PYMNTS Blockchain Series: What is XRP?

Throughout this series of articles, we examine the major cryptocurrency blockchains to help you understand the alphabet soup of so-called “altcoins” that exists beyond that of Bitcoin’s BTC and Bitcoin’s. ETH of Ethereum.

We will see what they are, how they work, what they do and their advantages and disadvantages.

You’ll come out of this series not only with a better idea of ​​what cryptocurrency is, but you’ll also understand why how a token works – how its blockchain handles transactions – is key to its success or success. its failure as a digital asset.

See also: Blockchain PYMNTS Series: What is Bitcoin Cash? The #2 payments-focused crypto is going its own way

So what is XRP?

First of all, it is arguably the most involved cryptocurrency in the payments industry.

Second, cryptocurrency is incorrectly called “ripple”.

Third, capital-R Ripple is a company that uses XRP to power a network of banks and money transmitters who use it to bypass the SWIFT financial messaging service and transfer funds internationally for pennies and a few seconds.

He is also effectively the sole user of the XRP Ledger, which is an open-source distributed blockchain on which all 100 billion XRP tokens were pre-mined in a single transaction. Which is actually important to know, for reasons we’ll see later.

Finally, XRP is the subject of a lawsuit by the Securities and Exchange Commission which, if Congress does not act first, will determine whether the SEC is correct in calling almost all cryptocurrency securities under its umbrella. regulatory. Again, more on that later.

Crossing borders

Ripple is one of the oldest companies, if not the oldest, that uses cryptocurrency to power cross-border transactions. Created in 2011, two years after Bitcoin, the company launched in 2012. It now has more than 300 partner banks and money transmitters in its payment networks.

There are three parts in this network. The biggest is RippleNet, which is used by companies such as Standard Chartered, Azimo, and Santander.

RippleNet customers can use its private network to transfer funds outside of SWIFT, but require parking funds at these banks. However, it does not require the use of XRP.

RippleNet customers can also use its two other products, On-Demand Liquidity (ODL) and Line of Credit.

Counterparty risk

ODL uses the XRP blockchain to eliminate the need to pre-fund transactions. The payer buys XRP and sends it to the destination institution via blockchain payment – ​​in real time and for minimal transaction fees.

While XRP prices can be just as volatile as bitcoin – it has a large and fervent investor base dubbed the XRP army – the ODL system is all about buying XRP in the market when needed and selling it. when received, effectively eliminating volatility by completing both trades within seconds.

This requires a lot of liquidity in the XRP market. Currently, XRP is the sixth largest cryptocurrency by market cap, with $35.7 billion in circulation. As of March 3, it had a 24-hour trading volume of $2.1 billion.

Being publicly traded as an investment – ​​and this is important for the SEC lawsuit we mentioned – XRP tends to follow the broader crypto market. Although it lagged in 2019 and 2020, remaining more or less stable, last year it broke out, climbing with the crypto bull markets and crashing with the bears.

The final way Ripple uses XRP is with its line of credit product, which allows RippleNet members to lock in an XRP price and fund payments by borrowing and repaying Ripple rather than buying XRP on the market. This not only eliminated more volatility, but allowed members to continue trading as usual when the SEC continued its lawsuit against Ripple.

The prehistory of XRP

Ripple executives struggle to say that the company did not create XRP.

Which is technically true but by separating the hairs quite finely.

The creators of the Ripple blockchain pre-mined the 100 million XRP with the blockchain genesis block, kept 20%, then “giftedthe rest to the company (the names have changed several times).

The three, David Schwartz, Jed McCaleb and Arthur Britto, were soon joined by Chris Larsen. Larsen is the executive chairman of Ripple and Schwartz its technical director. McCaleb left the company to found a competitor in the crypto payments space, the Stellar blockchain.

Specifically, Ripple still controls a large portion of the market. Besides being its only real users, Ripple has around 46.5 billion XRP in escrow accounts – which was necessary as XRP investors felt that the company was selling too much of its cash, artificially maintaining the price of XRP. low.

Beyond controlling this huge stash of XRP – and its executives and founders have big kitties too – Ripple is the only company that uses XRP for anything other than an investment.

For Ripple, XRP is, in crypto jargon, a utility token. And like any cryptocurrency other than bitcoin and some payments-only blockchains like Litecoin, investing is (in theory) based on the idea that as more projects are built on a blockchain, demand for its capped number of tokens will increase, increasing prices. .

See here: Blockchain PYMNTS Series: Litecoin Is Bitcoin’s “Silver” “Gold”


This is where the SEC lawsuit comes in.

The SEC claims that Ripple’s public sales of XRP represent a 9-year unrecorded sale of outstanding securities – which Ripple denies and calls ridiculously unfair after all this time.

The significance is that while XRP is a utility token, buying and selling it to power cross-border payments is quite straightforward. If it is a security, buying and selling it becomes much more complex and time-consuming. Make it much less useful for cross-border payments.

More here: Ripple Lawyer Confident SEC Case Will End in April

This is the Howey test, which refers to the Supreme Court decision on which the definition of a title is based.

She says a transaction is an investment contract if it meets four criteria: Someone (1) invests money (2) in a joint venture (3) and is made to expect profits (4) solely from the efforts of the promoter or a third party.

Ripple says no, XRP is a utility token, used as a unit of transaction to transfer funds across borders. The SEC disagrees.

The case is significant beyond XRP, as all of the companies that the SEC has prosecuted for selling cryptocurrencies in an initial coin offering that was an unregistered securities sale have either settled or shut down their blockchains before a lawsuit is heard.

The crypto industry has long complained about litigation regulation, and the Ripple lawsuit is where the rubber hits the road, as the company vigorously fights back.

If he loses, the usefulness of most cryptocurrencies – not just XRP – would be called into question.

And Ripple is unlikely to settle, given that the SEC also characterizes the private sale of $1.3 billion worth of XRP over the years by the company’s two top executives as illegal securities sales. They are not about to settle for that.



On: Forty-two percent of US consumers are more likely to open accounts with financial institutions that facilitate automatic sharing of their bank details upon sign-up. The PYMNTS study Account opening and loan management in the digital environmentsurveyed 2,300 consumers to explore how FIs can leverage open banking to engage customers and create a better account opening experience.

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