Tag Archive for: Ripple

Blockchain and Stable Coins: opening the crypto markets?

| 20-05-2019 | Carlo de Meijer | treasuryXL

In my recent blog about IBM’s Blockchain World Wire I mentioned the use of Stable Coins as settlement instrument for global payment transactions. Not many are familiar with the term Stable Coins, because it is a relatively new type of cryptocurrency.

The Stable Coin market is however hotter than ever. In recent months, Stable Coins have seen remarkable growth in both size and variety. Today, with over 120 projects on the market, there is growing thinking that Stable Coins may trigger the mass adoption of cryptocurrency payments, thereby opening the crypto currency market. Facebook recently came with its WhatsApp Stable Coin. Even a traditional bank like JP Morgan has entered this market, with their own Stable Coin-like product named JPM Coin.

Why is there such a hype in talking about this phenomenon? And what are Stable Coins? How do they work and what should you know about it in terms of use cases, benefits and risks.

Why Stable Coins? 

But first of all: why Stable Coins? The cryptocurrency market such as for Bitcoin, Ether and others suffers from high volatility and unpredictable price fluctuations. They are struggling to maintain a decent valuation against the fiat. Last two years we have seen the market capitalization of the crypto reaching a high of almost 1 trillion USD before bouncing back to less than 200 billion USD. Most of the coins are down 80% from their all-time highs.

This volatile nature is one of greatest criticisms directed towards the crypto market. Because of this high volatility, Bitcoin and most cryptocurrencies are inconvenient for daily transactions. The demand for cryptocurrency is mainly fuelled by speculation and trading. Retail merchants on the other hand are sceptical of accepting the crypto as a medium for financial transactions. 

There is however a growing desire to bring stability to the cryptocurrency market. The  current market sentiment is turning more towards less price-volatile options. It is thus not surprising  that interest in Stable Coins is on the rise.

“Unlike cryptocurrencies such as Bitcoin, which are highly volatile, stable coins provide people with the pragmatic, helpful benefits of a cryptocurrency, without having to worry about distressing price changes since they are grounded in the real world.” Brigitte Luginbühl, CEO of SwissRealCoin

What are Stable Coins? 

A Stable Coin is a cryptocurrency with all its intrinsic functionality, but does not suffer from the vulnerabilities of market fluctuations and price volatilities. They fall into the category of payment tokens, whose main purposes are store of value, medium of exchange, or unit of account. Like other cryptocurrencies, Stable Coins aim to become global, fiat-free money that is programmatically issued and tracked with the use of blockchain technology.

A Stable Coin refers to a class of  cryptocurrencies that is pegged to a tangible, or stable, asset such as fiat money (which is specifically USD) or precious metal (which is generally gold). The idea of backing a cryptocurrency with a tangible asset is to reduce the price volatility associated with standard cryptocurrency. Since the Stable Coin is correlated to the gold or fiat, its valuation is fixed in relation to that underlying asset.

In theory, this makes Stable Coins ideal and usable as a store of value and a basic medium of exchange. They provide cryptocurrency traders and investors with an easy and simple way to keep value without losing to price swings. In doing so, digital coins may become far more practical for everyday use, and it may encourage global adoption.

Models of Stable Coins

To “get rid” of the volatility of the cryptocurrency market, different variations of Stable Coins have been introduced. Thereby a number of alternative types have emerged, backed by a multiplicity of assets, ranging from baskets of cryptocurrencies to physical assets. Most Stable Coins fall into one of the following models: fiat-collateralized, asset-based, crypto-collateralized, or algorithmic.

A. Fiat-collaterised

Fiat-collaterised Stable Coins are the most popular form of Stable Coins. They are fully backed i.e. on a 1:1 ratio by existing fiat currencies in real bank accounts such as the USD that is held in reserve by the Stable Coins’ issuers. The coins represent a claim on the underlying fiat currency.

How do they work?
Stable Coin working is quite simple. They are backed by a company or a central entity. This company or central entity manage the acceptance of new fiat and issues a corresponding amount of the fiat backed tokens. The issuing company holds assets in a bank account or vault (or works with a third party provider that does so on their behalf.  The company or the central entity is the custodian of the fiat reserves, and it backs all the tokens.

A degree of trust in the central entity is created by third-party audits – validating that fiat reserves are kept equal to the token supply. If the holder wishes to redeem cash with his tokens, the company or central entity will wire transfer the fiat money to the holder’s bank account and the equivalent coins will be destroyed or taken out of circulation.

Pros and cons
Stable Coins have a fiat backed structure and their operations and working are simple to understand. Since these are backed by a stable fiat currency, there is not much fluctuation in the prices.

But, these fiat-based Stable Coins are issued by centralized entities with their own governance protocols and, in the case of full custody integration, can be vulnerable  to fraud activities. This is very much against the concept of decentralized crypto. Additionally, not all fiat currencies are stable, as the fiat that underlies them, may not be stable itself.

Examples
Most known examples of fiat money-backed Stable Coins are dollar-based including Tether (USDT), TrueUSD (TUSD), USDCoin (USDC) and Gemini Dollar (GUSD).

