Ripple: Big Long-Term Challenges
In the near term, the Ripple token (XRP) is not a bad investment.
It has good trading volume. Its lower-than-average volatility can help add some stability to a diversified crypto portfolio.
As the entire space recovers, investors can make good money.
And as I wrote here on March 2, our Weiss Cryptocurrency Ratings model gives it credit for all of these strengths.
What puzzles me, though, is how XRP owners can hope to profit from Ripple’s long-term trajectory.
Here are the twin dilemmas that investors face:
Dilemma #1. The company’s big mission right now is to make deals with banks and other financial institutions. “Use our blockchain technology,” goes the pitch, “and we’ll help you transfer any currency to any other institution faster and cheaper.”
Sounds good, right? The problem is all those bank deals have little to do with XRP. They don’t need XRP for those transactions. They’re all going from fiat to fiat.
In fact, a whole new set of tokens will be issued for each fiat currency, much like gold trusts or funds issue shares of gold. This process, called “tokenizing,” bypasses the need to use the XRP token in the first place.
In fact, Ripple will “tokenize” the currencies and completely bypass the need to use the XRP token in the first place.
Result: XRP owners could be left out in the cold.
Dilemma #2. Ripple is not a public company. So there are no Ripple shares to buy.
Could it make inroads into the banking industry? Could it generate good earnings? Perhaps. But again, that has nothing to do with XRP.
I repeat: XRP is not needed for the bank-to-bank transaction business. Nor does it entitle owners to any share of the company’s earnings. For that, investors are going to have to wait for an Initial Public Offering.
Technology vs. Governments
If you think governments might try to push back against other cryptocurrencies, then you’ve got to think they’re going to be a stone brick wall blocking the expansion of Ripple.
I repeat: Ripple is going after the business of traditional financial institutions that are deeply embedded in a world controlled by governments and supranational institutions.
Like the International Monetary Fund, World Bank or Bank of International Settlements.
These guys are essentially inseparable. They’re a chummy, elite club. And what about the revolving door between regulators and financial institutions? It’s in full swing, with round-the-clock staff swapping parties.
And never forget, after 2008 the too-big-to-fail megabanks made a solemn pact with governments: “You guarantee our survival,” said the bank CEOs to the Treasury officials. “You protect our oligopolies and monopolies. And we consent to heavy-duty scrutiny and regulation.
“Oh, and one more thing,” said the bankers and bond dealers. “Next time around, when push comes to shove, we think you’re going to need us to market your big debts more than we’re going to need you to bail us out.”
How does this all relate to Ripple? Well, it would be a relatively trivial task for governments to shut XRP down.
Heck, if XRP is perceived as a direct threat to their interests, what would it take for them to forbid all financial institutions under their thumb from using the token?
A lot less than it would take to forbid decentralized cryptocurrencies whose users are not under their thumb! In fact, it’s safe to say that banning decentralized cryptocurrencies would be almost impossible. But Ripple is anything but decentralized.
I think the folks at Ripple may soon figure this out themselves. They will begin to realize that introducing a new currency isn’t just an issue of technological superiority. It’s also a political battle. And politics is a whole different realm. Consider the facts …
Fact: Sure, RippleNet is technologically superior to the Society for Worldwide Interbank Financial Transactions (SWIFT). But banks and governments have no stake in Ripple. They do have a stake in SWIFT. They flat-out own it.
Fact: The banks and regulators want that level of control. That’s how they can ultimately sanction renegade nations like Iran. All they have to do is shut the country out of SWIFT, and poof! Its currency and economy melt down. Clearly, SWIFT is more than just a transfer app for banks. It’s also a tool of geopolitical control.
Fact: Is RippleNet willing to be used in the same way? Perhaps. But the more likely scenario is this: International bankers and regulators wake up one morning and say: “Hey! Why the hell do we need RippleNet? All we have to do is co-opt their deal. We use the same blockchain technology. And we kiss Ripple, XRP and everyone behind them goodbye.”
Not exactly good for Ripple’s long-term future!