Open Innovation: Internet 3.0?
The internet is the first example of Open Innovation in which peers can interact within the network through a common protocol (TCP/IP), allowing information to be shared within seconds. While the present layer of internet has significantly improved how parties interact with one another, the time has come for an additional layer on the internet that allows value to be shared at equal speed and efficiency.
The most obvious example use case of sharing value through the internet is in the international remittances and money transfer market. Presently cross-border remittances are transacted through the archaic correspondent banking system. There are usually 6 participants to a transaction: payer, receiver, payer’s bank, payer’s correspondent bank, beneficiary bank’s correspondent bank, beneficiary bank and finally the beneficiary. The transaction flows exactly in this sequence through the SWIFT messaging network. Even today, international transfers still take 1- 5 days and can cost the customer between $25-$30 over and above the foreign exchange spread.
What is Ripple doing?
The importance of improving this legacy framework is obvious both from a customer and Bank perspective. The company that is making progress in this space is Ripple that uses the Integrated Ledger Protocol, an open source distributed ledger that connects across different Bank’s proprietary ledgers through connectors for seamless peer to peer transactions. The Interledger can be considered as the second layer on the internet that allows any financial institution to connect its core system to transact within the network.
Ripple’s ultimate goal
At full potential of the ILP use case, transaction costs will be go down, forex fluctuations will be limited, and operational efficiency will increase. The true cost saving for Banks will be not having to pre-fund correspondent banks or creating multiple trust lines with different banks, making the network more scalable. Ripple has introduced its own product known as the Xrapid that uses its own digital asset called the XRP to act as a liquidity provider within the network. If this is achieved, financial institutions will transact with each other using the XRP and exchange it to fiat currency when crediting/debiting to customer accounts. This is the example of Internet of Value, in which through use of digital assets, money transfers are getting executed in a matter of seconds.
Barrier’s ahead and Ripple’s response
However, Banks are still hesitant to use a digital currency/asset such as the XRP which has volatility much like other cryptocurrencies. To counter this problem, the company is offering its solution known as the xCurrent for FIAT currencies through using the Interledger protocol to share information on a real time basis and automatically update the banks’ systems, eliminating settlement risk. However, the argument is made that while the present solutions provide all the advantages of improved operational efficiency, it is still not sharing of value and parties to the transaction still need to maintain correspondent relationships to maintain trust. For now, the strategy of the company is to build the network through the xCurrent and slowly integrate the digitized asset solution (xRapid) in future years.
I believe that Ripple should look at adopting a stable price digitized asset rather than the current XRP. The digitized asset is essentially an IOU that is universally accepted between partners to the network and can be moved around in the system in a faster way. This could be the proposed XRP, Bitcoin or even just a stable token as long as its utility has a consensus within the network. I believe; however, a stable token solution may get more acceptance from mainstream companies rather than a volatile cryptocurrency. From Ripple’s perspective, it should not matter if the price of the asset is stable for them to deliver the true potential of their product. Although few countries (Abu Dhabi being the latest ) are making strides in adopting digital assets, most user acceptance is still for Ripple’s Fiat currency product.
The uncertainty ahead…
I see great potential in Ripple and its impact on the international remittance market. However, I am still uncertain about their willingness to adopt a fixed token model as the company will lose out if there is capital appreciation of the XRP since they also hold significant quantity of the token. If they continue to operate with the XRP, it may well prove to be difficult to get institutional buy-in, without which the true value of the XRP and its ability to appreciate is circumspect.
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 Blair, David. “Ripple vs SWIFT: payment (r)evolution” Treasury Today, Jul 2017, http://treasurytoday.com/2017/07/ripple-vs-swift-payment-r-evolution-ttpv
 Rethinking correspondent banking, McKinsey & Co.,
 Leonard, Shanna. “The Internet of Value: What It Means and How It Benefits Everyone” Ripple, Jun 21, 2017 https://ripple.com/insights/the-internet-of-value-what-it-means-and-how-it-benefits-everyone/
 “Interledger Architecture” Interledger, https://interledger.org/rfcs/0001-interledger-architecture/
 Technical Overview of xCurrent, Ripple, October 2017; https://ripple.com/files/ripple_product_overview.pdf
 “Guidance – Regulation of Crypto Asset Activities in ADGM”, https://www.iosco.org/library/ico-statements/Abu%20Dhabi%20-%20FSRA%20-%20Guidance%20-%20Regulation%20of%20Crypto%20Asset%20Activities%20in%20ADGM.pdf