The short version
- Ripple created the XRP cryptocurrency and blockchain to facilitate international payments.
- XRP’s goal is to improve existing financial institutions and global payment processing systems rather than replace them.
- The SEC filed a lawsuit against Ripple in 2020 and the major U.S. cryptocurrency exchanges delisted it as a result. A case decision is expected in 2023.
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What is XRP?
Before the creation of Bitcoin, Ripple was known as Ripplepay. This early 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 eventually create XRP, their native cryptocurrency.
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.
On 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-facing cryptocurrencies.
XRP is also different from other digital assets because it's not mined like Bitcoin or Ethereum. Instead, it's created by the Ripple company. One hundred billion XRP were created at Ripple's inception, and no more can be created. This fixed supply makes XRP a deflationary currency, meaning that it should increase in value over time as demand increases and the supply remains the same.
What is XRP used for?
Unlike other cryptocurrencies, XRP was not designed as a token to exchange for goods and services. Instead, XRP facilitates currency exchanges between financial institutions, central banks, and commercial businesses.
XRP powers RippleNet, Ripple’s blockchain platform. It facilitates cross-border transactions. RippleNet is an alternative to SWIFT, the current system most banks use for financial exchanges.
SWIFT doesn’t actually process financial transactions. It's a messaging system created in the 1970s to relay instructions on how banks should settle transactions.
Similar to SWIFT, RippleNet processes financial transactions between institutions. But unlike SWIFT, RippleNet can process those payments in seconds rather than days.
In the current system, financial institutions must pre-fund accounts before making payments in different currencies. XRP eliminates this need by utilizing the Interledger Protocol to integrate other ledgers into an interconnected ledger, decreasing the time it takes to process transactions.
The XRP tokens act as a bridge currency, and transactions occur in XRP before being converted back into their respective fiat currencies. All this speeds up transaction processing times while decreasing the costs.
Who uses XRP?
The primary users of XRP are financial institutions and international payment providers. They use RippleNet to settle financial transactions. Most financial institutions on RippleNet are located outside the United States. These include commercial banks, central banks, and companies handling cross-border remittance payments.
Aside from its current use in financial institutions, XRP could also be an enterprise-level solution for companies that are looking to settle invoices and collect payments from international partners. XRP would allow companies to settle charges with electronic invoicing faster and eliminate the need for paper-based billing 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 CBDCs. The Royal Monetary Authority of Bhutan began working with Ripple in 2021 to pilot the creation of its first CBDC. 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
Individuals who make frequent international payments may find that XRP improves the existing remittance process. XRP can facilitate remittance payments between different countries using different fiat currencies. This is being piloted 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 an important 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, claiming 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 lawsuit, 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 impact XRP’s value — either positively or negatively. If XRP wins the suit, its value may rise. But a verdict against Ripple would make it more difficult for American-based financial institutions and companies to adopt XRP. And that would likely slow its traction and future growth opportunities.
In any case, the uncertainty surrounding the SEC decision and XRP’s future makes it a high-risk cryptocurrency to invest in right now.
The bottom line: should you invest in XRP?
If you live in the United States, you most likely can't invest in XRP right now (unless you use a decentralized exchange). But what about everyone else? Is XRP a worthy investment opportunity for non-U.S. investors?
Increased adoption among businesses, banks, and governments will ultimately determine XRP’s value and thus its potential return on investment. Also, Ripple hopes to launch an IPO once the SEC lawsuit concludes. This could allow investors to invest directly in Ripple and its payment processing capabilities rather than just by holding XRP.
However, a ruling against Ripple would make it difficult for American-based entities to use XRP, decreasing its ability to gain more traction. And aside from the ongoing litigation with the SEC, it's too soon to tell whether XRP has greater value beyond its role as a transaction-based asset.
At this point, we consider XRP an even riskier investment than other cryptocurrencies like Bitcoin and Ethereum. If you have a high risk tolerance, you might be comfortable with allocating about 1% of your portfolio to XRP as a moonshot. But for everyone else, XRP should probably be a “wait and see” crypto for the foreseeable future.
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