In October, a five-year-old company called Ripple boasted that it was one of America’s “most valuable start-ups . . . after Uber, Airbnb, Palantir and WeWork”.
Although its core finance technology business has not done much disrupting yet, cryptocurrency mania was growing the value of XRP, the digital coin created by Ripple’s founders and whose supply the company still controlled. XRP’s price rose 36,000 per cent during 2017, challenging bitcoin’s market value, giving Ripple an XRP hoard worth $200bn by Christmas. XRP is a cryptocurrency outlier. Unlike decentralised, rebellious bitcoin, created post-financial crisis amid distrust of banks, XRP is supposed to grease creaking banking infrastructure, part of the back-office finance technology offered by San Francisco-based Ripple.
Brad Garlinghouse, its chief executive, called XRP “the global liquidity solution for payment providers and banks”. But Ripple’s golden goose cryptocurrency, whose price has now sagged, raises awkward questions.
While its separate technology solutions for fast payment settlement impresses some financiers, XRP’s volatility, and Ripple’s ownership of more than half the 100bn XRP ever created, has unnerved banks that evangelists hoped would adopt the asset as a bridge currency. Ripple wants to supplant the international Swift network, which is owned by and connects about 11,000 banks. It promises to accelerate cross-border payments using distributed-ledger, or blockchain, technology that sends messages between banks, while offering XRP as a cheap and universal bridge currency, to short-circuit the expensive nostro and vostro accounts of traditional correspondent banking.
Think of XRP “like the oil you put in [a car] engine”, says Greg Kidd, Ripple’s former chief risk officer who runs Synthetic Liquidity, a liquidity provider that is trialling XRP by moving small amounts. Banks “really shouldn’t need that much”, he adds. Share this graphic But some speculators are betting that banks will need a lot of XRP oil as a reserve currency, which, if correct, would see XRP loom large in the global financial system.
But if banks are unconvinced that they need to own substantial amounts of XRP — which Ripple’s systems for sending and processing payments do not require — the now $60bn total market value of circulating XRP coins looks highly speculative. The enterprise software start-up says more than 100 financial institutions have adopted at least one Ripple product. Ripple recently announced another pilot project with money transfer group MoneyGram, which will involve XRP.
But while it has touted live projects with Santander, a Ripple investor, and American Express, others have hesitated to move beyond tests. The Financial Times spoke to 16 banks and financial services companies publicly linked to Ripple (two more declined to comment). Most had not yet gone beyond testing, but some were using Ripple’s systems for moving real money. For instance, Sweden’s SEB bank says it used Ripple software for fast cross-border payments between accounts held by some of its corporate clients; soon, Santander is expected to launch a cross-border payments app using Ripple’s technology to clients in Europe and America. But none of the banks who spoke to the FT had used XRP. Kansas-based CBW Bank was one of the first partner banks announced by Ripple in 2014. But Suresh Ramamurthi, CBW’s chairman, says it has shelved plans to use Ripple’s systems until regulatory guidance is clearer.
Some banks shy away from cryptocurrencies such as XRP for fear of being “the first casualty”, Mr Ramamurthi adds. Hank Uberoi, executive chairman of cross-border payments specialist Earthport, works with Ripple to jointly offer their services to financial institutions. “Banks are hesitant to use XRP because they are unsure of the regulatory aspects of it. If money is in transition and the price of XRP collapses in that time, what happens then?” he says. Ripple’s other problem, Mr Uberoi adds, was signing up enough banks to have the scale to seriously challenge Swift. “It is only of value if everyone is connected to the network — like a fax machine, if others don’t have one, then it is not much use,” he says. Ripple says: “Enabling the internet of Value is not something we can do alone and it’s not something that happens overnight.”