 B. Asset-based

Asset-based Stable Coins are backed by some type of commodities. The most common commodity which is collateralized is gold. Gold backed Stable Coin represents a specific value of gold. The physical gold in itself is stored in a trusted third party’s vault.

How do they work?
Asset-based Stable Coins work similarly in cases where the coin is backed by fiat money (see above).

Pros and cons
As these Stable Coins are backed by real assets they provide stability. In a way, the commodity has been tokenized. This brings greater liquidity and price discovery. The coin holder has the advantage of recoursing to the underlying asset. They can redeem these assets at the conversion rate to take possession of the real assets.

Just as in fiat money backed Stable Coins, they are governed by centralised entities. So some of the very concepts of crypto and digital currencies are defeated in this type of stable coin. The holder is dependent on the vendors and custodians. This can result in a single point of failure at some time. This system is also dependent on the audit and assessment by the third party, underscoring the purpose of cryptocurrency.

Examples
Examples of commodity-backed Stable Coins are Digix gold (DGX) and Petro Coin. DGX is dependent on the market value of gold and is fully redeemable at any point in time.  The ownership/custodianship status is tracked on the Ethereum     Blockchain. Petro Coin is a Stable Coin backed by the oil reserves of Venezuela.

C. Crypto-collateralised

Crypto-collateralized Stable Coins are backed by a mix or basket of other digital currencies like Bitcoin or Ether.

How it works
Crypto backed Stable Coins require holders to stake a certain amount of cryptocurrencies into a smart contract which will then result in the creation of a fixed ration of Stable Coins.

In this type of coins, the volatility risk of a single cryptocurrency is reduced and distributed in a group of cryptocurrencies. The Stable Coins are over-collateralized to withstand the extreme price fluctuations.

Pros and cons
The benefit of this method is that it is decentralized and as a result adhere to the trustless, transparency and secure structure of the crypto world. Therefore they are not vulnerable to a central point of failure.

Crypto backed coins are considered transparent because transactions are recorded on the public blockchain with full transparency and accountability. They are efficient in the sense that conversion from one crypto to another is quick as it occurs on the blockchain.

On the other hand they are volatile and complex. Since the underlying asset is a cryptocurrency itself, it is inherently much more volatile as compared to other types of Stable Coins. Also, there are multiple complex elements which can trouble the minting process of these stable coins.

Examples
The most prominent example of crypto backed Stable Coins is Dai. DAI does not rely on any central entity and lives on the blockchain. Its  face value is pegged to the USD. It achieves stability by using an autonomous system of smart contracts.

 D. Algorithmic (or Seignorage) Stable Coins

The most complex and less popular model are algorithmic Stable Coins. These Coins are not backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

Algorithmic Stable Coins are based on smart contracts (and other mathematical -based algorithms) where people put up collateral in a cryptocurrency (like Ethereum). This to back the value of a Stable Coin pegged to a fiat currency. With this method, there is no need for know your customer (KYC) measures to be put in place because there is no need for a counterparty to maintain reserves or redeem money from.

How it works
These types of Stable Coins maintain stability using an algorithm. This means that the Stable Coins are not actually backed by real-world assets. Instead, trust in the system is reliant on the expectation that the coins will gain a certain amount of future value (similar to Bitcoin).

These models are generally created with two tokens: the first is a Stable Coin, and the second is related to a bond, thus promising income if the Stable Coin rises in price. By purchasing the bond with the Stable Coin, supply is decreased. As the total demand for the coin increases, a new supply of stable coins are created to reduce price back to stable levels. The main objective is to keep the coin’s price as close as possible to USD 1.

Pros and cons
The advantages of these type of Stable Coin are that they are decentralized, they have an absence of collaterals and lastly, they are kept at stable prices.

On the other hand, these are the most innovative of Stable Coins but also the most complex and thus difficult to create these successfully.

Examples
Basis (formerly known as Basecoin) is an example of this type of Stable Coins. Basis is pegged to the value of USD through algorithmic adjustments of the coin supply. Prices are monitored using the Oracle system.

Use cases for Stable Coins

Stable Coins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, Stable Coins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system.

Various use cases have been proposed for Stable Coins, including mobile app payments, alternative currencies in emerging markets and global payment systems. Currently, the most common use of Stable Coins is for crypto traders to move between investment positions seamlessly and create leveraged positions, without added volatility.

Stable Coins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions. Another interesting use case, is one of coupon and dividend payments in the up and coming digital securities space. This may enable to receive coupon payments in real time via a Stable Coin directly into a smartphone’s digital wallet.

Benefits of Stable Coins

Just like any other cryptocurrency, Stable Coins may offer both benefits and risks  connected to each alternative governance and price-stability models. The main goal that Stable Coins strive to create is an optimal currency in terms of  price stability, scalability, privacy, decentralization and redeem ability.

Unlike Bitcoin or other cryptocurrencies, Stable Coins are more immune to price fluctuations because they are pegged to tangible and more stable assets, like the US dollar (USD).

