Ripple wants XRP to be Bitcoin for banks

Every day, companies and consumers around the world send more than $76 billion in payments through a vast network of banks. Without the flow of money, container ships stay in port, workers don't get paid, and supply chains break down. For the past seven years, Ripple, a tech company in San Francisco, has vowed to use the blockchain wizardry behind Bitcoin to rewire this global circulatory system with what it calls an "internet of value."

That in itself would be a fairly interesting business story. But then Ripple became a part of the great cryptocurrency melt-up of late 2017. The company owns a lot of a digital token called XRP. From late September to early January, XRP saw an astonishing 1,300 percent increase in value, blowing away the gains of rival virtual currencies Bitcoin and Ether and turning its executives into paper billionaires.

One rationale for buying XRP is that unlike Bitcoin, the token has one narrowly defined but clearly useful purpose: to help banks move cash from point A to point B faster and more cheaply, especially across borders.

The problem is that banks say they have no interest in using XRP. Current and former executives at seven global banks-some of whom have partnered with Ripple-say there was scant chance they would ever entrust their corporate clients' payments to a cryptocurrency. The executives requested anonymity.

"It's bewildering," says Joseph Lubin, the founder of ConsenSys, a startup that develops applications based on the Ethereum blockchain, the technology used for Ether. "Effectively it's a totally useless token except that it is being used by that company to make a lot of money to fund some of their activities."

There are 100 billion of the tokens and, according to Ripple's website, the company holds about 61 billion-with a value of $1.33 each on Jan. 24, or $81.4 billion total. Most are held in escrow and can be sold only in limited chunks over time to avoid crashing the market. Ripple has sold more than $185 million in XRP since September 2016, according to reports the private company publishes.

Chief Executive Officer Brad Garlinghouse says Ripple is working with more than 100 banks to overhaul the way they handle payments for their clients. "Ripple is trying to be a catalyst to mature a whole industry," he says. "The current system is fraught with friction and is measured by a lack of transparency and speed." There's a difference, however, between Ripple, the company, and XRP, the token. XRP is "absolutely at the core of what Ripple is doing," says Garlinghouse, but at the moment the company's main product, RippleNet, doesn't rely on it.

RippleNet takes on an entrenched competitor, the Brussels-based Society for Worldwide Interbank Financial Telecommunication, or Swift, a messaging system that acts like an air traffic control system for money as it moves across the globe. It connects about 11,000 financial companies. "This is a relatively standard David vs. Goliath Silicon Valley story," says Garlinghouse. With trillions of dollars of asset flows at stake, the competition between the two companies is fierce.

Ripple set out in 2012 to create a streamlined, decentralized payments system using technology inspired by the blockchain. From the outset, it hoped XRP would be an important part of it. For example, the token could be used as a bridge currency-pesos in Mexico City could become XRP, which could then be turned into baht in Bangkok.

Having a lingua franca of payment could help banks avoid the hassle and expense of tying up money in different curren- cies in accounts at other banks.

Banks, however, balked at XRP. They said there was no way they could use an instrument that regulators may never approve, according to an executive in the cross-border payment industry familiar with Ripple's business. Moreover, the real power in the cross-border payment system wasn't banks but the big companies that used it for their cash needs around the world. A corporate treasurer for a Fortune 500 company wasn't going to tell its bank to use a startup with a digital currency, the person says.

So Ripple pivoted away from XRP and focused on RippleNet, which is similar to Swift in that it's primarily a messaging system that tells banks where to send the money. It also has a service that helps banks settle transactions.

Ripple has signed a lot of banks onto its network and sold equity stakes in itself to Standard Chartered Plc and Banco Santander SA. Influential names from Wall Street such as Zoe Cruz, the onetime co-president for institutional securities and wealth management at Morgan Stanley, joined Ripple's board. Of the more than 100 companies, though, Garlinghouse will say only one, Stockholm-based Skandinaviska Enskilda Banken AB, is moving commercial payments over RippleNet.