Financial innovation company R3 and twelve of its consortium member banks have trialed Ripple’s distributed financial technology and the potential for its digital asset to scale liquidity and reduce the costs and inefficiencies of interbank cross-border payments.
Banks traditionally provision liquidity for cross-border payments by holding various currencies in local bank accounts around the world, known as nostro accounts. The practice of holding various currencies across many accounts is costly because banks have to fund those accounts, trapping capital. The emergence of digital assets offers an alternative to this process.
„Digital assets can enable near real-time value exchange anywhere in the world, providing liquidity on demand and reducing associated costs. Of the popular digital assets today, XRP boasts the fastest settlement speed, settling in about five seconds or less. This trial introduced XRP to test the feasibility of reducing or retiring the use of current nostro accounts for local currency payouts.”, according to the press release.
The trial demonstrated that the Ripple network could enable banks to make markets for fiat currencies using XRP and then complete authenticated payments without multiple nostro accounts. Through a series of transactions, the participating banks explored how Ripple’s solution and XRP could enable both cost-cutting opportunities and revenue opportunities.
„Because of the real-time nature of the transaction, a bank making cross-border payments can do this instantly instead of figuring out where the collateral would come from or blocking up collateral that they may not need,” said Nilesh Dusane, vice president for client relations at Ripple in an interview with Reuters.
The trials, conducted in an environment set up at R3’s lab, were designed to show how banks could save money and create new revenue streams by using XRP to provide liquidity to their many bank accounts around the world.
Nilesh Dusane said the effort revealed not only how banks could minimize delays getting funds to their customers, but save money by harnessing the technology.
Dusane told CoinDesk:
„Everything comes down to return on investment. This project was aimed to show the ROI of reducing costs around liquidity by around 60%.”
Playing the ‘nostro’ margins
In short, instead of making banks redundant, this implementation was designed to show how the use of cryptocurrency could potentially make them money.
That’s because for banks to do business around the world, they open accounts called nostro accounts that must be filled with local currency. Ripple argues this results in a waste of capital that the trials were designed to showcase.
First, Ripple contends that value is lost because currency that must be held in the account is capital that could be invested elsewhere – and adding liquidity to these accounts costs money. Second, if a customer needs to do business with the bank for an amount that exceeds what is in the nostro account, days-long delays can result.
Instead, „the trial demonstrated that Ripple’s technology could enable banks to make markets for fiat currencies such as dollars and euros using XRP and then complete authenticated payments in real time without multiple „nostro” accounts.”, says R3 CEV in its blog.
Throughout the tests, participating banks including Barclays, CIBC, Intesa Sanpaolo, the Royal Bank of Canada and Santander were given control of their own wallets and the ability to move funds from one virtual location to another.
No actual cross-border payments occurred, according to Dusane.
„Because of our real-time settlement, banks can on demand, buy euros [or another currency] in chunks so their capital is not tied up,” he added. „If there are instances when their needs are more than they have, they can make those decisions instantly.”
It’s not a blockchain
Still, the ability for Ripple’s distributed ledger to operate without a currency has proved appealing to an increasing number of financial institutions that are otherwise wary of the stigma surrounding bitcoin.
Such sentiment led Ripple to launch a report earlier this year which aimed to showcase the cost savings that using a digital currency with a distributed ledger could achieve.
Released in February, Ripple argued that its tech could provide banks with a 33% savings on international payments. Yet, this figure rose to 42% when digital currencies were used to facilitate the trades.
Indeed, the increasing use of Ripple’s technology without a digital currency led to market confusion about the company and its goals, a fact acknowledged by CEO Chris Larsen in a March interview with CoinDesk.
„We could do a better job of communicating that XRP is essential to the Internet of Value,” Larsen said at the time.
And there are reasons Ripple may have shied away from this argument.
Like all cryptocurrencies, Ripple’s price has undergone dramatic fluctuations since it’s launch. At one point in 2014, the value of XRP approached $800m before settling down to its current market cap of about $300m, where it has been more or less steady since May 2015.
XRP is currently valued at $0.008 with 35.4bn tokens held by the public and 64.5bn tokens held by Ripple. When Ripple first launched, the company created all $100bn worth of the currency and dispersed the funds to over 25,000 beta users.
Overcoming the stigma
That’s not to say there weren’t regulatory considerations needed for the trial.
For example, R3 co-founder and COO Todd McDonald said the tests were designed in consideration of consortium members’ own regulatory needs. With bank participants from places as diverse as Italy, Australia, Canada and Scotland, regulatory requirements were diverse, forcing regional solutions in spite of the consortium model.
„At the end of the day payments and regulation is local and those are the questions that need to be answered,” said McDonald. „Local regulators need to understand the value proposition.”
However, the cryptocurrency environment today is also more established from a regulatory perspective than it was during the early days of bitcoin, a point put forward by Dusane.
„There is globally a lot more clarity from a regulatory standpoint about how digital assets like XRP should be treated,” Dusane said. „Banks can now for sure understand what they can do with a digital asset like XRP.”
But there is another reason banks are opening up to cryptocurrency, according to Trond Undheim, a former senior lecturer of MIT Sloan School of Management, who earlier this year wrote an article about why banks „fear bitcoin”.
Now the founder of knowledge discovery platform Yegii, Undheim told CoinDesk that he believes banks were originally hesitant because they weren’t sure how such experiments might impact investor confidence, but that the fear of missing out has taken over.
„Now, it is almost the opposite. Disruption and innovation is moving so fast that if they don’t get on board, they realize they will be perceived as losing their mojo. They also find they still have a role to play in the emerging financial system post the FinTech revolution.”
R3 is leading a consortium with over 60 of the world’s largest financial institutions to develop ground-breaking commercial applications for the financial services industry that leverage the appropriate elements of distributed and shared ledger technology. Operating in New York, London and San Francisco, the R3 team is made up of financial industry veterans, technologists, and new tech entrepreneurs, bringing together expertise from electronic financial markets, cryptography and digital currencies.
The R3 Lab and Research Centre has quickly become a centre of gravity for collaborative research and testing of distributed and shared-ledger inspired technologies, and is where R3 works with its partners to define, design and deliver the next generation of financial infrastructure.
Ripple provides global financial settlement solutions to ultimately enable the world to exchange value like it already exchanges information – giving rise to an Internet of Value (IoV). Ripple solutions lower the total cost of settlement by enabling banks to transact directly and with real-time certainty, optionally using the digital asset XRP to further reduce liquidity costs. Banks around the world are partnering with Ripple to improve their cross-border payment offerings, and to join its growing, global network of financial institutions and liquidity providers.
„Tendinţele pe care le-am remarcat înainte de începerea pandemiei s-au accelerat pe perioada stării de urgenţă. Am văzut acest lucru ca o oportunitate, un tipping point pentru bancă. Post-pandemie nu avem cum sa ne întoarcem la comportamentul financiar pe care îl aveam până în februarie a.c. Relaţia românilor cu online-ul s-a schimbat. In plus, cardul fizic se va dematerializa. Vom asista la o scădere a cererii pentru cardurile fizice, respectiv la o creştere a preferinţei pentru componenta digitală a acestora.”