Aimee Pearcy

@aimee_pearcy

How blockchain is changing banking, and why Ripple could disrupt the entire industry

June 25th 2018
Photo by Erol Ahmed on Unsplash

Over the past couple of years, investors have been flooding into the cryptocurrency market.

Some of the trends have been pretty bizarre. When New York-based beverage maker, Long Island Iced Tea, announced that it would be changing its name to Long Blockchain Corp. and diversifying by shifting some of its focus to investing in the blockchain (whilst still making iced tea), its stock prices soared by 200%.

Despite claims that the ICO flood is ‘overvalued’, it’s hardly surprising that so many companies are leaping onto the blockchain bandwagon.

At the start of 2017, the size of the entire cryptocurrency market was $16 billion. By the end of 2017, it was $600 billion.

Blockchain technology has enormous potential. It’s set to kick off some huge advancements in several multi-billion dollar industries including healthcare, supply chain management, and identity management.

However, there is unlikely to be an industry that blockchain is set to shake up as much as banking.

Why so many banks are turning to blockchain as a solution

Banks transact with one another by creating and carrying out agreements.

Currently, this process is cumbersome and slow, and the extended settlement time is expected to cost the financial industry anywhere from $65 — $80 billion a year as a result of parties defaulting or reneging on agreements.

Blockchain technology has the potential to lower costs, reduce errors and exceptions, create new revenue opportunities, and drastically reduce — and possibly even eliminate — this extended settlement period.

Of course, both the concept and application of the blockchain is still relatively new, so whilst many banks have expressed interest in how they can leverage the technology, most still seem to be in the early stages of adoption. Nine in 10 executives have said their bank is currently exploring the use of blockchain.

Currently, the most prevalent use-cases that banks are studying involve intra-bank cross-border transfers.

How Ripple is set to disrupt the banking industry

Ripple is probably the biggest contender set to disrupt banking right now. In 2016, it raised $55 million in funding from global banks.

The company was created back in 2012 with the aim of making payments faster, safer, and more reliable through leveraging blockchain technology.

Right now, international payments can take several days to make and have a very high cost. Ripple has stated that their technology could reduce banks’ operating costs by 33%, and move money ‘in seconds’.

Many global banks are already using the Ripple ledger to facilitate cross-border money transfer operations.

Ever since its beginning, Ripple has been working closely with some of the biggest mainstream financial companies.

One of the major ways that Ripple sets itself apart from other crypto companies is that, instead of asking questions like ‘how can we overthrow governments and banks?’ it asks, ‘how can we work together alongside governments and banks?’

This attitude has been crucial in helping Ripple to develop crucial partnerships with big global players, including the likes of Santander, China-based Lianlian Pay and the Saudi Arabian Monetary Authority (SAMA).

Ripple vs. SWIFT

Ripple and SWIFT are currently fighting it out to define how cross-border payments will be handled for years to come.

SWIFT is an interbank messaging service that has been around for 45 years and currently handles half of the world’s high-value cross-border payments. It runs as a co-operative that is owned by its thousands of member banks.

In order to ward off the blockchain threat, the company is currently trying to improve the efficiency of its messaging system, whilst carrying out tests on the potential of blockchain technology to see how efficient it really is.

After carrying out tests with 34 banks this year, SWIFT has argued that blockchain technology would currently be difficult to scale and that it is not currently at a level that would make implementation practical for the majority of banks.

Regardless, the creeping blockchain threat still lingers — and it’s only going to get increasingly powerful.

The rise of XRP

Right now, crypto prices are just beginning to show recovery from a significant slump. Regardless, as of June 2018, Ripple currently has the third highest market cap of all existing cryptocurrencies. As a result, most major crypto exchanges now list XRP as one of their supported trading options.

Following Coinbase’s recent announcement that it would be opening another office in Japan (where XRP is one of the most popular cryptocurrencies) Brad Garlinghouse, the CEO of Ripple, is currently rallying for Coinbase — the most popular crypto exchange — to add XRP to its list of available cryptocurrencies.

So far, Coinbase has dismissed rumors that it will be adding XRP to its list of supported currencies.

One of the major reasons that it has not yet been added is likely due to concerns that the SEC might classify XRP as a security.

These concerns come from the fact that Ripple owns the majority of XRP tokens, and therefore maintains significant control over the cryptocurrency, leading many to believe that the cryptocurrency isn’t actually decentralized.

However, Garlinghouse disputes this by emphasizing that XRP exists independent of Ripple. In a recent statement, he said:

“I think it’s really clear that XRP is not a security. I don’t think that our ownership of XRP gives us control. Saudi Arabia owns a lot of oil — that doesn’t give them control of oil.”

However, this is highly unlikely to be enough to sway the decision. If Coinbase does add XRP to its list of supported cryptocurrencies and then US laws deem it to be a security, both Coinbase and its traders could potentially be punished as unregistered security distributors.

The reality is that Coinbase will likely not add XRP to its website until the SEC releases an official clarification that XRP is not a security.

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