Can Ripple XRP replace the correspondent banks? This bank says yes

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XRP, the popular and controversial token issued by the Ripple distributed accounting software company, has its first official approval in the bank: Euro Exim Bank in London.

On Tuesday, the bank announced that it has adopted XRP and Ripple's xRapid software as a response to the liquidity and visibility problems that arise in sending payments worldwide.

"There has been a lot of talk in the markets about how blockchain technology can help in commercial finance," said Graham Bright, Head of Compliance and Bank Operations. "We are interested in moving forward and creating a payment platform for our customers in over 80 countries at the moment, making sure they have a simple and frictionless way of paying the local population."

Currently, if a US bank wants to send a payment to another country, it must keep the money deposited on our account at a corresponding bank in that foreign country. The funds in the account are used to settle the payment, which is directed by a message sent via the Swift network. (When a bank does not have a direct relationship with a bank in another country, use the corresponding banks as intermediaries through which the payment instruction "skips").

Ripple is trying to remedy this practice. Using Ripple and XRP xRapid software, and following the guidelines set by the software company, banks can send payments across borders without having to deposit money into accounts in foreign countries.

Instead, they can use XRP as a bridge across borders: they can use their local currency (for example, US dollars) to buy XRPs. They then buy the currency of the foreign country with that RPP and use it to make the payment. Both parties trust the XRP register to securely encrypt and record the transaction.

"When you use XRP, instead of having to pre-park all your money in foreign accounts all over the world, keep your funds locally, under your control, your stability, your creditworthiness.It's a much better position structurally "said Marcus Treacher, senior vice president of Ripple. "You can transfer funds from your local account, the Brazilian real, for example, to the destination account, in euros, for example, in two minutes."

Banks could keep less money stuck in offshore accounts and reduce the risk of currency volatility, he said.

A Ripple customer, Cuallex, is a US-based payment company that sends payments to Mexico. Before he started using Ripple's xRapid and XRP model, Cuallex had to pre-book funds in Mexican pesos and keep them there a few days in advance.

"With the fluctuations in the value of weight in dollars, this is a high-risk method," said Treacher. Now Cuallex holds ground funds in US dollars.

Because Euro Exim Bank is all in

Euro Exim Bank became interested in Ripple when some executives were invited to the company's Swell conference in San Francisco last October.

"We realized the kind of companies that thought a lot ahead of the innovation they were putting into place," said Bright. "We saw that technology would allow us to generate payments simply and quickly without bilateral relations."

The bank also liked the idea of ​​receiving an audit and recording of everything that happens on the network.

"That visibility is so important," said Bright.

In contrast, in an interview on January 4, he noted that his bank had sent a payment instruction to another bank on December 29 through the Swift network and still did not know where it was.

"He was lost somewhere in the quagmire of a central organization and we have no visibility where he is," said Bright, who worked for Swift for 20 years. Everything the counterpart says is "We have not received your message". "

Another interesting feature is speed. Ripple says he can process 1,500 transactions per second. Swift's network is store-and-forward, so transactions can take a day or more to run.

In commercial finance, where large quantities of goods are found in ports while buyers are waiting for them, being able to make payments within minutes will make a big difference in some locations, said Bright. Several clients of Euro Exim Bank are "almost desperate to make sure this can work," he said.

Many of the bank's customers have to pay for materials from foreign countries in local currencies and the exchange of currency is often a challenge. But converting XRP to naira in Nigeria, or XRP in the Malaysian ringgit is easier, he said. And this method eliminates the need to have intermediate banks, each of which takes a cut and adds a delay.

Euro Exim Bank plans to start using XRP in cross-border payments in the first quarter of this year. He hopes not to be the first bank to use XRP and xRapid in cross-border payments, but to help other banks follow the same path.

XRP legal questions

It's a bold move, as there are legal questions about XRP. Also the question "What is XRP?" it's hard to answer.

In most initial coin offerings, a company issues tokens that act as securities (small pieces of the company that you can buy that grow in value as the company thrives), utility tokens (the right to use the products and services that the company is building are once completed), or digital currencies (decentralized digital assets that can be used to buy things). XRP does not fit perfectly with any of these categories.

The founders of Ripple created 100 billion XRPs in 2013 (at the time the company was called OpenCoin). Ripple currently owns just over 60% of XRP and releases 1 billion XRP per month for sale "to grow the team, business and ecosystem". In December 2017, Ripple blocked XRP 55 billion in a series of commitments.

Ripple would not say who else owns big pieces of XRP. Last year Forbes reported that the co-founder and former CEO Chris Larsen, who resigned in November 2016 and now executive chairman, owns 5.19 billion XRP and holds 17% of the company. This gave him a net worth of $ 37.3 billion, making him the fifteenth richest American. The publication also said that Ripple's current CEO, Brad Garlinghouse, has a 6.3% stake in Ripple and an unknown number of XRP tokens.