“An optimal cryptocurrency should have the following four traits: price stability, scalability, privacy, and decentralization.” “Short-term stability is important for transactions and long-term stability is important for holding.” Forbes

“Stable coins are one of the keys to bringing the benefits of cryptocurrencies to everyday people, both in terms of price stability and decentralization of capital.” Rafael Cosman, founder and CEO of TrustToken,

These benefits give it a better chance of mass adoption, compared to existing crypto currencies. This will be especially relevant for people living in countries with unstable monetary systems, where residents are often exposed to hyper inflation and uncertainty.

Stable Coins development could also be of help for the general population in economic and/or political uncertain countries. If the fiat money is converted into Stable Coins it will ensure that the value of money is preserved.

The adoption of Stable Coins may also  support capital market formation and can be used in new applications for decentralised finance on the blockchain. These include lending and derivatives markets because without borders and volatility, it becomes easier to lend money.

Traders and investors can change between cryptocurrencies, without being exposed to  asset volatility. Stable Coins enable traders to keep value stable against a fiat currency, usually the dollar, while they’re in-between trades.

Finally Stable Coins may help in reducing the risk of high price movements. They can be used in the cryptocurrency market as a hedge against bitcoin and other top cryptocurrencies.

 Main risks of using Stable Coins

There are however a number of bottlenecks that could limit the adoption of Stable Coins. First of all, there is the counter-party risk. By trusting a third-party keeping a cryptocurrency stable, the dollars or other fiat currencies could be fractionally reserved instead of fully backed. In this case, a bank run could cause the price of the coin to drop dramatically.

There is also the centralisation risk. Centralisation risks mean the same monetary issues that fiat-currencies face when a central authority has the power to print money without oversight. Accounts can be subject of misappropriation, being blocked, or accessed by unauthorised third parties.

In the case of algorithmic based Stable Coins there is the risk of algorithm manipulations. As most decentralised Stable Coins are embedded  within smart contracts, there is a risk the algorithm which keeps the currency stable fails. Algorithms could even be manipulated by a third-party.

Stable Coins and Regulation

Thus far, Stable Coins have largely been got attention from regulatory agencies. There hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to Stable Coins. But also in Europe Stable Coins has got less scrutiny from a regulatory point-of-view up till no. But that may change.

As Stable Coins are seeing greater industry adoption, the US SEC and CFTC will likely take a harder look at their compliance status. But the main question is: how will those Stable Coins be characterised?

Given how dollar-backed Stable Coins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request. Demand notes are presumed to be securities.

For its part, the CFTC might take the position that Stable Coins are “swaps” under Commodity Exchange Act Section. Under that definition, the CFTC might characterize Stable Coins as options for the purchase of, or based on the value of, fiat currencies.

If Stable Coins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, Stable Coin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates Stable Coin transactions might have to register as a broker-dealer.

The SEC and CFTC aren’t the only regulators that may take an interest in Stable Coins. Only time will tell how other regulators worldwide will approach the regulation of Stable Coins, particularly if they’re used to avoid trade sanctions or other transaction reporting obligations.

 Asia ripe for Stable Coins

Stable Coins are looking to become a more attractive crypto solution, particularly in the Asia  Region. And that for various reasons.

According to a recent report by Remitscope, more than 50 percent of remittance flows worldwide could be attributed to countries from the Asia Region. Current traditional money transfers however are far from instantaneous or frictionless and often result in the end customer paying unnecessary transaction costs.

With interest growing, a Stable Coin with a well-developed user experience built into the remittance solution would greatly appeal to these markets. In Asia’s emerging markets, the technology’s application in the remittance sector is especially promising. Stable Coins via blockchain technology can improve the speed and stability of these transfers—particularly in countries where financial infrastructure is still in development.

Asian countries are well placed to adopt Stable Coins. It is encouraging that cryptocurrency ATM usage has grown and more cryptocurrency ATMs means improved access to Stable Coins, which will only help the ecosystem mature and evolve for the better.

It is also very likely that we will see more non-USD Stable Coins being tailor-made for Asia. The emergence of more non-USD Stable Coins will signal that the market is maturing further and ready for the benefits of Stable Coins globally.

The regulatory environment, without overt regulatory guidance in jurisdictions,  in the Asia Region is particularly favourable to encourage such innovation.

 What is needed to drive adoption?

To drive Stable Coin adoption, further development is needed in both cryptocurrency exchanges and various cryptocurrency services.

First, making it easy to digitally deposit and withdraw fiat currencies into and out of exchanges remains a huge hurdle to widespread adoption of cryptocurrency as the process is slow and transactions can take a long time or, if they are fast, involve expensive fees.

There is also still a need to solve issues surrounding settlement and velocity in fiat deposits and withdrawals into exchanges. Top exchanges generally take weeks to process transactions and this often leads to increased customer service tickets.

