For over a decade, Ripple has been exploring a fundamental blockchain use-case: efficient cross-border payments. Using the XRP ledger, the company allows people to send and receive funds at much lower rates than they’d be charged by traditional banks.
In the fourth quarter of 2021, the average fee to send US$200 across borders was six per cent. In comparison, Ripple facilitates transactions at a standard rate which, at present, is a very small fraction of a cent.
With the digital remittance market projected to grow annually by 15 per cent by 2030, the need for blockchain-based finance solutions is more apparent than ever.
“[Blockchain solutions bring] a clear economic benefit to these markets,” says Rahul Advani, Ripple’s Policy Director in the Asia Pacific (APAC) region.
Digital assets enable micropayments and remove friction from the remittance process. People no longer need to wait till they have a large amount of money to send — they can send as little as a dollar everyday, and still end up paying less in cumulative transaction fees.
Low crypto transaction fees: is it sustainable?
At a panel discussion this August, J.P. Morgan’s Umar Farooq claimed that once regulations catch up in the crypto space, transaction fees will increase as well.
[Bank transfers] are expensive, but this is because of reasons such as AML, KYC, and last-mile transferability. Once the regulatory arbitrage between the crypto and TradFi industry becomes smaller, the delta is not going to be that big.
– Umar Farooq, CEO, Onyx by J.P. Morgan
From Advani’s perspective, this argument isn’t entirely valid.
“Compliance does cost, but the reality is that the friction in traditional rails isn’t from compliance costs,” he says. “If you look at the correspondent banking model, you have to have pre-funded accounts, and that ties up capital, which makes transfers more expensive.”
Ripple addresses this problem with its On-Demand Liquidity offering, wherein the XRP crypto token acts as a bridge between fiat currencies, and transactions can be settled in a matter of seconds.
“You no longer have to pre-fund your destination correspondent banking accounts,” Advani explains.
Given this scenario, even if compliance costs were to increase in the crypto space, players like Ripple would still have an edge over traditional payment solutions.
“The issue is not compliance, the issue is pre-funding,” he adds.
Are TradFi institutions getting left behind?
In recent years, an increasing number of banks and financial institutions have started exploring the benefits of blockchain technology. Firms including Goldman Sachs and J.P. Morgan are experimenting with the use of blockchain-based networks for securities trading.
Ripple is currently working with hundreds of institutions including Siam Commercial Bank and Tranglo.
While the crypto winter has heavily impacted cryptocurrency prices and the speculative side of the industry, real blockchain use-cases continue to thrive. Ripple is seeing record levels of growth, even with the XRP token down over 85 per cent from its all-time high.
In terms of On-Demand Liquidity, we’re going to be doing US$15 billion this year. That’s the highest it has ever been. We’re growing at 8x, 9x year-on-year. That’s because we solve a very real problem.
– Rahul Advani, Ripple’s Policy Director, APAC
As blockchain-based solutions disrupt the finance industry, Ripple sees collaboration as the way forward.
“Since we started building 10 years ago, our approach was very clear that we needed to involve traditional banks. Banks play a very important role in the ecosystem,” Advani continues. “We don’t see us as working at opposite ends. We’re working together to provide benefits to the broader economy.”
Dealing with regulatory changes
Global regulations will have a significant say in the future of blockchain technology. Since 2020, Ripple has been involved in a court case which could have significant consequences, not just for the company, but the wider crypto industry.
The lawsuit — filed by the US Securities and Exchange Commission — alleges that XRP, the native crypto token on the XRP ledger, should be treated as a security rather than a currency.
“This case is going to set precedent one way or another, and we don’t want it to set a negative precedent because that could affect many other tokens out there,” says Advani.
As Ripple CEO Bradley Garlinghouse told CNBC, if Ripple loses the case, most crypto tokens in the US would be deemed securities. Their respective issuers would have to register with the SEC as broker dealers. “That’s cost, that’s friction,” explained Garlinghouse.
Advani believes this is an example of the US lagging behind in terms of its crypto regulations. “There’s no other jurisdiction anywhere in the world that has indicated that XRP is a security.”
In countries including Singapore, Japan, and UK, there’s clear taxonomy differentiating between digital payment tokens and securities. “The US is a unique situation because it really doesn’t have that regulatory clarity.”
Singapore leads the way
The regulatory clarity in Singapore is one of the primary reasons why Ripple chose the country for its APAC and MENA headquarters.
The industry is moving at a breakneck speed. A lot of regulators are playing catch up. Singapore is ahead of the curve and as a regulator is open to discussions with the industry. You can sit in with the Monetary Authority of Singapore (MAS) and exchange views quite openly.
– Rahul Advani, Ripple’s Policy Director, APAC
While other companies have jumped ship in recent years, Ripple uses Singapore as a benchmark for other jurisdictions. Advani believes that the MAS’ views around crypto have been consistent, going as far back as 2017.
“What you don’t want to see is a race to the bottom,” he says about Singapore’s DPT licensing requirements. “What’s the point of a regulatory framework if anyone can get a license?”
The crypto winter has spurred on regulatory talks in areas such as crypto lending, which were previously uncovered by the MAS and other policymakers.
Advani believes that any sort of regulatory clarity is only going to be beneficial. “We will work with regulators to ensure that our views are incorporated into any sort of framework which is implemented.
Regulatory missteps
In Ripple’s view, MAS’ policies have been generally positive, however, Advani shares concerns about the language which is used in regulatory talks and documents.
As an example, he refers to the opening address by MAS’ Managing Director Ravi Menon at a recent Green Shoots seminar. Menon’s speech was titled, ‘Yes to Digital Asset Innovation, No to Cryptocurrency Speculation’.
“What we feel is speculation isn’t unique to crypto,” says Advani. “We’ve seen speculation in other markets. It’s not a new thing.” He adds that if it weren’t for crypto, people would be speculating on other asset classes, whether it’s whiskey bottles or Rolex watches.
“We think the view should be ‘Yes to Innovation, No to Speculation’, full stop. It shouldn’t be specific to cryptocurrencies and digital assets,” he adds.
For a regulator promoting blockchain innovation, using technology-neutral language is important. Otherwise, it appears as if speculation and poor risk management are issues which are exclusive to digital assets.
Crypto assets are not bad. The technology underlying them is not bad. It’s how you use them that could be. That’s true with any technology. Take the traditional securities market for example, and what happened during the global financial crisis.
– Rahul Advani, Ripple’s Policy Director, APAC
Advani elaborates using fraud as an example. “Whether it’s on Carousell selling fake concert tickets, or doing a rug-pull in crypto, it’s equally bad. They can both be addressed with the frameworks in place. There’s no need to say speculation in crypto assets is bad. Speculation is bad, full stop.”
Featured Image Credit: Ripple
Also Read: From mass adoption to regulation: VCs and execs discuss the future of crypto to navigate ahead
