Can XRP Be Used For Cross-Border Payments?

Founded in the year 2012, Ripple Labs is a San Francisco-based company working in the fintech sector. Ripple has made it their mission to build the internet of value. In simpler terms, Ripple aims to do for money what the internet did for information.

Ripple works by intending to move money across borders faster, secure, and cheaper than ever before. XRP is the central asset of Ripple Labs. It is a cryptocurrency that is leveraged for cross-border transactions.

What Is XRP and How Does the XRP Ledger Work?

XRP is the native currency of the Ripple blockchain technology. XRP operates on this decentralized blockchain or distributed ledger. The XRP Ledger, commonly referred to as the XRPL, is fast, cost-effective, and highly scalable.

The XRP Ledger does not require intensive mining efforts comparable to Bitcoin; instead, it uses a consensus protocol where globally located validators make sure of the smooth operation of the blockchain.

How XRP and the XRP Ledger Compare to the SWIFT Network

The SWIFT network is the existing central system that conducts cross-border transactions. SWIFT is a messaging protocol that connects over 11,500 banks worldwide. They communicate with each other over the internet to finalize transactions.

At the backend, SWIFT (Society for Worldwide Interbank Financial Telecommunications) does not send money anywhere; rather, it sends the instructions regarding the money transfer. The actual fund transfer occurs through nostro/vostro accounts, which hold approximately 27 trillion US dollars in parked liquidity.

Ripple intends to replace this time-consuming system by means of XRP as the bridge asset. As of now, banks have to hold multiple currencies to facilitate transactions. With XRP, this could be avoided, according to Ripple. When XRP is used as the bridge currency, banks will hold XRP, and the fund transfer is done immediately with real-time conversion rates between currencies.

This comes with certain benefits; first of all, this does not require banks to have capital-intensive fund holding anymore. Secondly, since banks are no longer holding funds directly in their account, this frees up liquidity. So if a business located in the US needs to send a particular amount to India, they will convert the US dollars into XRP, send it across using the XRP Ledger, and at the receiving end, the XRP is converted into Indian Rupees.

This process, which previously required a 24-hour time window using SWIFT, can now be done in a matter of seconds if the XRP Ledger is involved.

This XRP-based operation does not require manual verification and is immutable since its underlying structure is a blockchain; hence, this system can run 24 x 7 for 365 days a year. This increases the scalability of the transactions while cutting the cost involved in the transaction. Even the modern version of SWIFT, the SWIFT gpi, launched in 2017, will take a full day’s time to settle 100% of the funds being transferred. This is in addition to the fee and the forex spread.

The Ripple network also eliminates the need for a pre-funded nostro/vostro account in each receiving country. This is because the Ripple network converts XRP at the source and destination using real-time rates. This freeing of nearly 27 trillion US dollars, which is now parked liquidity, is no small achievement. These funds can be utilized for various purposes, like lending, development, and trading, by their owners rather than being held in an account as escrow.

The Financial Role of XRP in Enabling Efficient Global Transactions

Much like how banks generate money by holding only a fraction of their deposit and lending out the other fraction as loans, XRP and XRP Ledger can together create this liquidity multiplier effect. A small amount of XRP can be utilized repeatedly in many transactions; this reuse is what creates the liquidity multiplier effect.

Since blockchain technology can record transactions securely and transparently, every step of the movement of money can now be easily tracked. This end-to-end traceability is a great advantage, as any party can verify the source and destination of the transaction. This increases the ability to audit for fraud and money laundering activities.

This additionally helps investigative agencies to track down any disguised fund transfers that could potentially be used for funding activities like terrorism, human trafficking, and other illegal ventures.

How Ripple’s ODL Service Is Transforming Global Payment Systems

The ODL (On-Demand Liquidity) service that Ripple offers allows banks to make real-time cross-border payments without the need to hold large sums in escrow. This level of capital freedom is not to be ignored. However, coordinating this idea across 70 markets that host multiple hundreds of financial institutions is no easy task.

Still, Ripple was able to engage with the central banks of over 20 countries and could help them create CBDCs(Central Bank Digital Currencies). Today, more than 90 percent of central banks are willing to explore the idea of having their own digital version of the base currency.

Today, there are over 300 financial institutions worldwide that make use of Ripple’s services in one way or the other. These include PNC, American Express, and Santander. They are already adopting and exploring the potential of XRP and the XRP Ledger.

If, in the coming years, Ripple and XRP could be integrated into our cross-border payment systems, it could become a paradigm shift. Instead of settling the transactions centrally, as per the traditional way, which consumes hours for processing, blockchain technology could be used to hyperdrive the transactions. This also comes at no extra cost to the financial institutions and frees up liquidity. These are all essentially helpful in reshaping the whole landscape of cross-border transactions/payments.

Conclusion: Why XRP Could Transform Global Cross-Border Payments

The world is undeniably facing a de-dollarization pressure, and with it, our financial sector is plagued by inflation volatility and global coordination failures. In this delicate situation, Ripple offers a neutral yet programmable and scalable solution. This is indeed worthy of appreciation and, most importantly, integration.

Ripple can indeed revolutionize the payment channel and revamp the way finances operate. Ripple and XRP together can smooth the ride that the global cross-border payment infrastructure is currently on.

FAQs

The post Can XRP Be Used For Cross-Border Payments? appeared first on BiteMyCoin.