to a low of 57 US cents amid the wide sell-off of cryptocurrencies throughout last month and early this month.

At the time of writing, XRP was hovering around 78 US cents per unit, translating into a market capitalisation of about US$30 billion.

While he does not deny that the volatility in XRP is a “distraction”, Navin says it is useful for bringing adopters into the market.

“In some way, the price volatility is a bit of a distraction but it also brings adopters to the market. People would otherwise not have a reason to study XRP, but it is now an area of interest because it is being talked about in the media,” he says.

However, Ripple does not want people to be introduced to digital assets as a speculative asset class — or as Navin puts it, as a lottery ticket — as this degrades the use case of a particular cryptocurrency.

“Right now, whenever we speak to young people or anybody who invests in the crypto space, they would talk about the potential to increase their money fivefold or tenfold. That’s not the purpose.

“During the dotcom boom, for example, if someone was buying Google stock because they saw it as a lottery ticket, then it was degrading Google because the value of the company is in its algorithm,” he says.

“Ripple is trying to make international remittance frictionless and this speculation is just a distraction. We want people to use XRP to transfer money internationally.”

Despite the issue of speculation, the company is not looking to manage the volatility, believing that prices should be driven by market forces.

When asked how XRP should be valued, Navin says it is not fair to compare the cryptocurrency and digital assets market to established markets like equities, as it is still early days for the crypto space.

Going back to the dotcom boom example, he points out that it was challenging to properly value internet and technology companies like Google, Yahoo and Apple based on their earnings, so investors looked at the potential of these companies based on the teams behind them, their business models and how their business fit into the larger ecosystem.

“So there are three things that should be considered when it comes to Ripple. One would be the technology — Ripple’s and others’ — out there. Second, the ecosystem that is built with the technology should be looked at, in terms of what the company is doing to make sure users can easily utilise the technology.

“And the third thing I would mention is that multiple blockchains and systems will exist. What we have is the Interledger Protocol, or ILP, whereby multiple chains and networks can communicate with each other, allowing for interoperability,” he says.

 

The road ahead

Going forward, Ripple will continue to push its bank-to-bank and P2P solutions. Navin says the company does not prioritise either one as its aim is to provide different options for the end user and leaves it up to the consumer to decide which option is more efficient.

“We don’t want to see an either-or world, so both solutions will coexist. Ideally, our underlying blockchain technology will be used, no matter if it is on an existing platform or whether XRP is utilised or not,” he says.

Navin explains that Ripple has efficiently closed 30 million ledgers of XRP transactions, maintaining a very low average time with “superb” processing speed.

On the fiat currency side, or the bank-to-bank platform, Ripple has already surpassed US$1 billion in transactions annually, with throughput increasing dramatically year after year.

Within the next five years, he says Ripple aims to facilitate a significant portion of the US$155 trillion worth of total cross-border payments every year.

“It is difficult to say exactly how much, but I can say that a significant portion of the US$155 trillion will happen through Ripple’s network.

“But in my personal opinion, if we are able to touch the lives of a significant number of people around the world with what we offer, we have definitely achieved our goal. We will let our products and solutions speak for themselves from then onwards,” he says.

 

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