The expectation of regulation is pretty much the bedrock of all institutional finance. If a crypto project can't swim through regulated waters, which is to say almost everywhere, it doesn't really matter how elegant or handy its underlying technology is, because the biggest pools of capital, which represent the vast majority of all capital that exists, will studiously keep their distance, and they will never be tempted to draw closer.
And that's why one recent contrast in particular is so revealing. XRP (XRP +2.48%) is getting explicit regulatory permission to operate in an incredibly important global financial zone, while privacy coins like Zcash (ZEC +2.15%) and Monero (XMR +0.60%) keep hitting roadblocks because regulators dislike them -- and that just happened in the same jurisdiction where XRP got cleared for business. Let's take a closer look at what went down and appreciate why it's a worthwhile reason to consider investing in XRP.
Image source: Getty Images.
Regulatory access is a key consideration
XRP and its blockchain, the XRP Ledger (XRPL), is being developed by Ripple and others to target international payments and transactions, among other functions. A core part of its investment thesis is that regulated financial companies keep experimenting with blockchains for their asset management and money transfer needs, and the projects that regulators are willing to supervise or permit will inevitably end up getting more shots on goal than those that regulators eschew.
One area of particular importance is Dubai, which is one of the world's biggest and most important financial centers, both for the traditional financial system and also for crypto. One special region within Dubai is the Dubai International Financial Center (DIFC), which implements a specific set of financial regulations that differ somewhat from those in the rest of the city and country. In November 2023, regulators there formally recognized XRP as an approved crypto token for use by licensed businesses inside the DIFC, but that was only the start.
CRYPTO: XRP
Key Data Points
As of mid-January of this year, RLUSD (the native stablecoin of the XRPL) is now one of just three stablecoins approved for use in the DIFC. So now there's effectively a wealthy jurisdiction at the center of international financial flows that XRP's chain is now exposed to directly by way of the stablecoin that largely exists on its network and nowhere else. Put differently, this regulatory breakthrough could attract a lot of capital to the XRPL, which will then require using a lot of XRP to manage, so it's bullish for its price.
And this new reason to buy XRP simply wouldn't have been possible if not for Ripple consistently working with regulators to ensure that its financial products are as compliant as possible.
Privacy coins are built to resist the very thing institutions need
Alas, privacy coins just suffered a defeat in Dubai, where the same regulators who gave a green light to XRP deemed them ineligible for use.
CRYPTO: ZEC
Key Data Points
Both Zcash and Monero aim to obscure transaction details that are public on most blockchains. While they differ in terms of their approach to implementing privacy, as well as in the odds that they will be able to one day appease regulators (which is an area where Zcash has a big edge), for now they're both subject to some stringent restrictions.
In the same announcement where authorities in the DIFC said that RLUSD was a permitted stablecoin for the jurisdiction, they banned coins capable of obscuring a user's identity from crypto exchanges operating there on the grounds that they were a barrier to enforcing anti-money laundering (AML) laws. Investors are still allowed to have them in their crypto wallets. Nevertheless, it's now incredibly difficult to purchase or offload the coins within that critical jurisdiction, and thus it's a new headwind for both of those coins. And Dubai is far from the only place where such restrictions are either already in effect, or will be soon.
CRYPTO: XMR
Key Data Points
For the average investor, this is a big problem, and it's simply not worth the headache of owning assets that might fall victim to it. In contrast, an asset like XRP, while targeting an entirely different niche and fulfilling an entirely different set of purposes, will almost certainly continue to experience its favorable regulatory treatment as a tailwind, so it's a much easier coin to feel good about holding.
So, as always, know what you hold, and appreciate that if one of your coins could just be banned, you may not want to hold it at all.