Another issue is the margins on cash to cryptocurrency exchanges. These are very high, sitting at 7-10 percent globally. Not only is it expensive to transact and exchange cryptocurrencies on exchanges, but it is also less convenient when needing to withdraw cash. That is why there is a premium on cryptocurrency ATMs.

Cross-border payments and converting cryptocurrency to cash should be made more convenient for users across the world. Stable Coins could reduce friction when sending money between counterparties as its often quicker, cheaper, and far more convenient.

To improve the user experience, money transfer companies should be encouraged to start integrating cash to crypto features in their respective locations. Overall, consumers will benefit the most from this increase in competition with more options in providers and more locations to conduct their exchanges locally.

In the long term, with more Stable Coins from various other currencies being made available, exchanges could become more liquid, enabling greater efficiency in the crypto ecosystem. Risks for companies dealing with cryptocurrency to fiat gateways will also be reduced as they no longer need to worry about banking relationships and can instead just focus on maintaining a cryptocurrency wallet.

Forward Looking

Stable Coins may have a great potential. The total addressable market for Stable Coins is essentially all of the money in the world, or approximately $90 trillion. Stable Coins are a crucial element in the world of cryptocurrencies, as they can bring stability. They may pave the way for wider acceptance and real potential for global adoption..

The technology is however still relatively young and will continually evolve, but it is clear that demand is there. Before full adoption is reached, Stable Coin developers will need to address the various concerns still in the market. The key is to create the optimal cryptocurrency including features such as price stability, decentralization, scalability, and privacy.

“Stable coins will ultimately give people enough confidence to start using cryptocurrencies for daily transactions.” “Stable coins are trying to strike the balance of not being dependent on a central bank, while also securing price stability”. Brigitte Luginbühl, CEO of SwissRealCoin

Ultimately, decentralised Stable Coins may pave the way for a new and modern  financial infrastructure  that will remove inefficiencies, reduce risk stemming from centralised parties and change the way we transact.

For Stable Coins to be accepted as a viable alternative to fiat currencies, however, they must first intersect and integrate into our current financial infrastructure.

 

 

Carlo de Meijer

Economist and researcher

 

Corda Settler, Ripple and SWIFT: mariage à trois?

| 07-05-2019 | Carlo de Meijer | treasuryXL

My last blog was about the IBM World Wire, a blockchain based platform for global payments. Another competitor in the blockchain payments world I have written about regularly is Ripple. Both are thereby targeting centralised payments messages network SWIFT.

IBM and Ripple however are not the only players in the blockchain payments world. Late last year R3 launched its new Corda Settler platform using Ripple’s XRP. But here it comes. In January SWIFT announced a partnership with R3 were they are collaborating to test Corda Settler, specifically to “integrate gpi with Corda Settler.” However, as Corda Settler depends on the XRP token, the partnership puts SWIFT and Ripple, the two rivals in an indirect connection. Will that result in a love triangle or even a “marriage a trois”? And could that work?

But first: What is Corda Settler?

In December last year, R3 announced the launch of Corda Settler. Corda Settler is designed in such a way to give companies a new fast, secure and reliable way to move crypto and traditional assets on a distributed ledger. The Corda Settler app is an open-source decentralized application (DApp), that runs on the Corda blockchain. It is aimed to facilitate global (crypto) payments across enterprise blockchain networks with Ripple’s XRP as its base currency. Corda Settler thereby focuses on the settlement of payments transactions between crypto and traditional assets within enterprise blockchains.

Corda Settler uses XRP

Both Corda and Ripple are open-source blockchain platforms with a focus on serving enterprise businesses. Therefore, it makes sense that Corda selected XRP, the globally recognized cryptocurrency, as the first and only supported cryptocurrency for settlement on the platform.

“The deployment of the Corda Settler and its support for XRP as the first settlement mechanism is an important step in showing how the powerful ecosystems cultivated by two of the world’s most influential crypto and blockchain communities can work together.” “While the Settler will be open to all forms of crypto and traditional assets, this demonstration with XRP is the next logical step in showing how widespread acceptance and use of digital assets to transfer value and make payments can be achieved.” Richard Gendal Brown, CTO at R3

While Ripple’s XRP is the first cryptocurrency supported by the Corda Settler, in the future it is very likely that R3 will make settlement in other cryptocurrencies possible.

“The Corda Settler is agnostic to which payment method is used. Whether it’s JP Morgan coin, or Wells Fargo coin, or BAML coin, or HSBC coin, it doesn’t matter to us. We have no horse in that race.” “We don’t have any financial incentives one way or another. We’re just trying to get as many people onto our platform as possible.”David Rutter, CEO of R3

How does Corda Settler work?

The platform is still in its first stages of development. Corda Settler supports payments of all sorts to be settled through “any parallel rail supporting cryptocurrencies or other crypto assets”. Also any traditional rail capable of providing cryptographic proof of settlement can settle payments obligations. In the next phase of development, the Settler will also support domestic deferred net settlement and real-time gross settlement payments.

In its current phase, when a payment obligation arises on the Corda blockchain during the course of business, any of the parties involved now have the option to request settlement using XRP. The other party can be notified that settlement in XRP has been requested and that they must instruct a payment to the required address before the specified deadline presented to them.

