Ripple has declared the death of . Well, to be fair, to be accurate, Ripple CEO Brad Garlinghouse has said the exact opposite when announcing the Silicon Valley crypto mainstay would launch a U.S. dollar-pegged stablecoin later this year. But in the grand scheme of things, XRP's usefulness is dwindling. (Sorry, XRP Army, it's my job to speak it how it is.)
The Ripple stablecoin, expected later this year, will apparently be backed 1-to-1 by cash equivalents including U.S. dollar deposits, U.S. government bonds and other low-risk investments, according to the company's announcement. The idea is reportedly to create a more trustworthy alternative to assets like Tether's and Circle's .
Indeed, as many others have pointed out, the $150 billion stablecoin market is crowded — but it's also highly lucrative. Tether, the first and largest stablecoin that currently dominates the market, is essentially being used as a cash cow to fund Tether CEO Paolo Ardoino's many wild ambitions (from AI to decentralized messaging).
It's possible, facing as much as a $2 billion fine from the U.S. Securities and Exchange Commission (SEC), Ripple is looking for a new, proven revenue source. Garlinghouse is apparently unfazed by the crowded competition, telling CNBC: in the future the stablecoin "market will look different, certainly based on size."
In many ways Ripple's existing business model — selling financial services based around its XRP Ledger as well as On Demand Liquidity and RippleNet protocols — is falling short. Although Ripple has seen some success forming partnerships, it seems increasingly clear legitimate financial institutions do not want to take on the volatile currency risks of working with unpegged digit assets.
Over Ripple's decade-plus history, it often seemed better at building community (the XRP Army) and being a crypto cause (taking the SEC to court over the crucial question of whether tokens are securities). It's been less successful at building products companies and individuals actually want to use.
"Nobody is using XRP itself as the method of payment, just like nobody is really using BTC much for that," Columbia Business Professor and former Paxos stablecoin fund manager Austen Campbell said in a direct message.
Of course, that isn't totally true. Diameter Pay CEO David Lighton said he partnered with Ripple on an early pilot experiment of xRapid (rebranded as Ripple ODL) to send remittances 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 doesn't rely on XRP.
"Ripple has sort of a best in class data structure, most of the banks are kind of behind," Lighton said. "It's a good product, but they don't really sell it that much anymore. I think that they're sort of keeping it alive for their legacy clients — 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 also to be a useful product. It helped him manage currency risk by providing real time settlements for small tokenized trades. "It's not entirely clear how all of that has been put together, because I'm not currently using it. But it's reasonable to say there's some value added because it helps firms reduce their cost of working capital," he said.
However, many of Ripple's higher profile partnerships have fallen through.
Santander, one of the largest banks in the E.U., put Ripple on ice after the bank realized using XRP wouldn't work for its customers' needs. A storied relationship with MoneyGram ended due to the increasing costs associated with cross-border XRP payments, and the need for MoneyGram to form third party relationships with crypto exchanges in dispersed regions.
MoneyGram terminated the deal with Ripple, which invested $30 million in the remittance giant in 2019 to use RippleNet, after a class-action lawsuit was filed by shareholders alleging MoneyGram should have been aware that XRP could have been deemed a security and thus impact MoneyGram's bottom line.
The question of whether XRP is a security won't really be answered until Ripple's four year legal battle with the SEC ends after appeals. Right now it's a complicated situation. Judge Analisa Torres found last year that XRP is NOT a security by default (specifically when traded on exchanges), but it does represent an investment contract when Ripple sells the token to qualified investors.
And that's the rub. For years, Ripple has essentially funded itself by selling quarterly tranches of XRP for hundreds of millions of dollars to investors. The SEC alleged that Ripple and two of its executives raised over $1.3 billion from the sale of XRP through unregistered securities offerings, about $770 million of which in institutional sales was found to violate Section 5 of the Securities Act.
It's unlikely, no matter the appeals process, that that activity will be able to continue on the same scale. It's hard to get a sense of Ripple's financials as a private company. But, in many quarters leading up to the SEC's suit, these programmatic sales represented a decent chunk of non-bot XRP trading activity.
Ripple has claimed in the past it has had over 200 clients for RippleNet from central banks and financial institutions across over 40 countries. But often, beyond the initial announcement that companies will be using XRP for cross border liquidity, there is very little indication how often Ripple's financial services are actually used.
Bank Dhofar, Omar's second largest bank, for instance, announced it would use RippleNet in 2021 and offers customers the option to "Deposit up to OMR 1,000 to deposit accounts in India instantly through Ripple." But that is the only mention on the bank's website. Many others — including payments apps and remittances services — make no mention of Ripple at all on their corporate sites.
Lighton said he'd consider using ODL again if it was "a good enough commercial proposition" and that if he could "get comfortable with the regulatory and compliance risks," but when it comes to financial services there's a lot of up- and downstream relationships that do internal risk ratings to figure out whether to work with you that aren't yet comfortable with crypto.
"It's really a tough environment right now to do something cool and sexy," he said. "I'm a regulated entity. My top loyalty is to anti-money laundering."
Asked whether he'd be more comfortable using stablecoins or stablecoin-based services, Lighton said he's even more hands off there following the Federal Reserve's Novel Activities Supervision Program instituted last summer, which dialed up the heat on entities using stablecoins.
"There's some brilliant ideas behind stablecoins. The problem is no one is really sure how to regulate them," Lighton said. He mentioned that PayPal is allowed remittances through its PUSD stablecoin on its Western Union-like platform Xoom, which might be an avenue that Ripple goes down.
To be fair, Ripple's XRP-based financial tools are largely meant to work in the background — though many would still likely prefer financial rails built on fiat rather than a free floating currency. That may be why a growing number of crypto companies and projects decide to go down the stablecoin route.
In fact, Ripple's soon-to-be competitor, Circle, issuer of the second largest stablecoin, went through a number of corporate reevaluations — going from a peer-to-peer payments platform to a bitcoin wallet — before it landed on the stablecoin business. Maybe that is the natural crypto lifecycle.
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– D.K.
@danielgkuhn
daniel@coindesk.com
