Banco Santander, XRP and the Volatility Issue

Posted by on April 22, 2018 4:50 am
Tags: , ,
Categories: ripple

(Disclaimer: let’s stay objective, open-minded and listen to facts, and not to what we’d rather like to hear.)

Banks hate volatility. They want stability. Yet banks are in for some “new thinking” as a main target of Ripple’s cross-border payment solutions which, once all parts are put into place, build on the liquidity provided by Ripple’s digital token XRP.

This issue was highlighted recently when Julio Faura, head of R&D (blockchain) at Banco Santander, was quoted by CoinDesk as saying that Banco Santander (which is a Ripple xCurrent client with its just released payment app) doesn’t believe in XRP for liquidity management (never mind the misspelling of Faura’s name):

The Ripple community was up in arms, FUD accusations went wild.

I double-checked, no: triple-checked what Mr. Faura said at Synchronize, and yes, turns out this is in essence what he said.

Banco Santander, the prominent Ripple customer — and early Ripple investor — voices concerns about the cryptocurrency’s market fluctuations a.k.a. volatility. But surprise surprise, Mr. Faura is as well the chairman of the Enterprise Ethereum Alliance. Might it be that vested interests are at play here? You’re about to learn why this might matter.

Let’s take a step back first. Ripple’s chief cryptographer David Schwartz allayed fears about XRP volatility many times, like here:

Banks don’t actually have to hold XRP, David says. They can use market makers who hold XRP and market makers can actually profit from volatility:

“In the short to medium term,” David wrote on XRP Chat, “it doesn’t matter all that much. We’re going to be choosing corridors that are so inefficient that XRP holding cost won’t be a significant factor. But over time, as we try to tackle larger and more efficient corridors, lower holding cost will make XRP more attractive.”

Yet there comes Julio Faura, head of R&D blockchain at a pioneer Ripple investor, saying they’re not planning to use XRP.

This is what sources at Synchronize heard him say, and I checked with Mr. Faura to make sure it’s correct and confirmed:

It is true that Banco Santander is piloting an international payments app that uses Ripple’s xCurrent module to route payments, but that needs to be connected to the bank’s current liquidity management systems, which is a clear limitation and source of extra cost.

The bank is indeed building liquidity management systems using blockchain technology, but they are using smart contracts (i.e. permissioned versions of Ethereum) for that since it is a much more powerful paradigm than anything else (e.g. Stellar or the original Ripple construct, which Ripple abandoned in favor of ILP).

Mr. Faura said Banco Santander does not believe XRP, BTC or any other (real) cryptocurrency is a good option for liquidity management, and believes instead in the idea of crypto fiat money, either in tokenized form (e.g. USC) or in native form (e.g. Project Ubin by the Singaporean central bank or what ConsenSys just did for South Africa’s central bank).

What ConsenSys did in Project Ubin or in South Africa, Faura explained, would not be a proprietary solution. It would be open-source technology used by a central bank to issue RTGS (real-time gross settlement) accounts on a decentralized ledger, not controlled by ConsenSys or even by the central bank themselves (at least at some point in time).

Banks or even non-banks could then deploy their decentralized apps on this same ledger, and use the RTGS accounts to settle payments (payment vs. payment PvP and delivery vs. payment DvP).

These RTGS accounts are essentially token wallets that live on a decentralized ledger, and therefore behave essentially like cryptocurrencies, except that they are not subject to market fluctuations.

There you have the key phrase: except that they are not subject to market fluctuations.

Ripple sure is addressing this and ups the ante.

The volatility is a big issue.

And of course it doesn’t help if the chairman of the Enterprise Ethereum Alliance might have a conflict of interest.

Yet given some of the industry’s lingering concerns on top of the regulatory constraints (which take time to be solved), it’s a given that Ripple is simultaneously focusing on other areas of the Internet of Value (IoV), especially micropayments and B2C solutions. Right, we keep on hearing the same big names…

Remember, it’s a brutal marathon and the full vision of Ripple is yet to be implemented. There is Codius, Ripple’s upcoming potential nuclear weapon. When released, Codius provides a secure and standard way of running applications in the cloud that accept any currency.