Replacing USD Denominated SWIFT with the XRP World Digital Asset
Numbers and letters. Letters and numbers. The combinations can be both exciting and intimidating. As an example, the H3N2 influenza virus is making the rounds throughout the West, and I may, or may not, have it. Definitely feels like it. Outside of letter and number combinations, that has absolutely nothing to do with this article.
Researching the blockchain technology and the deep field of cryptocurrencies which are now available across numerous exchanges has been a fascinating endeavour. It doesn’t take long to understand that Bitcoin is now so outdated that it must only be running on momentum. But Bitcoin is serving the purpose of drawing large numbers of people into the world of blockchain and the wonders of tomorrow.
When I wrote the article on Ethereum it was valued at around $430 USD. That was on December 10, 2017. One month later and Ethereum has appreciated to the $1400 USD range. That is a substantial increase. But while Ethereum is a de-centralized crypto, the centralized Ripple has been performing equally as well.
Back when the Ethereum post was written, Ripple, or XRP, what the digital asset by Ripple is called, was valued at $0.74 USD. It spiked above $3.00 USD and has since dropped back down to around $1.90 USD at the time of this writing. Wow. On both.
These type of value swings are almost unheard of in the old world of stocks and bonds. Outside of an outlier here and there over the years. So just what is happening in this new world of blockchain and high speed payment transfers?
Comparisons made between the SWIFT international payment system and the Ripple payment system involve imagining a horse and buggy attempting to outrun the high speed Tesla performance car. Those who do not immediately grasp the importance of this will not be able to take advantage of the opportunities which are being presented.
In April of 2016 HSBC’s Global Head of Payments Innovation jumped ship to join Ripple as Global Head of Strategic Accounts. Marcus Treacher also served on the Global Board of Swift from 2010 to 2016. This was followed in April of 2017 with Ripple attracting SWIFT Executive Marjan Delatinne, who was responsible for customer engagement on global payments innovation with SWIFT.
SWIFT executives involved with payments innovation moving over to Ripple is a huge indicator on which direction the international monetary architecture is moving. SWIFT can fine tune some processes and tighten loose bolts on the wagons wheels, but it still will never be able to match the performance of the race car. No time to waste on the past.
The Federal Reserve released a report last year after two years working on its Faster Payments Task Force. One of the actions from that report was the use of Ripple as the foundation to support the next generation of cross-border payments. Ripple was the choice over SWIFT, and it was only a few days after this report was released that the International Monetary Fund stated it was interested in using blockchain technology in its operations with member nations and the function of the Special Drawing Right (SDR).
At the beginning of November, 2017, Ripple hosted a Central Bank Summit in New York. Little has been written about this summit, and it has appeared to remain off the radars of most analysts and economic writers.
IMF Deputy Director Dong He gave a speech at that conference where he discussed cross-border payments and CBDCs, or Central Bank Digital Currencies. Alongside suggesting that central banks could implement digital versions of the domestic currency they represent, he also stated the following:
“Other characteristics of CBDCs, however, would differentiate them from commercial-bank reserves in one or several ways. Importantly, whether interest is paid on a CBDC or not has important and differing implications for the transmission and effectiveness of monetary policy, as well as for financial stability. A non-interest-bearing CBDC would be a better substitute for cash than for bank deposits, an interest-bearing one for bank deposits. The latter may affect the transmission mechanism and financial stability more than the former.”
What is being said here is that regular consumer payments can use something based on Ripple, but bank deposits would still require to be connected to interest bearing assets. The separation of a currency into a non-interest bearing segment and a interest bearing segment is interesting. It would in essence create dual-purpose digital currencies which change function based on their location and status.
Such a thing would never have been possible without blockchain technology.
The role of the SDR in reference to foreign exchange reserves and quota amounts based on the financial and economic performance of a nation will need to accommodate the emergence of blockchain and the XRP digital asset by Ripple, for the same reason that SWIFT is now obsolete.
Ripple is fast becoming the standard on payment transfers. At the end of 2017 a partnership had been announced between Ripple and MoneyGram. This will be followed in 2018 with partnerships between Ripple and Amazon, Uber, Apple Pay, Visa, MasterCard, and a host of other banks and financial institutions. Ripple already has such partnerships with over 100 institutions.
It is clear that Ripple market capitalization will be growing as its acceptance moves forward. There are 100 billion units of XRP created with 60% still being held by Ripple. Some are suggesting that Ripple could dump these units onto the XRP market and drive the price of Ripple down. But this would not support the stability needed to continue making XRP a stable asset which can be used as an internal payment system.
Transferring international payments with SWIFT takes 2 to 5 business days. With Ripple it will take 5 seconds and reduce costs tremendously. Nothing can stop this change from taking place. It’s the difference between traditional snail mail and email.
Everyday there is on average $27 trillion tied up in SWIFT accounts. The fees and costs of transferring such large amounts through SWIFT can be reduced to just cents. When you add in the amount of USD and other reserve currencies being held in the foreign exchange reserve accounts of central banks around the world, the possible valuations for the full 100 billion units of XRP becomes mind-boggling. Not to mention the market capitalization of Visa, Amazon, and all the other customers that are interested in using Ripple.
Ripple will need to be careful not to let XRP appreciate too high and too fast, as that would also create the instability which would undermine its role as a payment system. But there could also be some benefits associated with such a fast appreciation. Think of all the debt being held in the foreign exchange reserve accounts, such as US Treasury debt. Transferring all of that debt into Ripple would drive the valuation of the full 100 billion units and would prevent markets from crashing and currencies hyper-inflating.
Some made the case over the years that gold would go to $10,000 per ounce to accommodate this large amount of money printing. Though gold will play a role for sure, it is starting to look more likely that Ripple, and other cryptos, like Ethereum, will provide the method by which debt-based liquidity is turned into functional crypto liquidity. Add the SDR into the mix to bridge the debt between domestic fiat currency and XRP, and you have the blockchain structure for a whole new world monetary and financial system.
Everything we have learned about the SDR, substitution accounts, quota amounts, and the reduction of foreign exchange reserves, is still relevant in this new crypto world. Ethereum and Ripple have just made it all that much more exciting. And of course what will be the geopolitical ramifications of the death of USD denominated SWIFT? Perhaps we are already seeing some of that in the lead up to big Ripple announcements and the unfolding Trump agenda.
Who would have thought that numbers and letters could be so fascinating. – JC
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JC Collins can be contacted at firstname.lastname@example.org