PYMNTS Blockchain Series: What Is XRP?


Throughout this series of articles, we’re looking at the top blockchains in cryptocurrency to help you make sense of the alphabet soup of so-called “altcoins” that exists beyond that of bitcoin’s BTC and Ethereum’s ETH.

We will look at what they are, how they work, what they do, and their pros and cons.

You’ll come out of this series not only with a better sense of what cryptocurrency is all about, but you’ll also understand why the way a token works — the way its blockchain processes transactions — is key to its success or failure as a digital asset.

See also: PYMNTS Blockchain Series: What Is Bitcoin Cash? The No. 2 Payments-Focused Crypto Goes Its Own Way

So, what is XRP?

First off, it’s arguably the cryptocurrency most deeply involved in the payments industry.

Secondly, the cryptocurrency not properly called “ripple.”

Thirdly, capital-R Ripple is a company that uses XRP to power a network of banks and money transmitters that use it to bypass financial messaging service SWIFT and transfer funds internationally for pennies and in seconds.

It is also effectively the only user of the XRP Ledger, which is an open-source, distributed blockchain on which all 100 billion XRP tokens were pre-mined in one transaction. Which is actually important to know, for reasons we’ll get to later.

Finally, XRP is the subject of a lawsuit by the Securities and Exchange Commission that — if Congress doesn’t act first — will determine if the SEC is right in calling nearly all cryptocurrencies securities under its regulatory umbrella. Again, more on that later.

Crossing Borders

Ripple is one of, if not the, oldest companies using cryptocurrency to power cross-border transactions. Created in 2011, two years after Bitcoin, the company launched in 2012. It now has more than 300 partner banks and money transmitters in its payments networks.

There are three parts to this network. The largest is RippleNet, which is used by companies including Standard Chartered, Azimo and Santander.

RippleNet customers can use its private network to transfer funds outside of SWIFT, but requires parking funds in those banks. It does not, however, require the use of XRP.

RippleNet customers can also use its two other products, On-Demand Liquidity (ODL) and Line of Credit.

Counterparty Risk

ODL uses the XRP blockchain to eliminate the need to prefund transactions. The payer buys XRP and sends it to the destination institution via blockchain payment — in real time and for tiny transaction fees.

While XRP prices can be every bit as volatile as bitcoin — it has a large and fervent investor base nicknamed the XRP Army — the ODL system involves buying XRP on the market when needed and selling it when received, effectively eliminating volatility by completing both transactions within seconds.

What this requires is a great deal of liquidity within the XRP market. Currently, XRP is the sixth-largest cryptocurrency by market capitalization, with $35.7 billion in circulation. As of March 3, it had a 24-hour trade volume of $2.1 billion.

Being publicly traded as an investment — and that’s important to that SEC lawsuit we mentioned — XRP tends to follow the broader crypto market. Although it lagged behind in 2019 and 2020, remaining more or less flat, last year it broke out, spiking with the crypto bull markets and sinking with the bears.

The final way Ripple uses XRP is with its Line of Credit product, which allows RippleNet members to lock in an XRP price and fund payments by borrowing and repaying Ripple rather than buying XRP on the market. That not only eliminated more volatility, it let members continue business as usual when the SEC pursued its lawsuit against Ripple.

The Prehistory of XRP

Ripple executive are at pains to say that the company did not create XRP.

Which is technically true but splitting hairs pretty finely.

The creators of the Ripple blockchain pre-mined all 100 million XRP with the blockchain’s genesis block, kept 20%, and then “gifted” the remainder to the company (the names changed several times).

The three, David Schwartz, Jed McCaleb, and Arthur Britto, were soon joined by Chris Larsen. Larsen is Ripple’s executive chairman and Schwartz its chief technical officer. McCaleb left the company to found a competitor in the crypto payments space, the Stellar blockchain.

More to the point, Ripple still controls a huge amount of the market. Aside from being its only real users, Ripple has about 46.5 billion XRP in escrow accounts — something that was necessary as XRP investors felt the company was selling too much of its treasury, keeping the price of XRP artificially low.

Beyond controlling that huge stash of XRP — and its executives and founders also have large kitties — Ripple is the only company that uses XRP for anything other than an investment.

To Ripple, XRP is, in crypto lingo, a utility token. And like any cryptocurrency other than bitcoin and some payments-only blockchains like Litecoin, the investment relies (in theory) on the idea that as more projects are built on a blockchain, the demand for its capped number of tokens will go up, raising prices.

See here: PYMNTS Blockchain Series: Litecoin Is the ‘Silver’ to Bitcoin’s ‘Gold’


This is where that SEC lawsuit comes into play.

The SEC says that Ripple’s public sales of XRP amount to a 9-year-long, ongoing unregistered sale of securities — something Ripple both denies and calls ludicrously unfair after all that time.

The importance is that if XRP is a utility token, buying and selling it to power cross-border payments is fairly simple. If it is a security, buying and selling it become a lot more complex and time-consuming. Making a lot less useful for cross-border payments.

More here: Ripple Lawyer Confident SEC Case Will Wrap in April

At issue is the Howey test, referring to the Supreme Court case on which the definition of a security is based.

It says that a transaction is an investment contract if it meets four criteria: Someone (1) invests money (2) in a common enterprise (3) and is led to expect profits (4) solely from the efforts of the promoter or a third party.

Ripple says no, XRP is a utility token, used as a transaction unit in transferring funds across borders. The SEC disagrees.

The case is important beyond XRP, as all companies that the SEC has sued for selling cryptocurrencies in an initial coin offering that was an unregistered securities sale have either settled or shut down their blockchains before an enforcement action came to trial.

The crypto industry has long complained about regulation by litigation, and the Ripple suit is where the rubber hits the road, as the company is fighting vigorously.

If it loses, the usefulness of most cryptocurrencies — not just XRP — would be called into question.

And Ripple is unlikely to settle, given that the SEC is also calling the private sale of $1.3 billion worth of XRP over the years by the company’s two top executives illegal securities sales. They’re not about to settle on that.



About: Forty-two percent of U.S. consumers are more likely to open accounts with FIs that make it easy to auto-share their banking details during sign-up. The PYMNTS study Account Opening And Loan Servicing In The Digital Environment, surveyed 2,300 consumers to examine how FIs can leverage open banking to engage customers and create a better account opening experience.

Read More: PYMNTS Blockchain Series: What Is XRP?

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