XRP - The Internet of Value & The Bridge to a New Financial Era

The Beginning of XRP and its Vision

XRP is a cryptocurrency created by Ripple Labs in 2012 with a bold vision to become the global bridge currency for all cross-border transactions.  

And what does this mean? This means transforming the entire financial infrastructure we currently rely on for processing international payments. This is a complete U turn. 

To summarize this in my way - to replace SWIFT - the current protocol in use to carry out international payments.

How Current Traditional Cross Border Payments Works

Before we dive into how XRP is going to solve the current issues in international payments, let's understand the process behind how international payments works and its drawbacks.

Before proceeding, it's important to know the meaning of a Nostro and Vostro account.

Nostro & Vostro Accounts

A Nostro is a bank account held in a foreign bank by your local or domestic bank, denominated in the currency of the foreign country. The term Nostro comes from Latin, meaning “ours.”

Let’s say you live in India. Your Indian local bank maintains a Nostro account in a U.S. bank,for example, Bank of America—denominated in dollars. 

This means your Indian bank opens an account with Bank of America, holding funds in USD. Essentially, Nostro means "our account in your bank."

On the other hand, Vostro is the opposite, it’s from the perspective of the U.S. bank. 

For example, Bank of America maintains a Vostro account on behalf of your Indian bank. Vostro means "your account in our bank." 

Cross Border Payment Scenario

Alice, who has a bank account at Citibank in the USA wants to send $1,000 USD to her friend Bob (in Korea), who will receive the money in KRW (Korean Won) in his account at Woori Bank.

The exchange rate is 1 USD = 1,300 KRW.

Now this is how the transaction takes place in a simple way

*If Alice Citibank does not have a direct relationship with Woori Bank in Korea, then Citibank needs to find a correspondent bank within the USA who does. 

A correspondent bank is an intermediary bank that has a relationship with both Citibank in the USA and Woori bank in Korea. Let's say the correspondent bank is BoA (Bank of America) in this case.

Step 1: When Alice initiates the payment, Citibank instructs $1000 to move to BoA, the correspondent bank.

Step 2: BoA who maintains a Nostro account of Woori bank denominated in USD, credits the Woori bank Nostro account by $1000 from the money got from Citibank.

Step 3: Woori bank then receives the instruction by BoA to credit Bob's account in Woori bank by 1,300,000 KRW. (1000 x 1300 = 1,300,000).

Nostro and Vostro: Barriers to Modern Banking

The above is a simplified scenario, but there are many debits and credits within this process, and the process becomes more and more complex and time consuming when banks do not have direct relationships. 

The longer the chain, the costlier and more time-consuming international payments become.

Some International payments take less than 24 hours while others could take more than 24 hours. (2 - 3 Days) depending on how many correspondent banks are involved in a cross-border transaction.

Here are the key drawbacks of this system:

Operational costs: Nostro accounts which hold foreign currency reserves need to be maintained by the foreign banks, this incurs high maintenance cost. Not to mention the regulatory compliance costs across different jurisdictions. which adds additional costs.

Counterparty Risks: If the foreign bank who holds Nostro accounts went bankrupt, then there is a risk that reserve currencies held by other banks could be lost.

Over Reliance: Banks should depend on other banks who hold Nostro and Vostro accounts to settle transactions on time. Any delays or failures could pose operational challenges - for example, when trying to trace payments.

Multiple currencies: When banks need to deal with many currencies, they need multiple Nostro accounts in different banks in different countries, increasing operational complexity and burden leading to errors in balancing out the accounts.

The Role of SWIFT in Banking (Society for Worldwide Interbank Financial Telecommunication)

All the money transfer banking instructions that banks send to each other are carried out through SWIFT.

SWIFT does not transfer money; instead, it provides a secure messaging infrastructure, enabling banks to exchange instructions for updating their ledgers within the global banking network.

So if you have misunderstood that SWIFT sends money, then you are mistaken. It has nothing to do with sending money and remember that money does not move physically across borders. 

