Ripple (XRP) is globally known as a cryptocurrency. Anybody when asked about Ripple will definitely define it as a cryptocurrency just like Bitcoin and others. But are Bitcoin and Ripple similar ? Is Ripple a cryptocurrency or a security?
Ripple is a San Francisco based startup with its digital token known as XRP. Ripple has gathered a huge fan following lately. The startup by using its token and payment tools has somewhat changed the traditional payment system and is now a prominent player in the field. Ripple stays in the news a lot with its new partnerships with global financial institutes some of which include some pretty high profile firms too.
XRP, the third largest cryptocurrency by value may be a digital token, but saying it is same as Bitcoin wouldn’t be completely fair. In fact calling XRP a cryptocurrency isn’t actually very appropriate.
The major speculation surrounding XRP is whether it is a cryptocurrency or a security?
Many in the crypto industry do not consider XRP as a cryptocurrency.
Even the CEO Ripple, Brad Garlinghouse at the Yahoo Conference in February said, “I don’t call this cryptocurrency. It’s not currency.”
The company prefers to call XRP as a “digital asset” instead. But that doesn’t explain much as the terms token, currency, asset and unit are used for other cryptocurrencies too.
Now let’s go through some of the key features of Ripple (XRP) to get a better understanding of its status.
XRP is Centralized
The main or let’s say the ‘key’ feature of a cryptocurrency that separates it from other currencies is “decentralization”. Well now let me break it to you: XRP is not completely decentralized.
In a decentralized system, data is not confined to a central authority but rather moves freely across a network of computers. Well everybody in the crypto world is an advocate of decentralization as they think centralization is not efficient enough.
However, Ripple says it does works a little differently and admits it’s not as decentralized as it is supposed to be.
The debate here is not about whether XRP is decentralized or not. It’s more about whether it produces better online money without complete decentralization.
Argument against Ripple:
Many argue that Ripple is not bringing any innovation in crypto-economics. Like, it is not doing something different than usual.
The point that is argued more often is the fact that the Ripple company itself selects the nodes that can validate transactions thus compiling the Unique Node List (UNL). Unlike Bitcoin, Ethereum and other virtual currencies where anybody running the software can operate a node.
Indeed, a major cryptocurrency exchange released a report on Ripple last month in which it stated that XRP “does not serve a clear purpose.”
Although, Ripple has brought a lot of entities including Microsoft and MTI which operate their own nodes and validate XRP transactions, critics believe that the way the algorithm is set up, other nodes veer toward trusting Ripple’s nodes and thereby the company itself.
Argument for Ripple:
Ripple developers on the other hand, say the exact opposite. They believe that XRP is way better than other traditional cryptocurrencies as it offers much faster transaction speed and much lower transaction costs as compared to others.
Cory Johnson, Ripple’s Chief market executive, went as far as to say that XRP “demonstrates an intrinsic value” which makes it stand out among the “sillier” coins.
The Ripple startup itself has always been planning to decentralize XRP but has not done it yet. Company’s CTO Stephan Thomas says that XRP will be “more decentralized” than Bitcoin once they add more validators to the network in the future and flesh out the technology.
Back when Ripple wasn’t open sourced, many believed that it will never be. But Ripple open sourced XRP full node in 2013 which means it welcomed developers from outside and allowed users to join in for the first time. Now, as the track record goes, when Ripple can successfully manage to open source, it can also fulfill the task of completely decentralizing XRP too. Well, last year, Ripple added 55 more validators to the network which gave developers a hope that it will keep up to its vision.
Ripple’s close relationship with XRP
Although XRP doesn’t represent an ownership stake in Ripple, their close relationship is still concerning for regulators which might make SEC consider XRP as a security.
The assertion stems up from Ripple’s numerous attempts to get XRP listed on major crypto exchanges however it had been let down by the exchanges following the concerns that the token might be a security.
Just last week Ripple was accused of offering financial incentives to Coinbase and Gemini to make them list XRP on their platforms however, both the exchanges refused to do so.
Argument against Ripple:
A point widely argued upon by critics regarding XRP being a security is the way XRP was launched in many ways a variation on the ICO model.
As soon as the XRP ledger was created, XRP tokens were distributed to popular Bitcoin forum users in a way that is today known as ‘airdrop’.
Another issue related with the relationship of XRP with Ripple is that whenever XRP price is going up, Ripple executives are found talking about it. For instance, over the last several months, the XRP price is doing somewhat great and Ripple’s leaders are parading it around. In a recent Fox news interview, Ripple CEO publicized XRP by calling it the beginning of a “new asset class” solving a “global payments problem.”
And meanwhile, when the token isn’t doing much, critics argue that Ripple doesn’t pay much attention towards it. Critics add that if XRP is really a crucial piece of Ripple’s product then the startup should herald it consistently.
Argument for ripple:
But still, people on the other side, see the security question not more than mumbo jumbo.
Ripple supporters believe that the company’s business doesn’t really have an effect on XRP value as if it was the case, the company would have already taken advantage from its rising popularity and partnerships with large financial institutions.
The supporters say that the clear purpose behind XRP had been to create a faster and cheaper financial platform.
And it won’t be fair either to say that the whole Ripple company has the same opinion about XRP. Many of Ripple’s developers and researchers strongly hold to the idea of it being a token.
There is no reason for banks to use XRP
Though Ripple has struck deals and partnerships with a lot of banks and other service providers, critics still believe there is no such reason for them to use XRP for their financial platforms.
Ripple has three payment products, xRapid, xCurrent and xVia. All three of the products are being used by global banks and financial firms while the xRapid product which is the only one to use XRP, is also being piloted by several payment providers.
Argument against Ripple:
Critics argue that XRP will never get much adoption from big businesses.
They say that Ripple tries to mix two opposite ideas together that cannot work along. Like, the RipplePay, which allows local communities to have more control over their currencies is great but mixing it with the idea of having a currency with no control at all, just wouldn’t do.
A pseudonymous cryptocurrency investor and essayist ‘P4man’ boldly claims that the only “rational reason” for XRP to exist is for Ripple to make lots of money during the crypto frenzy. He along with other critics, backs his claim by the fact that Ripple holds about 60 percent of the XRP to itself.
Argument for Ripple:
Well, Ripple supporters think there is a reason for payment providers to use XRP. They believe that Ripple will unleash XRP in all the financial systems once it gets its product through enough banks around the globe.
Now this is already happening as Ripple is persuading businesses to use the xRapid product in place of xCurrent to increase liquidity.
Ripple’s chief cryptographer, David Schwartz says that the more ripple increases the number of “corridors”, the more XRP will increase in usefulness.
“Now, say you’re a company like Seagate that pays out money all over the globe. If you have to make payments to five countries in our corridors, you’d rather hold one pile of XRP than five piles of different currencies,” he said in XRP chat post.
While admitting that Ripple is doing “a pretty crazy thing”, Schwartz said “If that succeeds, it should massively increase the price of XRP.”