After they make the payment, an oracle service will ensure the validity of the payment and settle the obligation. Uniquely, the Corda Settler will verify that the beneficiary’s account was credited with the expected payment, automatically updating the Corda ledger.

What does Corda Settler mean for the parties involved?

It is clear that in the transaction initiated by Corda Settler, the receiving party doesn’t need to use Corda to receive the payment. At the same time, it is not mandatory for the sending party to use XRP or any other cryptocurrency.

This means that using the Corda Settler; one can send XRP or dollar and the receiver can accept the payment in an entirely different currency. “Settlement Oracle” will broadcast the actual settlement notification. It can be operated through different entities like exchanges, banks, and others.

It will thus allow banks and other financial institutions to build their blockchain networks with minimum overheads. They don’t need to integrate the R3 technology fully. All they need is to let their clients receive deposits via Corda-enabled services.

SWIFT partnership with Corda

End January SWIFT has announced its partnership with R3’s Corda Settler to launch a proof-of-concept (PoC). The trial would see the interaction of SWIFT’s payments standard framework GPI (Global Payments Innovation) with R3’s trade finance platform.

Following the recent launch of our Corda Settler, allowing for the payment of obligations raised on the Corda platform, it was a logical extension to plug into SWIFT gpi. SWIFT gpi has rapidly become the new standard to settle payments right across the world. All the blockchain applications running on Corda will thus benefit from the fast, secure and transparent settlement provided through the SWIFT gpi banks.” David E. Rutter, CEO of R3

Global Payments Innovation (GPI)

This trial will integrate SWIFT’s GPI Link cross border payments gateway with R3’s Corda Settler platform to enable the continuous monitoring and control of payment flows, settle GPI payments through their bank, and receive credit information.

SWIFT’s GPI is a messaging system based on existing messaging standards and bank payment processing systems. It has rapidly become the new standard to settle payments right across the world. The integration will also support application programming interfaces (APIs), as well as SWIFT and ISO standards to ensure global integration and interoperability.

It aims to provide quick and cost-effective transfers between SWIFT members. Through GPI “SWIFT hopes to assist banks enhance their relevance within the fast-evolving international payments ecosystem – by delivering immediate value to SWIFT’s members’ customers”.

Goal of the SWIFT-Corda Settler PoC

The objective of the PoC-trial is to try out interlinking of trade and e-commerce platforms with GPI – SWIFT’s new standard for cross-border payments and is an extension of other SWIFT trials with blockchaintechnology. These platforms need global, fast, secure and transparent settlement, preferably using fiat currencies.

With the gpi Link, banks will be able to provide rapid, transparent settlement services to e-commerce and trading platforms, opening up whole new ecosystems to the speed, security, ubiquity and transparency of gpi and enabling them to grow and prosper in the new digital economy. Given the adoption of the Corda platform by trade ecosystems, it was a natural choice to run this proof of concept with R3.” Luc Meurant, SWIFT’s Chief Marketing Officer

“SWIFT GPI will integrate directly to Corda Settler, the application that allows participants on the Corda blockchain to initiate and settle payment obligations via both traditional and blockchain-based rails. This will enable obligations created or represented on Corda to be settled via the large and growing SWIFT GPI network”.R3 co-founder Todd McDonald

While SWIFT is keen to experiment with the possibilities opened up by blockchain-based trades, they are much less enthusiastic about using cryptocurrencies such as XRP.

Objective

The SWIFT and R3 Corda Settler trial will enable corporates to authorise payments from their banks via a GPI link to their bank through the Corda Settler platform. GPI payments will be settled by the corporates’ banks, and the resulting credit confirmations will be reported back to the respective trade platforms via GPI Link on completion.

By enabling trade platform ecosystems using Corda to integrate ‘GPI Link’ into their trade environments, SWIFT hopes to extend its reach beyond member banks to include to a wider range of corporates and markets.

The first stage of the PoC will work with R3’s Corda blockchain platform, Corda. SWIFT says it will not limit ‘GPI Link’ to R3’s DLT-based trade environment. SWIFT has plans, if the Corda PoC is successful, to extend the trial to other DLT, non-DLT and e-commerce trade platforms. The results of the PoC will be demonstrated – as a prototype – at Sibos in London in September 2019.

Corda Settler: Fiat currencies versus XRP

Swift said it is not (yet) using XRP on Corda Settler!. And that for a number of reasons.

“All trade platforms require tight linkages with trusted, fast and secure cross-border payments mechanisms such as GPI. While DLT-enabled trade is taking off, there is still little appetite for settlement in cryptocurrencies and a pressing need for fast and safe settlement in fiat currencies”. Luc Meurant, SWIFT’s chief marketing officer

According to SWIFT CEO Leibbrandt banks simply are not prepared to use a cryptocurrency as a clearing unit due to its price volatility. It appears that most banks prefer to use Corda’s technology for rapid and transparent settlement services in fiat currency rather than cryptocurrencies. Most enterprises prefer to settle via traditional payment mechanisms, albeit wishing for greater visibility into what is happening to payments and receipts. This leads to the need for trade platforms to have fast and safe settlement in fiat currencies.

