Ripple (XRP) - Why I Invested, From An Ex-Banker (FX/Remittance)

This is gonna be a long one, ladies and gents.

As of the time of writing, Ripple (XRP) has crossed the 2 USD price mark, unseating Ethereum (ETH) as the second-largest crypto-coin by market cap.

I'd heard rumblings about XRP for quite some time - I searched up interviews and did research about the company behind it (also called Ripple, formerly known as RippleLabs), and was pleasantly surprised to find that their project had to do with making cross-border payments more efficient. In simpler terms, they want smoother and faster transactions when you remit money overseas. Naturally, this puts them at odds with SWIFT, which most banks worldwide currently use for financial correspondence. I'd been working in a bank for a couple of years, specializing in Forex and Remittance, so I was glad to do a comparison between the system that I knew (SWIFT) versus the new kid on the block.

The future of remittance?

From conversations with peers and relatives, I have found that not many people are familiar with the remittance process. I mean, yeah - your money leaves your account, and ends up in someone else's account. You may have noticed that it sometimes takes a few days for your money to be received. To that end, let me break down the process for you guys:

How Normal Remittance Works (Where Your Money Goes)

(1) You head to the Internet Banking section of your chosen bank, and choose to remit money overseas. Let's say, for the sake of the example, that you guys want to send money from Singapore to Australia. Your chosen currency of remittance is the Australian Dollar (AUD).

(2) Once all the details have been entered, you click the 'Confirm' button, and away your money goes! Funds are debited from your account, and are on their way to the beneficiary bank (the bank that ultimately receives the money; or the bank where the receiver's account is located).

(3) Now here's the interesting part - your money may not go straight to the beneficiary bank. Your Singaporean bank and that Australian bank may not have a relationship. Therefore, your money needs to be sent to a bank that has relationships with both of your banks. This bank is called an intermediary bank. Just imagine a cold war between husband and wife, with the child acting as a messenger. It's something similar - Dad says to tell Mom that she needs to do something, Child runs to Mom and tells her. In this case, the Child would be the intermediary between the two people.

(4) Your money heads off to the intermediary bank, and finally, to the beneficiary bank. In more complex examples, multiple intermediary banks are required, thus passing your money through multiple banks until your money finally reaches the receiver, with handling fees (also called lifting fees) deducted by each bank along the way. In the meantime, banks need to maintain multiple Nostro accounts, which are accounts with other banks in foreign currency. Funds are drawn from these accounts to facilitate the transfer of funds. When you remit AUD from Singaporean Bank, they tell the Australian Bank, "Hey, could you take XYZ amount of AUD out of our account there and help us send it to ABC Bank over in your country? Thanks!"

(5) Your funds finally reach the receiver.

(above) Credit: ripplelabs. How the traditional system works.

(above) Credit: ripplelabs. What Ripple plans to do, after overhauling the old system.

---

Why I Chose To Invest + Risks

Ripple plans to overhaul the system by connecting banks and payment providers through RippleNet, which in theory would provide a smoother experience sending money globally. Their coin, XRP, would be a digital asset that is marketed to banks and other financial institutions - these organizations will be able to use these coins to further reduce costs when remitting customers' funds overseas.

They presented an interesting idea - they aim to reduce remittance time by cutting away the need for multiple intermediary banks, and by freeing up cash that is essentially stuck in Nostro accounts for more liquidity. It is very true that the current process of remittance has not yet caught up with the modern trend of 'anything at any time.' In a world where we can talk to friends overseas instantaneously, share pictures and videos taken in a foreign country with friends back home, and have video calls with people half a world away, traditional remittance is lagging. If funds are delayed, there often is a long wait to find out what happened and why. A message needs to be sent out to the intermediary banks, saying, "Hey, do you have the money? If not, who did you pass it to? My client still hasn't received it." Several of my previous clients have expressed frustration with the current system.

In terms of technology, XRP handles 1,500 transactions per second (as compared to Bitcoin's 6 and Ethereum's 15), and is touted to be able to scale until it handles the same load as Visa. 

credit: steemit.com 

Tranches of XRP coins are held in escrow, set to be released on the first of every month for the next 54 months, marketed towards institutional investors and financial companies. Any coins left unpurchased will be returned to escrow, joining the back of the queue.

Ripple has made some good partnerships over the past few years, including American Express, SBI, and Standard Chartered. Their cross-border solutions are already being tested or implemented in small doses. Their consortium has more than 70 global banks, including clients such as Bank of America, UBS, and MUFG. I have also heard vague rumours of Ripple being added to Coinbase as one of the crypto-coins for trade. This is unsubstantiated, but if it occurs, XRP's price can be expected to head upwards. 

While I am one to support advancements in tech, I will give SWIFT props - I have never seen money lost. Money can be delayed, but not lost, because banks will maintain records of 'I received money from ABC bank, and I sent money to XYZ bank.' I suppose that the use of blockchain and distributed ledgers would somewhat alleviate this problem, although SWIFT has commented that 'some big banks might not be comfortable putting large transactions on a distributed ledger.'

My other concern was regarding compliance, anti-money laundering (AML), and counter-financial terrorism. This is a BIG part of remittance, and it serves to make certain that no illicit funds are transmitted. This process could often take a lot of time - intermediary banks might have their own internal 'watchlists' and someone who seems all right to one bank might be held up for screening at another. Banks still would have to conduct these compliance and AML checks on their own, even on the Ripple platform.

Another risk would be if banks choose not to utilize Ripple's digital assets (meaning the XRP coins), while simply using the Ripple protocol/payment system. That would entail a severe overvaluing of the coins.

I am willing to take a punt on Ripple and their digital asset XRP, as I believe the advantages outweigh the drawbacks. To that end, earlier on in the week, I managed to get 10,000 XRP on Binance at 1.21 USD per coin. This means that thus far, I'm pretty satisfied with the returns. I'll consider whether or not to keeping holding to take some profit first.

Until next time. Thanks for reading, guys. As again, with cryptocurrency being as volatile as it is, I'm still learning about the market, and I'm willing to take higher risks with these investments.

UPDATE: I eventually chose to liquidate my XRP holdings for a near 100% return. This was triggered by observing more and more people around me get hit with "crypto-fever." I was wary of a bubble bursting, so I moved to sell my holdings. I could have made a little more if I had held on a bit longer, but then again, everything always seems easier in hindsight. I was glad to have escaped the massive drop in price that occurred a while later. I will continue holding ETH into the future - I am very curious to see what new developments await. Again, I must emphasize to my readers that cryptocurrency is not backed by any central bank, and is a very risky investment. NEVER trade cryptocurrency with money you cannot afford to lose.

Creed