XRP (XRP -6.21%) is an oddity. For starters, with a market capitalization of $52 billion, it is the sixth-largest cryptocurrency in the world, but it is the only major token that has not recovered from the crypto bear market of 2018.
Its setup is unique as well. Ripple, XRP's creator, runs RippleNet -- a platform for currency exchange and cross-border transactions. Hundreds of financial institutions worldwide use RippleNet, but only its on-demand liquidity (ODL) service uses XRP tokens. It allows instant settlement of international transactions for as little as 0.00001 XRP (or 10 Drops), essentially eliminating transactional costs for all parties involved. So what makes the XRP ecosystem controversial?
A bull-bear whirlpool
The first criticism of XRP is directed at its founders' intent to disrupt the Society for Worldwide Interbank Financial Telecommunications (SWIFT). SWIFT pretty much dominates global wire transfers, processing 41.8 million transactions each day among over 11,000 financial institutions. Last month, SWIFT launched its SWIFT Go service -- allowing businesses and customers to send money to one another in seconds. Skeptics are already claiming that the move will mean the end of RippleNet or the need for XRP.
But it's important to note that unlike with RippleNet, SWIFT transactions do not settle in real time, taking between one to four days and even longer if there are mistakes, such as a misspelling in the recipient's bank's address. In addition, all this debate about speed ignores another important element of bank transactions, their costs. SWIFT messages are not cheap -- taking a foreign exchange fee of 3% to 5% in addition to a base fee. So, it's definitely cheaper to use either RippleNet or XRP instead.
Another point of contention lies in an ongoing lawsuit between Ripple and the U.S. Securities and Exchange Commission. Starting last December, the SEC alleged that Ripple sold $1.3 billion worth of unregistered securities beginning in 2013. Unlike Bitcoin's (BTC -2.28%) developers, Ripple minted all 100 billion of its XRP tokens from the start, largely so that miners do not have to waste energy and repetitively guess possible outputs to the network's hashing algorithm to validate transactions. Whether that move constitutes securitization is being fiercely debated in the courts.
Until the dust settles, institutions will be hesitant to use a service whose parent entity has alleged regulatory compliance issues. But the lawsuit has gone nowhere -- XRP's market cap has now become big enough to allow Ripple to either settle the lawsuit while admitting no wrongdoing or proceed with litigation till the end. So it's not like there's no way out of it. What's more, financial institutions continue to sign up for RippleNet even as the lawsuit is ongoing.
The last major critique of XRP falls on a seemingly impossible dilemma within the token itself. Banks and businesses may enjoy the use of RippleNet, but they don't want to use XRP for transactions, as it is very volatile. If the exchange rate of XRP to fiat were fixed, it would undoubtedly lead to greater adoption, but there would be no point in investing in the token. When this is combined with a detachment from RippleNet's enterprise payment solutions (non-ODL segment), critics say that XRP is in a catch-22 it can't dig out of.
That argument is becoming increasingly archaic in the face of new technological developments. One plausible solution is for Ripple to introduce a stablecoin linked to XRP, much as Terra (LUNC -3.40%) introduced Luna tokens in its own ecosystem.
Terra, too, is a network protocol to facilitate global payments. However, transactions are not settled via Luna tokens but via its TerraUSD (TUSD -0.07%) stablecoin. Users can buy-swap TerraUSD with Luna when the latter is trading at a discount to the U.S. dollar (bidding the price up), or sell-swap their Luna for TerraUSD when the latter is trading at a premium to the U.S. dollar (driving the price down).
Terra rewards users for maintaining the 1:1 exchange rate between the stablecoin and USD without Terra holding any USD reserves. Not only can investors benefit from Luna's price appreciation, but consumers can perform transactions without worrying about volatility. The same setup here could apply to Ripple.
What's the verdict
The Ripple-RippleNet-XRP ecosystem has its fair share of problems, but there are no dead ends. It has its ways of dealing with SWIFT competition, the SEC lawsuit, and XRP's currency dilemma. In the coming years, I expect RippleNet and its ODL service to continue to gain traction with real-time settlement and ultra-low fees. It's a crypto I would bet a small amount of money on for the long term.