“I think that the big part of Ripple’s value proposition is the cryptocurrency XRP. There we do find the banks are hesitant to convert things into a cryptocurrency right now because of the volatility in the currencies.” Leibbrandt, SWIFT CEO

Another reason why SWIFT is hesitant (not willing) to use crypto currencies is because the legal status of XRP and other cryptocurrencies remains unclear due to the current uncertain regulatory environment. Risk averse financial institutions are unlikely to adopt cryptocurrencies until regulations become clearer.

Ripple’s CEO Garlinghouse however argues back that “with SWIFT payments taking days and XRP payments clearing within seconds, SWIFT transfers are actually subject to much greater volatility due to fluctuating foreign currency rates”. At present, the banks take on that volatility risk by guaranteeing the amount sent will match the amount received. Because of XRP’s speed, which executes transactions in a matter of seconds, Ripple says it ‘eclipses’ volatility risk. With near-instant XRP-backed transfers, that volatility risk is actually completed eliminated.

“I hear people talk about volatility and I feel like they’re propagating this misinformation. Mathematically, there’s less volatility risk in an XRP transaction than there is in a fiat transaction.” Garlinghouse, Ripple CEO

Garlinghouse countered SWIFT’s legal arguments saying that every XRP transaction is vetted for Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance. Finally, Garlinghouse added that XRP payments greatly reduce systemic risks to banks in smaller economies, which have to use large amounts of money to prefund international transfers.

Mariage à trois?

With the launch of a universal settler app for payments on the Corda blockchain platform, using XRP as its first crypto payment trail, this may bring the Corda and XRP ecosystems into closer alignment.

Now SWIFT has partnered with blockchain consortium R3, we are in the strange position wherein SWIFT will be possibly be trailing Ripple XRP-powered payments. Through its experimental integration with R3, SWIFT may be indirectly integrating with XRP, though Leibbrandt has no desire to work with XRP directly.

It is still to be seen whether SWIFT will move beyond the proof of concept stage. But that might change. The future of SWIFT and Ripple’s relationship will not lay in the hands of present CEO Leibbrandt, as he will be stepping down as SWIFT CEO in June. His successor may be more receptive for the new world.

It is still speculative  that the proof of concept — or a future trial — could see SWIFT being more interested in cryptocurrency settlement. On the other hand Ripple will do its utmost by leveraging its relationship with R3 to convince (SWIFT-related) banks to take the dive into cryptocurrency via the Corda Settler platform.

For now, the complex links between SWIFT, Ripple, and R3 are sure to trigger continued debate about the future of global finance.

Read the full article here

 

 

Carlo de Meijer

Economist and researcher

 

Ripple is making blockchain waves

| 23-03-2018 | Carlo de Meijer |

Almost a year ago I wrote my blog “Blockchain and the Ripple effect: did it Ripple?”. Now twelve months later we may conclude it did. And even more than that. Ripple is making many waves. A lot happened both in broadening their offerings and in enlarging their network. A growing number of banks and payment providers, increasingly join RippleNet, Ripple’s decentralized global network, to “process cross-border payments efficiently in real time with end-to-end tracking and certainty”. By using the growing set of Ripple solutions they are able to expand payments offerings into new markets that are otherwise too difficult or too expensive to reach. The focus of Ripple therefor has especially moved towards emerging markets.

BROADENING RIPPLE OFFERINGS

Ripple was set up in 2012 to create a streamlined, decentralized global payments system named RippleNet, using technology inspired by the blockchain, to record transactions between banks. RippleNet is an enterprise-grade blockchain platform, that nowadays has over 100-member banks and financial institutions. These partners can use all the Ripple offerings.

Solutions

Ripple makes software products based on blockchain technology and sell them to banks, payment providers and others to be used on RippleNet. These are aimed to make cross border payments truly efficient for these players and their customers. Next to their digital asset XRP, the XRP Ledger, and xCurrent, that helps banks settle transactions, Ripple has added a number of new services/offerings to the platform including xRapid and xVia. This in order to attract more clients to enter RippleNet. Ripple is now taking the next step to help build the Internet of Value (IoV), by establishing an Infrastructure Innovation Initiative.

a. XRP: digital asset

From the outset, XRP, Ripple’s digital asset was expected to be an important part of Ripple’s decentralised payment system. Ripple uses its own XRP cryptocurrency as a payment method to make it easier for banks to move money internationally. Banks and payment providers can use Ripple’s digital asset XRP to further reduce their costs and access new markets. One rationale for using XRP is that unlike Bitcoin, the token has one narrowly defined (payments method!) but clearly useful purpose: to help banks move cash faster and more cheaply, especially across borders. The token could be used as a kind bridge currency between fiat currencies. For example South African rands in Johannesburg could become XRP, which could then be turned into baht in Thailand. That could help banks avoid the time consuming and expense of tying up money in different currencies in accounts at other banks.

