Author: Daniel Kuhn, CoinDesk; Translated by: Tao Zhu, Golden Finance
Ripple pronounces XRP’s demise. OK, to be fair, it’s accurate to say that Ripple CEO Brad Garlinghouse said exactly the opposite when he announced that the Silicon Valley crypto mainstay would launch a dollar-pegged stablecoin later this year. But in the long run, XRP’s usefulness is waning.
According to the company’s announcement, the Ripple stablecoin, expected to launch later this year, will apparently be backed 1-to-1 by cash equivalents such as U.S. dollar deposits, U.S. government bonds, and other low-risk investments. The idea is reportedly to create a more trustworthy alternative to assets like Tether (USDT) and Circle (USDC).
Indeed, as others have noted, the $150 billion stablecoin market is crowded but also highly lucrative. Tether, the first and largest stablecoin that currently dominates the market, is essentially used as a cash cow to fund many of Tether CEO Paolo Ardoino’s ambitions, from artificial intelligence to decentralized messaging.
Faced with a $2 billion fine from the U.S. Securities and Exchange Commission (SEC), Ripple may be looking for new, proven sources of revenue. Garlinghouse is clearly not fazed by the fierce competition, telling CNBC that in the future, the stablecoin "market will be different, depending on the scale, of course."
Ripple’s existing business model (selling financial services based on the XRP Ledger and On-Demand Liquidity and RippleNet protocols) falls short in many ways. While Ripple has had some success in building partnerships, it is becoming increasingly clear that legitimate financial institutions do not want to take on the volatile currency risk that comes with working with unpegged digital assets.
Over Ripple’s more than 10-year history, it has generally seemed better at building a community (the XRP army) and becoming a crypto leader (taking the SEC to court over the crucial question of whether its tokens are securities). It has been less successful at building products that companies and individuals actually want to use.
“No one uses XRP itself as a payment method, just like no one really uses BTC,” Austen Campbell, a professor at Columbia Business School and former manager of the Paxos stablecoin fund, said in a direct message.
Of course, that’s not entirely true. Diameter Pay CEO David Lighton said he worked with Ripple on an early pilot experiment with xRapid (rebranded as Ripple ODL) to send money between the U.S. and the Philippines. While he no longer uses that particular service, he does use the RippleNet messaging platform for some cross-bank transactions, which don’t rely on XRP.
“Ripple has a first-rate data structure, and most banks are behind it,” Lighton said. “It’s a great product, but they don’t sell that many anymore. I think they’re trying to keep their old customers alive — it’s not entirely clear to me why that is.”
Lighton said he stopped using ODL when he left the consumer remittance business, but found it a useful product. It helps him manage currency risk by providing real-time settlement for small tokenized transactions. “It’s not entirely clear how all of this fits together because I’m not currently using it. But it’s reasonable to say there is some added value because it can help businesses reduce working capital costs,” he said.
However, many of Ripple’s high-profile partnerships have failed.
Santander, one of the largest banks in the European Union, put Ripple on hold after realizing that using XRP could not meet the needs of its customers. The storied relationship with MoneyGram ended due to the increasing costs associated with cross-border XRP payments and the need for MoneyGram to establish third-party relationships with cryptocurrency exchanges in decentralized regions.
MoneyGram ended its deal with Ripple, which invested $30 million in the remittance giant in 2019 to use RippleNet, after shareholders filed a class-action lawsuit alleging that MoneyGram should have known that XRP could be considered a security.
The question of whether XRP is a security won’t be answered until Ripple’s four-year legal battle with the SEC is concluded on appeal. Right now, the situation is complicated. Judge Analisa Torres found last year that XRP is not a security by default (especially when traded on an exchange), but it does represent an investment contract when Ripple sells the tokens to accredited investors.
That’s the problem. For years, Ripple essentially raised money by selling hundreds of millions of dollars of XRP to investors every quarter. The SEC alleges that Ripple and its two executives raised more than $1.3 billion through the sale of XRP in an unregistered securities offering, of which about $770 million of institutional sales were found to have violated Section 5 of the Securities Act.
Regardless of the appeal process, Ripple’s financial health is difficult to understand as a private company. However, in many quarters before the SEC’s lawsuit, these programmatic sales accounted for a significant share of non-robot XRP trading activity.
Ripple has claimed in the past that RippleNet has more than 200 customers from central banks and financial institutions in more than 40 countries. But typically, beyond the initial announcement that the company would use XRP for cross-border liquidity, there is little indication of how often Ripple’s financial services are actually used. Typically, the pilots are internal only and not used for consumer-facing applications.
For example, Dhofar Bank, Omar’s second-largest bank, announced that it would use RippleNet in 2021 and offer customers “the option to instantly deposit up to OMR 1,000 into accounts in India via Ripple.” But that’s the only mention of it on the bank’s website. Many other apps, including payment apps and remittance services, don’t mention Ripple at all on their corporate websites.
Lighton said he would consider using ODL again if it was “a good enough business proposition” and he could “get comfortable with the regulatory and compliance risks,” but that in financial services, there are a lot of upstream and downstream relationships to conduct internal risk ratings to determine whether to work with someone who is not yet familiar with cryptocurrencies.
“It’s a really tough environment right now to do something cool and sexy,” he said. “I’m a regulated entity. My biggest loyalty is to our anti-money laundering obligations.”
When asked if he would be more comfortable using stablecoins or stablecoin-based services, Lighton said he was more hands-on following the Federal Reserve’s introduction of its new activities supervisory program last summer, which increased pressure on entities using stablecoins.
“There are some brilliant ideas behind stablecoins. The problem is nobody’s really sure how to regulate them,” Lighton said. He mentioned that PayPal’s ability to conduct remittances through its PUSD stablecoin on Western Union-like platform Xoom could be a step toward Ripple’s downfall.
To be fair, Ripple’s XRP-based financial instruments are mostly operating in the background — although many people still might prefer financial rails based on fiat currencies rather than free-floating currencies. This is probably why more and more cryptocurrency companies and projects are deciding to go the stablecoin route.
In fact, the second-largest stablecoin issuer, Circle, went through multiple corporate reassessments — from peer-to-peer payment platform to Bitcoin wallet — before getting into the stablecoin business. Perhaps this is the natural crypto life cycle.
