DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech company, discussing its history, products / services, and how it has grown to be a leader in the industry.

Ripple’s Value Proposition:

Help financial institutions process customer’s transfers (payments) anywhere in the world reliably, cost-effectively, and instantly.

Ripple is an all-in-one digital payment network for transfers using its proprietary cryptocurrency (XRP).  As a top 3 digital coin by market capitalization, Ripple has been in the spotlight of the crypto-hype alongside Bitcoin and Ethereum.   Ripple has also been in the crosshairs of the SEC (US Securities and Exchange Commission) when it comes to proper asset classification.  Despite the hype and scrutiny, enthusiasts (as partnerships and customers) worldwide firmly believe in the value of Ripple as a step towards a monetary system capable of replacing legacy banking infrastructure with speed, efficiency, and cost-savings. 

The Origin of Ripple

Due to its ongoing status as a private company and multiple parties involved in Ripple’s evolution, there is lack of a clear timeline of its origins. With that said, the estimated starting point was back in 2004, Ryan Fugger started developing an early prototype (after his work on a Vancouver trading exchange) focused on a decentralized credit network benefiting individuals interested in extending credit to friends and family. Fugger would go to build the first version of the platform known as RipplePay.com (a site still running today), operating with both traditional and virtual currency.

Separately in May 2011, Jed McCaleb was working on a digital currency system that would gain consensus for transactions among members instead of mining (which was the process used by Bitcoin).  McCaleb hired Chris Larsen and both (who had heard of Ryan Fugger) met with him — the three agreed to team up in fusing the digital currency system with Fugger’s RipplePay network.  In September 2012, the team founded OpenCoin, which began development of the ripple protocol (RTXP), and Ripple payment network.

In April 2013, OpenCoin was working hard to finance the company, especially at a time before ICOs (initial coin offerings) were in use. Fortunately, they were able to raise angel investments from multiple venture capital firms (such as Lightspeed Ventures) which helped purchase SimpleHoney, a company that had focused on digital currency usage for the everyday consumer. 

OpenCoin officially became Ripple Labs, Inc on September 26, 2013, and made their native source code (used for the peer-to-peer network) as completely open source (available and transparent to all).  Any ongoing or future maintenance of the Ripple platform could now be done by the community of users and developers. 

How it Works

Current processes for cross-border transfers involve a customer making a transfer request at their bank, followed by the sender bank sending the request to a correspondent (intermediary) bank, who uses the SWIFT network to verify the accuracy of KYC (know your customer) of the beneficiary through the beneficiary’s bank. If all request information was captured correctly and verified properly at each step in the series, the funds movement would happen within 3 - 5 business days at a cost of $30+ for the transaction due to the currency conversion and number of parties involved. Any mistakes (avg. errors 12.7%) in account / beneficiary information would result in delays, transfers posting to the wrong account, and a potential loss of funds. The overall industry cost of global remittances is estimated at $1.6 trillion.

The Ripple payment protocol operates as an open-source, peer-to-peer decentralized platform, moving money with ease in any form (i.e. USD, Euro, bitcoin, etc.) from one party to another, globally.   Ripple uses XRP as the “holding currency” so that the payment being sent is converted from the payor’s native currency (i.e USD, JPY, Euro, etc.) to XRP; the XRP is then converted to the beneficiary’s native currency for final payment. The process has been tested and takes 4 seconds to complete, at a fraction of the cost. This powerful tool has been extremely attractive to financial institutions looking to stay up-to-date with the latest technological updates AND serve clients securely, quickly, and economically.

The company’s blockchain system, RippleNet, provides large banks, businesses, and sovereign funds the ability to send and receive payments through multiple programs.  xCurrent is one of the company’s offerings focused on incoming payment processing for bank clients (e.g. merchant services); xRapid helps institutions moving funds between different currencies; and xVia offers businesses a way to process outgoing payments or transfers.

Classification: Currency vs. Security

In the majority of transactions, XRP acts as a bridge currency between the payor’s funds and the recipient’s payment for liquidity purposes.  Additionally, XRP’s supply is predominantly owned and controlled by its parent company, Ripple — approximately 60 of 100 billion XRP owned; based on this, crypto critics believe it has ultimate control and influence internally over the valuation of the coin in the open market. As a result, XRP is constantly criticized as not being an actual currency and instead a security due to its use as a conduit in transactions and lack of decentralization. Leaders at Ripple have publicly defended the criticism by saying that XRP would still exist on its own if the parent company closes down.

In 2015, Ripple was hit with a $450,000 fine regarding the sale of XRP due to its lack of registration with FinCEN and lack of compliance with AML (anti-money laundering) procedures.

The debate rages on between multiple government entities (e.g. SEC, IRS, FinCEN) that have their own opinion on classification impacting future taxes, property and security rights, and privacy.

Key Differences with Bitcoin

Despite Ripple being in the top 3 of cryptocurrencies, there are multiple differences, especially when compared to bitcoin, such as:

• Ripple has faster transaction times (est. at 4-sec.) than bitcoin;

• Bitcoin is completely decentralized so it doesn’t require  an intermediary; Ripple runs on a centralized network;

• Ripple seeks to update existing capabilities in global financial transactions; Bitcoin has focused on creating a new financial system to replace traditional ones in place that require intermediaries;

• Bitcoin relies on mining activity to complete transactions on its platform; all XRP in the Ripple already exist and can be purchased openly on any exchange.

Partnerships and Clients

Ripple continues to add to its list of active clients, including big name players such as American Express, Bank of America, and UBS.  Various pilot programs with clients have helped create and improve its blockchain payment system, especially when it comes to speeding up transaction times with current sector leaders such as Visa and Mastercard.

Some notable partnerships from 2018 are:

• Santander launched a blockchain-based transfer service in April, based on Ripple’s global network;

• Western Union announced in February that it was running pilot tests of funds transfers using Ripple;

• Moneygram said in January that it would use Ripple’s xRapid program and XRP in pilots.

Future Outlook

Overall, Ripple has accomplished a significant amount by delivering on its value proposition, gaining and growing its client base, and being ranked as a top cryptocurrency. Ripple’s payment network and services continue to improve with the support of early adopters as customers and partners.

In order to push towards mainstream adoption, Ripple will need to increase its alliances with banks and large financial institutions in an effort to further gain legitimacy in the industry. Competition is increasing from other players, such as the incumbent transfer network of SWIFT (who is piloting their own blockchain service), Stellar (another blockchain platform leveraging its own cryptocurrency, XLM), and payment giants such as Visa (who are able to process 20K transactions per second and piloting blockchain solutions). Lastly, its lack of a listing on mainstream exchanges (such as Coinbase and Robinhood) make it difficult for retail investment to pour into XRP.