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Ripple is a payment processing network that uses blockchain technology to improve international money transfers. Its native token, XRP, provides users with on-demand liquidity to make cross-border payments in different fiat currencies. (Some people use “Ripple” and “XRP” interchangeably when talking about cryptocurrency.)
The entire Ripple ecosystem could fundamentally alter how money changes hands between banks, companies and foreign governments. Although XRP has its risks, its underlying applications in the international financial system make it a popular cryptocurrency token.
Read on to learn how XRP works and what sets it apart from other cryptocurrencies.
The short version
- Ripple created the XRP cryptocurrency and blockchain to facilitate international payments.
- XRP’s goal is to enhance existing financial institutions and global payment processing systems rather than replace them.
- The SEC filed a lawsuit against Ripple in 2020, and as a result, major US cryptocurrency exchanges delisted it. A decision on the case is expected in 2023.
What is XRP?
Before the creation of Bitcoin, Ripple was known as Ripplepay. This first version of Ripple served as an international payment system without blockchain technology.
Then in 2008, Satoshi Nakamoto published the Bitcoin white paper and introduced cryptocurrency and blockchain technology to the world. Ripple’s developers adopted this technology to create XRP, their native cryptocurrency.
Read more >>> Why are there so many cryptocurrencies?
Why is XRP different from other cryptos?
The fundamental difference between XRP and other cryptocurrencies is the role it aspires to play in the financial system. Cryptocurrencies like Bitcoin want to replace traditional financial infrastructure with a decentralized network of peer-to-peer validators.
At the other end of the spectrum, XRP works with financial institutions to modernize rather than replace them. XRP’s convertibility makes it different from most consumer-oriented cryptocurrencies.
XRP is also different from other digital assets because it is not mined like Bitcoin or Ethereum. Instead, it has been created by the company Ripple. 100 billion XRP were created in the early days of Ripple and no more can be created. This fixed supply makes XRP a deflationary currency, meaning it should increase in value over time as demand increases and supply remains the same.
What is XRP for?
Unlike other cryptocurrencies, XRP was not designed as a token to exchange goods and services. Instead, XRP facilitates currency exchanges between financial institutions, central banks and commercial companies.
XRP powers RippleNet, Ripple’s blockchain platform. It facilitates cross-border transactions. RippleNet is an alternative to SWIFT, the current system that most banks use for financial exchanges.
SWIFT does not actually process financial transactions. It is a messaging system created in the 1970s to convey instructions on how banks should settle transactions.
Similar to SWIFT, RippleNet processes financial transactions between institutions. But unlike SWIFT, RippleNet can process these payments in seconds instead of days.
Under the current system, financial institutions must pre-fund accounts before making payments in different currencies. XRP eliminates this need by using the Interledger protocol to integrate other ledgers into one interconnected ledger, decreasing the time it takes to process transactions..
XRP tokens act as a bridge currency and transactions occur in XRP before being converted back to their respective fiat currencies. All of this speeds up transaction processing times while reducing costs.
Who uses XRP?
The primary users of XRP are financial institutions and international payment providers. They use RippleNet to settle financial transactions. Most of RippleNet’s financial institutions are located outside of the United States. These include commercial banks, central banks and companies handling cross-border remittance payments.
Apart from its current use in financial institutions, XRP could also be an enterprise-level solution for companies looking to settle invoices and collect payments from international partners. XRP would allow businesses to settle charges with e-invoicing faster and eliminate the need for paper invoicing and data processing.
XRP Ledger, Ripple’s blockchain technology, could also be used to help central banks create their own central bank digital currency, or CBDC. The Royal Monetary Authority of Bhutan began working with Ripple in 2021 to pilot the creation of its first CBDC. The XRP Ledger would allow central banks to manage their currency supply while improving efficiency in bureaucratic tasks such as collecting taxes at the point of sale.
People who make frequent international payments may find that XRP improves their existing remittance process. XRP can facilitate remittance payments between different countries using different fiat currencies. This is being tested with some providers, such as SBI Remit. However, greater adoption could give users more control over remittance payments.
Finally, as more and more users adopt Ripple’s payment processing infrastructure, XRP could emerge as a major reserve cryptocurrency.
The Risks of Investing in XRP
XRP is a high-risk cryptocurrency investment. In December 2020, the Securities and Exchange Commission (SEC) filed a lawsuit against Ripple, alleging that the company used XRP as an unregistered security to raise funds.
Ripple and the rest of the crypto community argue that XRP is not a security. Due to the demand, most exchanges delisted XRP. It is difficult for Americans to buy XRP and even more difficult for American companies to adopt Ripple’s payment platform.
The outcome of the lawsuit is expected in 2023. The ruling will likely affect the value of XRP, either positively or negatively. If XRP wins the demand, its value may increase. But a verdict against Ripple would make it difficult for US-based financial institutions and companies to adopt XRP. And that would likely delay its traction and future growth opportunities.
In any case, the uncertainty surrounding the SEC decision and the future of XRP makes it a high-risk cryptocurrency to invest in right now.
Conclusion: Should you invest in XRP?
If you live in the US, probably he can not invest in XRP right now (unless you use a decentralized exchange). But what about everyone else? Is XRP a worthy investment opportunity for non-US investors?
Greater adoption among businesses, banks and governments will ultimately determine the value of XRP and thus its potential return on investment. Additionally, Ripple expects to launch an IPO once the SEC lawsuit is concluded. This could allow investors to invest directly in Ripple and its payment processing capabilities instead of holding XRP.
However, a ruling against Ripple would make it difficult for US entities to use XRP, diminishing its ability to gain more traction. And aside from the ongoing litigation with the SEC, it’s too early to tell whether XRP has greater value beyond its role as a transaction-based asset.
At this point, we consider XRP to be an even riskier investment than other cryptocurrencies such as Bitcoin and Ethereum. If you have a high risk tolerance, you may feel comfortable allocating around 1% of your portfolio to XRP as a moon spot. But for everyone else, XRP should probably be a “wait and see” crypto for the foreseeable future.
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