Ripple enjoyed high profile in Q4 2017, running its conference in Toronto alongside that of the organisation it aims to take down (SWIFT), seeing the price of its XRP cryptocurrency rise from $0.25 on October 10th to $2.25 on December 31st, and releasing a steady stream of positive publicity about interest in/take-up of its core service: payment message transmission.
But the parallel story is less coherent:
- the relative banality of the pilot project run for Santander UK, which amounted to diverting MT103 messages out of SWIFT, into Ripple and to the bank’s existing New York correspondent, who dropped them into the Fedwire system, saving Santander UK the SWIFT “Traffic Fee”;
- the contradiction between XRP’s value as a settlement medium for payments in multiple fiat currencies – requiring price stability – and its value as a cryptocurrency investment – requiring price volatility, both up and down;
- the difficulty in determining the number of XRP units over which Ripple itself has “ultimate beneficial ownership”, be they units in Ripple’s “war chest” that it owns, or units “in escrow” that it controls;
- the difficulty in reconciling the total number of XRP units supposedly in existence, with those in Ripple’s “war chest”, those “in escrow”, those owned by core service users, and those owned by investors.
Of greatest concern is whether there is any meaningful take-up of the core service. There are announcements of pilot schemes, but without metrics on volumes and revenues. Announcements of pilots going into full production and of compelling new services becoming available to end-users are rather thinner on the ground.
There is also the discomfort, in the view of this one seasoned financial professional, that XRP is a “commodity” in the view of financial regulators, and is not listed on a regulated market. Statements and transactions (like the release of further units of XRP) can thus be undertaken about it that do not need to have the full regulatory rigour of an announcement to a Stock Market applied to them. According to our calculations, around 8% of the total of XRP in existence are available to investors and therefore tradeable. This percentage would fall below the minimum portion of a company’s shares that could be listed on a regulated stock market, in order to avoid a situation where:
- the price of the listed shares disproportionately reflects movements in the company’s trading prospects and actual performance;
- the “market value” of the company is projected (by the company itself or by journalists that the company does not take steps to contradict) as being the total number of shares in existence multiplied by the price applying to a very small portion of them;
- the company can then position itself to undertake dealings and transactions based on a “market value” which risks being exaggerated and which might not hold water if 100% of its shares were tradeable.
This issue is current in the subject of the London listing of Aramco, where Aramco wished to list only 5% of its shares.
Furthermore any bank that had a holding of XRP – as it surely would do to operate Ripple’s core service and use XRP as the payment settlement medium for it – would have to acquire it at the market price, write the purchase price off completely in its P&L account, and value the XRP in its Balance Sheet at zero. “Fair value” accounting would compel a zero valuation because the ownership of a unit of XRP confers no claim on either a portion of net assets or on a dividend, and the payment made for it is non-refundable. XRP is no organisation’s liability or equity, so it can be no organisation’s asset, and it is unlisted to boot.
Zero-valuation is the same treatment the Bank of England applies to its shareholding in the European Central Bank, as confirmed in a letter of January 15th 2018 from the Governor to this one seasoned financial professional, on the grounds that the contribution is “non-refundable and as a non euro area member the Bank [of England] is not entitled to any dividends”. The ECB’s shares are also unlisted of course.
The compulsion to zero-value any holding of XRP is a fatal flaw for any bank or other entity that produces accounts on a “fair value” basis.
But most of all this one seasoned financial professional would like to know why Ripple is a better deal end-to-end than SWIFT, when it is well-known that the SWIFT “Traffic Fee” is a very minor component of the end-to-end cost of a cross-border payment.