Rather, SWIFT is a highly secure single communication platform that over 10,000 financial institutions in more than 200 countries rely on to carry out banking instructions, processing more than 35 million messages in a single day!

So, to summarize, the role of SWIFT is to send secure messaging instructions to banks across borders while nostro/vostro accounts are used to update the ledgers of correspondent banks. Also remember that SWIFT also plays a role in sending messages to domestic banks within a country's border.

What about Business Services?

Business Services like PayPal, Wise, Stripe,Payoneer,WorldPay,Sage pay,Amazon Pay all help to facilitate cross border transactions conveniently without people having to deal directly with banks.

But guess what, at the end of the day, all these business services rely on the underlying banking infrastructure, which is SWIFT, Nostro and Vostro accounts to settle international transactions that involves different currencies.

So, what you have believed to think as real time settlement of funds is not actually real time settlement behind the scenes. 

These services, despite being pretty good in speed, cost and user experience for international payments, heavily rely on the existing banking framework to make sure that funds are settled across borders.

What will happen if the underlying banking infrastructure poses any issues? then without a doubt, these services will fail to operate. 

A good example is PayPal suspending its services from Russia when SWIFT was restricted to Russian banks and institutions as a response to Russia's invasion of Ukraine in 2022.

XRP - The Solution to the Global Banking Bottleneck

What if money transfers become as fast as possible just like the speed of how information is shared? 

What if anyone, anywhere in the world, could transfer any amount of money to anyone within 5 seconds, with fees costing only pennies?

Have you ever paused yourself to just think about how the internet of value could transform the lives of many people worldwide?

With faster and cheaper international payments, businesses of all sizes will thrive. Job creation will accelerate, and poor people will gain greater access to money through lower remittance costs. 

Not only that, but financial inclusion will also expand for both the unbanked and underbanked populations, economic growth will flourish as money flows freely, benefiting governments through improved tax collection and more.

The main purpose of XRP is to revolutionize the global banking infrastructure by replacing SWIFT and also eliminating the need for nostro and vostro accounts. 

How does XRP achieve this?

The solution is to get as many banks and financial institutions as possible to use XRP as a bridge currency to carry out international payments. 

To understand this, let's use the same scenario where Alice in the USA wants to send $1,000 from her Citi Bank account to Bob in South Korea, who wants to receive the money in Korean Won (KRW) in his Woori Bank account.

If banks use XRP without Nostro/ Vostro accounts, this is how the transaction will work.

Let's assume the exchange rate is 1 USD = 1,300 KRW.

Let's assume that the market value of 1 XRP is $1

Step 1: Alice’s bank (Citi) converts $1,000 into 1000 XRP at the current market rate.

Step 2: Using the XRP Ledger, the bank sends 1000 XRP to Bob’s bank (Woori) in Korea. The transaction is completed in seconds!

Step 3: Bob’s bank converts the received 1000 XRP into 1,300,000 KRW and credits it to Bob’s account.

The above scenario is a simple way to explain the process. Transaction settlement and messaging all happens securely and simultaneously in the XRP ledger. This eliminates the need for prefunded nostro/vostro accounts and also SWIFT.

In the above scenario, XRP acts as the bridge currency between the US dollar and South Korean Won. In this case, note that we also don't need any correspondent banks who have relationships through accounts opened in other banks to settle payments. 

This new system just requires banks and institutions to hold XRP to transfer money, utilizing XRP as the bridge currency!

But Why XRP and Not Other Crypto?

Ripple Labs Vision, Partnerships and Human Capital

Chris Larsen and Jed McCaleb founded Ripple Labs in 2012 with a revolutionary vision—to shatter the barriers of traditional banking and create a lightning-fast, low-cost digital payment system that could transform institutional cross-border transactions forever.

This is the only project in the whole crypto space who have been closely working with many banks over the past years and who have a massive number of partnerships with banks and financial institutions worldwide with Non-Disclosure Agreements. (NDA). 

