Here's how and why XRP will be used by banks
Feb 18, 2018
The FUDsters cry, "Banks don't need to use XRP to use the Ripple ledger". TRUE! But, here's why some are ALREADY using, and WILL ALL use XRP eventually.
Ripple's approach to adoption is two-fold:
1) Get the banks to use their ledger software to send fiat money (without necessarily requiring XRP), instead of the SWIFT way. This step is important because it doesn't radically change the way banks do things today, but it does give them some very valuable tools and real-time information about their money transfers. This is what most Ripple-partnered banks are talking about when they say they are using Ripple's products. What also comes with this software is a Ripple feature called ODL (On-demand Liquidity), which leads us to step..
2) Once banks are Ripple-integrated, they will have the 'option' of using XRP (via Ripple's ODL feature). Sure, they don't have to, but they will want to eventually; let me explain:
The first adoption step puts the option to use XRP right in front of the banks' noses. And while at this time XRP may seem irrelevant to their existing infrastructure, it will be profoundly easy to start using XRP if they get curious. Said another way, xCurrent and ODL are not mutually exclusive, they are sequential adoptions. No bank will jump right into XRP, and a bank's choice to use xCurrent is NOT their decision to NOT use ODL, it just means ODL will remain an option for when the bank is ready to trial XRP.
Why would a bank want to use XRP then?
- It would take very little effort to start using the integrated ODL feature
- They would save an additional 30% on transfer fees
- Their competitors are using it, undercutting them and taking business away (MoneyGram? Western Union?)
- And most importantly: ELIMINATES NOSTRO ACCOUNTS!!!!!
Let me say that again because it's super important
USING XRP ELIMINATES THE NEED FOR NOSTRO ACCOUNTS!!!
That's right, the billions upon billions of dollars sitting idle in foreign bank accounts that are required for SWIFT and even Ripple's messaging software, can be recouped and reinvested by the banks, allowing them to make BILLIONS more from that money! And not only that money is freed up, but money that is currently locked 'in-flight' for 3-5 days during SWIFT transactions, TRILLIONS of dollars, will also be liberated so the recipient can spend that money again immediately.
Instead of just one transaction a week, that same money can be re-used for potentially THOUSANDS of transactions in a week. The effect on the global economy will compound exponentially; equivalent to the effect of mail evolving to email. Imagine trying to step backwards to using paper mail to support the equivalent of daily email flow..
So, please do not focus on the fact that banks don't 'have' to use XRP to send wires, because the same rationale could be applied in that the banks don't 'have' to send wires in the first place. They DO send wires though, because there's money to be made, and so if they can make even more money with those wires, then they are going to do that.
I've also seen a lot of posts expressing concern that XRP cannot be used for transferring large sums because if the banks source their XRP from an exchange, it would take too long and would have an impact on the price (slippage), both buying and selling, and this would erase all the savings. Well my friends, banks will NOT be sourcing their XRP from exchanges, the intent is that they will be sourcing XRP from Liquidity Providers (LP, or market makers).
LPs are companies that stockpile enormous reserves of XRP with the intent of providing wholesale buys and sells to large customers, and it's the facility of the LP to spread that volume over time into and out of the exchanges. The fact that banks can lock-in a price with the LP conversion rates prior to committing to the transaction, means that LPs PERFECTLY SHIELD their bank customers from the volatility of the markets.
For example, Bank of Canada wants to send $1 Million CAD to Bank of India. BofC will purchase $1 million CAD worth of XRP from a Canadian XRP LP. It will then send this XRP to the BofI, instantly. BofI will sell this XRP to an Indian XRP LP for Rupees. Transfer complete. Zero slippage, and the LPs will rebalance their holdings over time either by further buys and sells with other bank customers, or by slowly buying and selling on the exchanges, which is how XRP price is ultimately, if indirectly, influenced by banking activity.
If the banks increase demand upon XRP, the LPs will be forced to buy more from the exchanges, and the price increases. LPs are also the fundamental reason why XRP incorporates a 'burn' rate on XRP, so that the price has a statistically-likely perpetual upward price momentum, making LPs statistically likely to be profitable over time, even if they have some losing periods.
What is happening here at the highest level, is the 'privatization' of the function of nostro accounts. What used to be the burden of banks to have money strategically positioned all around the globe, has evolved into these much more efficient private LP companies that facilitate that same purpose at much more economical rates. Think of it like a 'pooled' nostro account that all banks can benefit from without any investment on their part. The LPs will be orders of magnitude more efficient at maintaining meaningful reserves and so these efficiencies are passed onto the banks in the form of very low transaction fees.
LP's are coming, as well as custodial services (think gigantic safes for crypto). These building blocks of massive money management will complete the picture that banks require to start dabbling in XRP. The FUD around banks possibly not ever using XRP just has to stop, it's really getting old.
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