b. xCurrent: processing payments

RippleNet is powered by xCurrent, for payment processing. xCurrent is the new name of Ripple’s existing enterprise software solution that enables banks to instantly settle cross-border payments with end-to-end tracking (and bidirectional messaging across RippleNet). It provides real-time messaging, clearing and settlement of financial transactions. The xCurrent messaging platform however does not involve XRP. It includes a Rulebook developed in partnership with the RippleNet Advisory Board to standardise all transactions across the network. That ensures operational consistency and legal clarity for every transaction. The Interledger Protocol (ILP) is the backbone of the solution and makes it possible for instant payments to be sent across a variety of different networks.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Blockchain and the Ripple effect: did it ripple?

|24-4-2017 | Carlo de Meijer | treasuryXL

Our expert Carlo de Meijer has published an interesting article about a blockchain initiative that we want to share with you. We have slightly shortened the original article about Ripple.

 

Who is Ripple?

Have you ever thrown a stone in still water of a river or a lake. I did! The effect is rippling the water in a way that can be followed outwards incrementally. It might be this effect that the founders of Ripple, the payments blockchain network had in mind when choosing the name for their project. Did it ripple?

San Francisco based Ripple is seen as one of the most advanced distributed ledger technology (DLT) companies in the industry, which focuses on the using of blockchain-like technology for payments.

In just four years, Ripple has established itself as a key player in the fast-growing distributed ledger technology world. Since 2013, the Ripple Protocol has been adopted by an increasing number of financial institutions to “[offer] an alternative remittance option” to consumers. Especially the years 2015 and 2016 marked the expansion of Ripple, with the opening of an office in Sydney (April 2015) and the opening of European offices in London (March 2016 ) and in Luxembourg (June 2016).
In June last year, Ripple obtained a virtual currency license from the New York State Department of Financial Services, making it the fourth company with a BitLicense. As of 2017, Ripple is the third-largest cryptocurrency by market capitalisation, after Bitcoin and Ether.

What is Ripple?

Ripple is a financial real-time gross settlement solution, currrency exchange and remittance network using distributed ledger technology. Released in 2012, it purports to enable “secure, instant and nearly free global financial transactions of any size with no chargebacks”.
Ripple is built upon a distributed open source Internet protocol, consensus ledger and native currency called XRP (ripples) enabling (cross-border) payments for retail customers, corporations, and other banks.
The Ripple Protocol, described as “basic (settlement) infrastructure technology for interbank transactions”, enables the interoperation of different ledgers and payment networks and brings together three aspects of modern payment solutions: messaging, settlement and FX management. It allows banks and non-bank financial services companies to incorporate the Ripple Protocol into their own systems, and therefore allow their customers to use the service.

The protocol enables the instant and direct transfer of money between two parties. As such the protocol can circumvent the fees and wait times of the traditional correspondent banking system. Any type of currency can be exchanged including USD, euros, RMB, yen, gold, airline miles, and rupees.
“Ripple simplifies the [exchange] process by creating point-to-point and transparent transfers in which banks do not have to pay corresponding bank fees.” Chris Larssen, former CEO Ripple

The Ripple company also created its own form of digital currency dubbed XRP in a manner similar to bitcoin, using the currency to allow financial institutions to transfer money with “negligible fees and wait-time. One of the specific functions of XRP is as a bridge currency, which can be necessary if no direct exchange is available between two currencies at a specific time. For example when transacting between two rarely traded currency pairs. Within the network’s currency exchange, XRP are traded freely against other currencies, and its market price fluctuates against dollars, euros, yen, bitcoin etc.

Did it Ripple?

Growing adoption by banks
Ripple has experienced a growing adoption by banks. Many financial companies have subsequently announced experimenting and integrations with Ripple. The first bank to use Ripple was the online-only Fidor Bank in Munich, which announced the partnership early 2014. Fidor Bank would be using the Ripple protocol to implement a new real-time international money transfer network.
Since then a host of major banks have adopted Ripple to improve their cross-border payments, and many have completed trial blockchain projects. These banking institutions – including Santander, UniCredit, UBS, Royal Bank of Canada, Westpac Banking Corporation, CIBC, and National Bank of Abu Dhabi, among others – view Ripple’s payment protocol and exchange network as a valid mechanism for offering real-time affordable money transfers.

Some recent developments in the Ripple network

The real uptake of Ripple however started to take place in 2016 and continued during the first quarter of 2017.