For example, Ripple’s partners include Santander (USA), Canadian Imperial Bank of Commerce (Canada), InstaReM (Singapore), Siam Commercial Bank (Thailand), RAKBANK (U.A.E.), SEB (Sweden),Airwallex (Australia), SBI Remit (Japan), IndusInd Bank (India) etc. Why would Ripple work with banks, if their intention is not to make a global bridge currency?

Ripple’s website showcases only a small portion of these partnerships because they could not disclose those partners without their explicit approval until the time is right. This was said by Brad Garlinhouse (CEO) in an interview. 

But the real question is what time is he talking about? can it be the right time to utilize XRP by all banks and financial institutions?

Ripple's Board of Directors include very high-profile individuals, for example Rosie Gumataotao Rios - Former Treasurer of the United States, serving as the 43rd Treasurer under President Barack Obama. She joined Ripple's board in May 2021. 

What about the expertise other than the BOD, in 2016, Marcus Treacher, formerly a high-ranking executive at HSBC and a member of the SWIFT global board joined Rippe Labs. In 2017, Marjan Delatinner, the SWIFT business director, followed shortly. 

Ripple Labs Connection with IMF and BIS 

It is very clear that Ripple Labs has deep connections with the IMF (International Monetary Fund and the BIS (Bank of International Settlements). For example, Ripple was chosen to serve on the IMF’s High-Level Advisory Group on Fintech, highlighting its role as a leader in the financial technology sector. 

In August 2023, Ripple joined the BIS's Cross-Border Payments Interoperability and Extension Task Force.  Ripple also has partnered with the BIS Innovation Hub to explore technologies related to central bank digital currencies (CBDCs). All these collaborations solidify Ripples commitment in transforming cross border payments.

Ripple Labs ties with governments and CBDCs

Ripple Labs - who created XRP, is working closely with governments to bring Central Banks Digital Currencies (CBDC) into the XRP ledger, this movement clearly paves the way for XRP to act as a bridge currency in the future.

For example, The Reserve Bank of India (RBI) formed a strategic partnership with Ripple Labs to utilize India’s CBDC in the XRP ledger. Other countries like Japan, the UAE, New Zealand, and Bhutan are also using Ripple’s XRP Ledger for CBDC activities.

Ripple’s Bank IDs: A Major Step Toward XRP Adoption

Ripple Labs has issued unique bank IDs for over 500 banks worldwide as part of its strategy to streamline and accelerate cross-border transactions. These IDs facilitate standardized communication between banks, reducing inefficiencies and costs associated with traditional correspondent banking systems. 

This implementation is crucial for improving the speed, transparency, and reliability of international payments. But why would banks accept these IDs if they had no intention of using XRP?

The fact that banks are adopting Ripple-provided bank IDs strongly suggests they are preparing to integrate Ripple’s technology and potentially XRP as a bridge currency.

Ripple Labs Stable coin for Liquidity

The launch of RLUSD (Ripple Stable Coin) in the XRP ledger and Ethereum network will surely provide more liquidity and stability when utilizing XRP for faster and efficient cross border payments.

I personally believe that RLUSD will outcompete USDT and will overtake Tether’s 70% stable coin market share within the next 5 years. 

It is possible that Tether’s house of cards would fall because of the lack of transparency of its reserves and the absence of proper auditing practices. For example, All EU Exchanges must delist Tether’s stable coin USDT by Dec 30 under Mica Non-compliance. 

Considering all the supporting evidence and Ripple's strategic advancements, the question is no longer whether XRP will become the global bridge currency, but rather when this vision will finally come to fruition.

Why Would Other Countries Accept XRP?

With the rise of BRICS nations who are actively seeking ways to reduce the reliance of the US dollar as a reserve currency, one intriguing question is why would countries like Russia, China, India etc. would accept a US origin product like XRP?

Well, the answer to this question lies in XRP design and purpose. XRP was not designed as a tool to be used for US dominance but as a neutral, global bridge currency. This means that no nation has to depend on the US dollar to settle cross border payments.

XRP was designed to create a level playing field where countries can transact efficiently and fairly without relying on a hegemonic currency.

