Throughout the past year, we have seen cryptocurrencies experience rapid changes in valuation as international investors begin to question their relevance in financial markets as well as their ability to take on traditional financial transaction systems, such as SWIFT. The most prominent cryptocurrency has been Bitcoin, yet there are several other contenders that are in poll position to replace Bitcoin as the dominant cryptocurrency.
Created in 2012, Ripple has sought to distinguish itself by working to revolutionize monetary processes with banks, which has allowed it to build an impressive cadre of backers, such as Google Ventures and Accenture, and ascend to the third most popular cryptocurrency in the world. Utilizing its RippleNet, Ripple seeks to make money transfers as seamless as data transfers, utilizing faster settlements, lower fees, and a simplification of the settlement process. This methodology has recognized benefits as it would not only streamline the transaction processes, but it would also reduce the need for human intervention. Though, with a complex series of rules and regulations, many are doubtful of Ripple’s ability to generate change within the financial transactions system.
Despite global headwinds, a study by McKinsey & Co. predicts that the global payments industry will grow by nearly $400 million dollars, though customers are increasingly demanding a more efficient process than in the past. Much of this is contingent on the digitization of the industry, which is where Ripple is ideally positioned. Currently, many banks use the Vostro / Nostro system, in which banks open accounts in a foreign bank in that country’s currency and vice versa. The outcome of using this system is that for a bank to send money to a client they must send the money via the Nostro account, an account in a foreign bank. The largest consequence of this is severe inefficiency, as hundreds of billions of dollars sit in a foreign bank’s accounts in order to maintain the ability to send the money at a moment’s notice. This hampers the ability of banks to conduct profitable activities, such as making loans. Ripple could help resolve these issues and allow banks to take on projects that are more beneficial for both their customers and shareholders.
In particular, Ripple has the potential to change the manner in which remittances are sent. In countries, such as the UAE, where there are large migrant populations, remittances are a crucial part of their finances, as these workers will send billions of dollars a year back to their home countries. Though transfer fee are relatively low, they remain a source of inefficiency. This has led to major banks on the Arabian Peninsula, such as the RAK bank of the UAE, to utilize RippleNet to enable instant payments to India – one of the greatest recipients of remittance payments. With increases in the exchange of workers between countries, there will a greater need for a more effective system than the one that is currently in place.
There remain significant concerns regarding Ripple’s role as both an investment vehicle and a means to transfer money. Though, it is important to note that there contractual agreements arranged for 50 billion Ripples to be sold directly to liquidity providers. These providers, which are often large financial institutions, increase the liquidity of Ripple, allowing for it to not only be seamlessly exchanged, but also expanding the range of buyers and sellers who have access to the asset and granting a better sense of security among those that use it.
An additional reassurance to those that use RippleNet is the power of the network. On a pure processing comparison, RippleNet is able to handle 50,000 transactions per second – on par with Visa’s payment system. Given that the network is not even close to capacity, this should ease concerns about the ease of payment processing with Ripple.
The great advantage of Ripple over any internal creation among individual banks is its ability to act as a centralized intermediary between them. Furthermore, government initiatives and current operational deficiencies, as well as the growth of both cross border payment flows and transnational payment systems, have put Ripple in ideal position to further expand into a more common fixture in financial markets. This is exemplified by the phenomenon known as the S-curve, where early adopters develop a new technology that then experiences rapid growth and adoption.
Given the recent trends with regards to technology and computer usage, the S-curve could be a crucial indicator as to where Ripple may go. One of the most pressing issues the world faces is creating an instant, fee-less and secure cross border remittance system, and Ripple is an ideal candidate to solve it.