Introduction and Background
When people ask: “What do you think of Ripple?” they are usually more accurately asking “What do you think of RippleNet?”
Ripple and XRP are two separate operations headed up by a company called Ripple Labs whose strategies are aimed in different directions. RippleNet is a project created by Ripple Labs to provide banks with a Blockchain solution that eliminates the need for swift transactions. Currently bank-to-bank transactions from one part of the world to another can be slow and cumbersome, and so swift payments are one of the leading methods to facilitate transactions.By using RippleNet, banks will able to use the benefits of Blockchain technology to send payments.
In tandem with this Ripple Labs designed XRP so that banks could use its token on the Blockchain- RippleNet in order to send amounts that equated to XRP relative to the amount of fiat currency that is being transferred. Once received, banks then exchange that amount of XRP into fiat. In layman terms, Ripple labs thought process is “why should banks send each other fiat currency using swift when they can use XRP using RippleNet?”
Sounds great! However, here is why that doesn’t work…
Because Ripple Labs controls RippleNet, essentially Ripple Labs controls most of the nodes that run the RippleNet protocol. As such, in the event that two banks were to send a store of value to one another using XRP, RippleLabs could effectively block that transaction. All of this begs the question: “why would banks hand over control of their preferred payment system, to let Ripple Labs dictate to them what to do?”
In crypto terms all of this makes RippleNet and XRP a centralised Blockchain and cryptocurrency respectively, which defeats the whole point of using crypto in the first place! If the banks didn’t have enough of a regulation phobia since the 2008 crash, (which the UK government slowly seems to be loosening its grip on) they are unlikely to want to hand over the way they send and receive money!
Rather than using XRP, a more sensible solution should a bank use a crypto would be a “stable coin” (a type of crypto that is pegged to a fiat currency but can be transferred using Blockchain.) For example Circle have announced “USD coin”, a crypto that is pegged to the US Dollar and will be used on their Poloniex exchange. There is also a Blockchain project- Colu Coin which is a crypto pegged of the £. These “stable” coins give banks the benefit of using Cryptocurrency without having to worry about the volatile nature of it- something that should not be underestimated.
So to clarify, we have a crypto specifically aimed at banks- to be used by banks, so then why do the general public want or need to buy XRP? Ripple Lab’s reasoning is that it is an asset that will increase in value, and when banks do start adopting it, the value of XRP will increase, and banks will then start buying it from the holders at a heightened price to your initial purchase price. This is why Ripple Labs has not been shy to market XRP to the general market, (private parties with Snoop Dogg performing and endorsing!) hence why it sits on Coinmarketcap at 3rd in overall market cap.
The real issue though is this: RippleLabs still holds the largest supply of XRP which will be released slowly when/if liquidity is needed. (Confirmed total supply of 99,992,233,977 XRP with only 39,189,968,239 currently in circulation.) This means that if/ when these stored XRP are released into the market, it will only serve to inflate the price and dilute the market all of which sounds like something the mass public are very much familiar with….. fiat currency and a bank!
So essentially, Ripple Labs are trying to act like a bank in the crypto world whilst trying to use banks as their partner, but at the same time eliminate one of their main businesses- bank to bank transactions. All of which means it truly remains to be seen if XRP will really be implemented by banks, as the rhetoric so far from banks is that they will not! In addition, if banks were to adopt RippleNet, would mainstream companies that currently use banks to transact with each other being happy to see Ripple Labs suddenly handling their transactions?
Finally, there is the risk that surrounds XRP and its current standing within the regulationary environment. Currently, there is still no clarification from the American financial regulating authorities (SEC), as to whether XRP is legal and whether or not it can in fact be classified as a security. In order to distinguish whether a crypto is a security, it must go through the “Howey Test”, where it would need to meet any one of the following four criteria:
- It is an investment of cash (or cash equivalents). True
- There is an expectation of profit from the investment. True
- The money is invested in an entity such as a corporation or project. Though technically buying XRP, it is seen as an investment into a common enterprise- Ripple Labs
- Profit from the investment comes from the effort of a 3rd party, i.e. the corporation. The profit that is gained from XRP comes from the effort of Ripple Labs, not the investor.
XRP passes all four of the above making it most definitely a security!
The reason all of this is relevant is because XRP is listed on an American exchange (Bittrex). Bittrex will only list crypto’s if it can be shown that the given crypto is a “Utility Token”, therefore should the SEC define XRP otherwise (i.e. as a Security), it could impose huge fines on Ripple Labs, be delisted from Bittrex and therefore be mainly based off Korean Exchanges which could leave investors very uneasy and uncertain of its future.
In conclusion, many are correct to be wary of XRP and Ripple Labs. One could argue that the idea of better connecting banks is a good use case of Blockchain technology, however there is no avoiding how centrialised the product is and it’s involvement in money which should immediately ring some alarm bells. If banks were to adopt Blockchain, I would see them using a private Blockchain adopted and regulated between themselves. If I were a bank using RippleNet or an owner of XRP, would I really be happy handing over control of my payment processes to another intermediary. The answer is probably not, as Blockchain technology was intended to remove 3rd parties not create more! The other unavoidable truth is that currently Ripple Labs main source of income is from XRP price doing so well, as its market cap valuation is at over $27B. However, Ripple labs as a company is worth a comparatively paltry $400m, which is a very stark contrast and a further warning sign that it may not necessarily live up to all of its hype!