According to historical data, traditional reserve currencies have lasted only 80 - 100 years. For example, Spanish Real (1530 - 1640), Dutch Guilder (1640 - 1720), British Pound (1720 - 1944), and now we have the US dollar from 1944 which is approaching the 80-year mark struggling to keep its dominance globally. 

With these historical trends, it's clear that no currency lasts for too long including the US dollar. It's also clear that the world won't go for another typical currency to depend on it as a global reserve currency knowing that it will fail in the future. 

XRP, on the other hand, was designed to be a new global bridge currency where no single country could control it. This neutrality makes XRP more appealing to nations wary of US financial influence. 

Further, XRP does not rely on the stability of a single nation, its value and utility mainly come from its protocol and adoption, making XRP a great choice for solving international payments.

And what about the significant cost savings that could be achieved by eliminating nostro/vostro accounts using XRP? XRP also being ISO 20022 compliant with lighting speed in settling transactions incurring pennies as transaction costs is a true legend compared to SWIFT. 

Finally, XRP is positioned to be ahead of the game in the financial revolution, integrating with Central Bank Digital Currencies (CBDC) offering forward looking solutions that meet the demands of the modern, interconnected global economy. 

Future Price Potential of XRP

The future price potential of XRP depends on how fast banks will adopt XRP as a cross-border payment solution.

If many banks adopt XRP at once after dealing with all the regulatory hurdles and other technological hurdles, then we could see an unimaginable price increase in XRP overnight.

If some part of the world banks decides to implement while many others wait to test the credibility of the system and if XRP is proven as the right solution, then other banks and financial institutions will follow suit, then we could experience a steady price increment, but still at a fast pace.

I do not prefer to give exact price levels,but considering the real utility of XRP and its solutions to cross border payments, XRP can be regarded as a once in a lifetime investment opportunity that you don't want to miss. 

Current Price Context

The current price of XRP as of this date is significantly undervalued when you consider the immense potential it has to transform the global financial system. 

Further, the current price of XRP is at somewhere around $2, but this price is mainly driven by the demand of retail investors, but when real adoption kicks in by banks and big financial institutions, this is exactly when the price of XRP will reach its true value. 

And the true price of XRP could be unimaginably high, this is because the total supply of XRP is only 100 billion, and no more XRP can be created. 

Why XRP Needs a Higher Price

In order for XRP to carry a significant amount of value in trillions and in quadrillions, the price of XRP should be unimaginably high from its current price. This is the only way XRP could function as a bridge currency, if it needs to provide liquidity in addition to RLUSD.

For example, let's say Bank of America needs to send $50 billion to a bank in Japan. Let's assume that the CMP of XRP is $1. In this case BoA needs exactly 50 billion XRP to carry out this transaction, this is not realistic, as only 100 billion XRP exists.

But what if the price of XRP is $10,000? In this case, BoA only needs to hold 5 million XRP. Therefore, the higher price facilitates more liquidity in international payments. Since XRP is designed to move quickly among banks and financial institutions across different countries within seconds eliminating the need for nostro/vostro, the higher price of XRP makes this process very efficient and simple.

Final Thoughts

In the future, it is very evident that Central Bank Digital Currencies (CBDCs) will be implemented in blockchain technologies, and XRP Ledger is one of the top choices of many governments, mainly because Ripple is actively working closely with governments to implement CBDCs on their ledger.

XRP would likely serve as a bridge currency when adoption takes place among big institutions and banks. Ripple, having ties with the IMF and BIS, solidifies the fact that XRP will be the chosen project for institutional-level money transfers across borders. Its fast transaction speeds, scalability, and low costs make it an ideal solution for global payments, setting it apart from other cryptocurrencies.

Moreover, Ripple’s ongoing efforts with projects like RLUSD and partnerships with central banks highlight their commitment to making XRP a central component of the financial system. As the financial landscape evolves, XRP’s utility could drive significant demand, potentially positioning it as a cornerstone in the emerging Internet of Value.

However, none of my claims should be taken as financial advice. I’m not a financial advisor. You should do your own research before investing in anything. In my opinion, XRP could be considered as one of the cryptocurrency market’s solid long-term investment opportunities. 

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.