Co-founder and former CTO of Ripple Jed McCaleb initially owned 9 billion XRPs. He left the company in 2013 and in 2014 announced the intention to sell all of his XRP. After a legal tangle with Ripple, McCaleb reached an agreement in 2016 to give XRP 2 billion to charity and put the rest of his 5.3 billion XRP into a custody account at Ripple. He is allowed to sell a small percentage of his participation every day.

The problem of who owns and controls Ripple and XRP is important for some.

"The Swift version of the world may be slow, but everyone has an interest, there is a feeling of ownership and control," said Lex Sokolin, global director of the fintech strategy in autonomous research. "The questions about who owns Ripple's capital and who is in the Ripple consortium, who is the billionaire who owns most of the XRP currency and why they should take what is essentially a capital market rent on the financial services system? they're all questions, it's pretty complex and it's not all that good. "

Bright, however, does not care how much control Ripple has on XRP.

"In its current form, the purpose of the financial community is much better served," he said. "It is not open like a bitcoin or ethereum".

During the past year, several XRP investors who suffered a severe blow when the price of XRP fell in early 2018 have reported Ripple, stating that XRP is a security title and the company has violated the law state and federal not registering XRP with the Securities and Exchange Commission before selling it to retail investors.

Ryan Coffey, a former Wells Fargo banker who filed a lawsuit on May 3, 2018, bought 150 XRPs in January 2018 for $ 2.60 and sold them $ 1.70 two weeks later.

"All 100 billion existing XRPs were created from scratch by Ripple Labs at its inception in 2013," he said in his class action. "Since then the defendants have earned huge profits by quietly selling this XRP to the general public, in what is essentially an endless initial currency."

But Ripple claims that XRP is a commodity.

"Ripple is holding XRP, it's like keeping coffee, cocoa, or copper," Treacher said. "We as a company are a very separate animal compared to the XRP digital resource, which is the crux of why it is a commodity, it is a class of activity, it is not a security."

For Sokolin, XRP is "only the phantom imagination of many people on the Internet". However, he is not worried about the lawsuits against XRP; Reasons that with any investment there will certainly be a part of people who will sue.

Bright in Euro Exim Bank considers XRP a digital currency that should be regulated by central banks.

"The regulation is welcome to bring it to the fore and make sure it can be treated as a normal currency," he said.

The lawsuits also highlighted statements made by Ripple officials, including Garlinghouse, who merged XRP with its software and caused an increase in the price of XRP. They say that Ripple's main source of income is the periodic sale of XRP to investors, that the price of XRP is directly related to the activities and activities of Ripple and that Ripple controls the provision of XRP and the ledger on which it is based.

For some, this seems antithetical to the idea of ​​a decentralized currency and to the underlying democratic concept of blockchain technology, which should be open to everyone and controlled by no one.

But Asheesh Birla, senior vice president of product (oversees all of Ripple's business software products: xCurrent, xRapid and xVia), disputes that the XRP registry is open and decentralized. It uses a consensus mechanism in which 150 "validation notes" work together to validate the new general ledger entries every two or three seconds. (Bitcoin and ethereum use mining to confirm ledger updates.)

According to Birla, Ripple manages seven of the validation notes and does not know who manages the other 143.

"Anyone can run a validator," Birla said. "Some of the exchanges that list XRP run a validator, many of our customers have expressed interest in launching an XRP validator." The validators also govern the road map for the XRP register, he said.

Ripple consolidated all claims for existing XRP investors, deposited in the state of residence of Ripple in California, in a case to be processed in a federal court. Ripple also hired former SEC president Mary Jo White and former SEC officer Andrew Ceresney to represent him in these seeds.

The trajectory of Ripple

One question that will direct Ripple's future is whether or not banks have an incentive to lower the cost of cross-border payments.

"Getting the price of the international monetary movement as close to zero as possible is going to bring down the revenue of the banks in that line of business," said Sokolin.

But there is also the question of how quickly Ripple can create a network effect that could rival that of Swift. Ripple has had recent growth spurts.

Last January, it created a partnership with MoneyGram through which the payment company will test the use of XRP and xRapid. In October, Ripple made xRapid available on the market and announced that MercuryFX, Cuallix and Catalyst Corporate Credit Union had signed the contract; in December, two Kuwait banks signed. Also in October, a group of Japanese banks launched a national payment app using Ripple. Several exchanges began accepting XRP over the course of the year.

Ripple now has more than 200 banks, start-ups and payment companies in the United States, Brazil, Europe, the Middle East, North Africa and the Far East in its RippleNet user network, most using xCurrent software to make cross-border payments.

The future of XRP may be uncertain, but Ripple's software is riding a wave of popularity, at least outside the United States, which is easy to see.

The large publisher Penny Crosman welcomes feedback on [email protected]


Penny Crosman

Penny Crosman

Penny Crosman is Editor at Large at American Banker.

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