Ripple Explained – Chapter 2: XRP transforms the traditional money transfer
Vontobel now offers investors access to the crypto currency «Ripple». But what is Ripple (XRP)? In six chapters, we want to give you high-quality knowledge about the exciting topic of «Ripple».
Brad Garlinghouse, CEO of Ripple, already complained: «We live in the age of the Internet and cannot send our own money back and forth between countries in real time. That's crazy.» That's an issue he and his company want to solve. In this article, we explain the problem of traditional money transfer and how Ripple wants to solve it.
SWIFT was founded in 1973 and is owned by more than 11,000 financial institutions. It operates an international and secure communications network for banks in over 200 countries, providing the ability to exchange financial messages quickly and securely. In addition to financial transactions, the SWIFT network also transmits messages related to documentary, foreign exchange and securities trading transactions.
Problem of traditional money transfer
In traditional transaction banking, when money is transferred from one bank to another, it is delivered with a digital promissory note. This means that the bank that receives the money is then in debt to the bank that transferred it. The details of the transaction are negotiated through SWIFT («Society for Worldwide Interbank Financial Telecommunications»). But they are complicated and very costly. Not only for the banks, but also for the end customers. In addition, there are long waiting times: If money is transferred across national borders and across different currency areas, a transaction can take up to several days - especially if the service is overloaded due to many transactions. Private clients wishing to transfer money quickly and across national borders have to rely on service providers such as Western Union or Paypal. But these services require high fees: Western Union requires 2% of the transfer value. Paypal even charges 3% of the transfer value if the transfer is accompanied by a currency change.
This problem has the following background: Banks and payment service providers face two significant challenges in transfers across national borders and different currency areas: First, liquidity must be available in all currencies involved. Secondly, it must be ensured that the payment works. Ripple has developed more innovative solutions than the existing payment system offers.
Which problems does Ripple want to solve?
Up to now, international transfers are made via so-called correspondent banks. In some countries, financial institutions must keep the respective currency on special accounts in order to facilitate transactions. This is expensive and costs a lot of money. Ripple's software programs take this into account and build on the existing infrastructures of the banks. If, for example, Dollars are exchanged into Euros, Ripple changes the Dollar amount for a short time into its own crypto currency XRP and then from XRP into Euros. Ripple can thus serves as an «intermediary» in a currency exchange, which can extremely cheapen and accelerate the expensive and tedious transfer from USD to EUR. The transaction will in general cost less, since the technology behind Ripple’s currency XRP automates the process where labor can be saved. As a result, efficiency increases and end-user costs can be reduced. For example, as mentioned earlier, SWIFT is responsible for the costly management of digital promissory notes. SWIFT could then become redundant as an intermediary if banks use Ripple.
Instead, XRP takes on the role of a mediator between two units of value. Ripple is by no means limited to fiat money (i.e. official currency of states), but can also be used for transactions between other units of value: No matter if gold, Bitcoin, Pound Sterling, Dollar, or Euro, the most important prerequisite is that the value of the exchange item is objectively measurable. For example, gold can be exchanged for XRP and after the value transfer of this XRP it can be paid out again in Bitcoin. So Ripple could act as a kind of "meta currency" that brings business partners together, no matter what currencies they trade.
Advantages of the Ripple Platform and XRP
The Ripple Platform can deliver currency conversions with lower commissions. Currently, there are many currencies that cannot be converted directly into other currencies. Therefore, banks must use the US dollar as the intermediary currency, but this results in a higher commission that must be paid. If Ripple is used as an intermediary, it is much cheaper than the US dollar.
Similarly, the Ripple platform offers faster transaction times than other alternatives. One transaction takes approx. four seconds, compared to ten minutes for Bitcoin or up to a few days for traditional money transfers. The Ripple network can perform 1,500 transactions per second. This means that the transaction capacity that can be processed by the network is significantly higher than for Bitcoin (15 transactions per second) and Ether (3-5 transactions per second). According to Ripple, the transaction capacity could also be increased to 50,000 transactions and thus have the potential to keep up with Visa or Mastercard in the future.
Conclusion: Ripple collaborates with the financial institutions instead of working against them
Ripple Labs has set itself the goal of building a «borderless» financial network by eliminating high transaction costs and long transaction times of banks and payment service providers. XRP as crypto currency is based on Bitcoin's decentralized digital currency approach and serves as a «mediatory currency». Thus, XRP aims to support the present payment network. However, it is not meant as a currency, with which we pay in everyday life. In contrast to Bitcoin, Ripple does not want to attack the traditional financial system with XRP, it wants to complement it.
This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the securities, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the sole binding sales documents for the securities. It is recommended that potential investors read these documents before making any investment decision in order to fully understand the potential risks and rewards of deciding to invest in the securities. The documents and the key information document are published on the website of the issuer on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information contains an indication of past performance. Past performance is not a reliable indicator of future results.
This document and the information contained in it may only be distributed or published in countries where such distribution or publication is permitted by applicable law. As stated in the relevant base prospectus, the distribution of the securities mentioned in this information is subject to restrictions in certain jurisdictions. This advertisement may not be reproduced or redistributed without Vontobel’s permission.