National Bank of Abu Dhabi (February 2017), Axis Bank (January 2017), SEB (November 2016), Standard Chartered (September 2016), and National Australia Bank (September 2016) are the latest banks to join Ripple’s blockchain-powered network for cross-border payments. And more banks will get on the Ripple bandwagon during 2017. Ripple says its network now includes 12 of the top 50 global banks, ten banks in commercial deal phases, and over 30 bank pilots completed.
Banks and their customers have been hearing about the promise of blockchain technology to enable real-time cross-border payments. Now, some of the most innovative and successful banks like NBAD are making this a reality by offering Ripple-enabled payments to their entire customer base, and in doing so, paving the way to make 2017 the year we see broad commercialization of blockchain take hold globally.” Brad Garlinghouse, CEO of Ripple

Further Rippling: enlarging the network

Global Payments Steering Group
Last year September Ripple created the “first: interbank group for global payments based on distributed financial technology. Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac, and Royal Bank of Canada have joined as founding members of the network, known as the Global Payments Steering Group (GPSG). CIBC will also join the GPSG as a new member.
“The creation of GPSG is significant because this represents the first time that major banks have formulated policies to govern the transfer of money across borders using blockchain,” Donald Donahue, GPSG chairman.

GPSG aims to use Ripple’s technology to slash the time and cost of settlement while enabling new types of high-volume, low-value global transactions. The group will oversee the creation and maintenance of Ripple payment transaction rules, formalised standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities.

R3CEV
Last year October R3 and twelve of its blockchain consortium member banks – including Barclays, NAB, Nordea, Royal Bank of Canada, Santander – have trialled Ripple’s Digital Asset XRP, to tackle the costs and inefficiencies of interbank cross-border payments. Ripple says XRP has the “fastest” settlement speed, settling in about five seconds or less.
“The prototype paves the way for a major overhaul of how banks process and settle cross border payments”. David Rutter, CEO of R3

Banks traditionally provision liquidity for cross-border payments by holding various currencies in local accounts with correspondent banks around the world. But these ‘nostro’ accounts are costly because banks have to fund them, trapping capital. Ripple argues that this can be fixed by instead using a digital asset – such as its XRP – which provides liquidity on demand.
Ripple’s network was trialled in R3’s lab and research centre, making markets for fiat currencies using XRP and then completing authenticated payments without multiple nostro accounts. The trial introduced XRP to test the feasibility of reducing or retiring the use of current nostro accounts for local currency payouts.

Ripple Innovations

In the meantime a number of important innovations were announced in the Ripple offering.

Ripple Validator Node
Global IT company CGI announced it is the first commercial enterprise to implement the Ripple Validator Node. Ripple validators are servers that confirm Ripple’s distributed financial technology transactions on the network. The CGI-hosted Ripple Validator Node provides banking clients with a trusted network partner for Ripple’s distributed financial technology that settles international and domestic transactions in real-time.

Smart Token Chain
Smart Token Chain (STC), a blockchain specialist in the FinTech sector, has completed its first full Smart Token transaction across the Ripple Network. Using Ripple gives STC universal access to a wide range of partners and customers without having to physically craft a digital relationship with each one. STC is leveraging Ripple’s open, neutral platform, called “Interledger Protocol” to move payments globally across different ledgers and networks.
Leveraging the Ripple platform with new Smart Token solutions is accelerating the move toward the launch of a truly useful blockchain and smart contract implementation, which has great potential for making global exchanges of value fast, affordable and highly secure. It also provides a well-documented audit trail that will make dispute resolutions more efficient and less frequent.

Ripple’s new cost model

Ripple created a cost model, designed specifically to help banks understand their cost structure and how Ripple can help them overcome current inefficiencies. With Ripple’s new cost model, banks can easily enter transaction volume and operational metrics to receive a custom cost analysis. The cost analysis breaks down cost to a per-payment level, for both a bank’s current system and if it were to use Ripple. By using this model banks can easily estimate the efficiency gains it could achieve using Ripple for international payments.
XRP Incentive Program

The XRP incentive program is designed to accelerate the use of XRP as a universal bridge currency by creating deep and liquid markets at the outset of being listed on digital exchanges. The program is funded by Ripple and will be operationally managed by exchanges for their liquidity providers.

Global financial institutions are increasingly looking for solutions to consolidate the liquidity tied up with the nostro accounts required to fund their overseas payments. Digital assets such as XRP allow for banks to fund their payments in real-time, and in the process, cut down their dependency on nostro accounts.
As a bridge currency, it can enable liquidity concentration around fewer currency pairs, making cross-border payments more efficient. As evidenced by R3’s trial with XRP for interbank cross-border payments, the use of Ripple and XRP can enable both cost-cutting and revenue opportunities for participating institutions.

BitGo makes XRP more accessible
Ripple’s efforts to build an active ecosystem around its XRP digital asset has been boosted by a deal with virtual currency processor BitGo. Under the programme, BitGo will provide multi-signature security, advanced treasury management and additional enterprise functionality for XRP, which will be integrated into the BitGo platform this year.

The Rippling goes on!

Ripple plans to enlarge the number of exchanges trading XRP. Working with a greater number of exchanges to list XRP is an important step to serve the growing demand for global payments in major and exotic currency corridors. Ripple has previously commented that by using its network and XRP as a bridge asset, banks can save up to 42% on interbank international payments.

“This cost-saving frees up capital to generate revenue opportunities, including new product offerings for high-volume, low-value payments and access to new corridors”, claims Ripple.

The Ripple effect goes on!

 

Carlo de Meijer

Economist and researcher