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104	Citi GPS: Global Perspectives & Solutions	March 2018

What is Ripple? How is it Different?

Ripple generated considerable attention in late 2017/early 2018 due to price action, but it is important to differentiate its two components: (1) a native cryptocurrency (XRP) that can be traded; and (2) a transaction protocol (RTXP) for RTGS payments.

Ripple XRP – The Cryptocurrency

Ripple XRP improves upon Bitcoin by doing away with mining, which is energyintensive/inefficient. Ripple does this through a technique called consensus, which is a way for the entire network to agree on the current state of the blockchain even though they don’t trust each or any central authority. This is achieved via validating nodes agreeing on a specific subset of the transaction using an iterative process until a supermajority of peers agree on the same set of transactions.

XRP saw strong price movement in December 2017 to January 2018 (albeit from a lower base), reaching a peak level of $3.38 in January 2018. Positive rally likely led by: (1) new strategic partnerships with Japanese credit card companies (CNBC) and greater focus on Asia; (2) growing discussion on Ripple's protocol; and (3) retail/institutional interest in crypto. However, XRP prices soon corrected and are now back to sub-$1.00 levels in March 2018.

Figure 96. Ripple XRP Price Performance in 2017-18, USD

Figure 97. Ripple XRP Trading Volume by Currency, Mar. 2018

US$

USD

3.5

15%

3.0

Nearly 350x fold

2.5

increase in 2017; but

declined 64% YTD

2.0

Bitcoins

1.5

Prices peaked at $3.4

KRW

16%

in Jan'18, but soon

1.0

52%

declined back to sub $1 levels

0.5

0.0

USDT

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb-18

Mar-18

9%

8%

Others

Source: Coinmarketcap, Citi Research

Source: Coingecko, Citi Research; # USDT (Tether) is a cryptocurrency asset issued

on the Bitcoin blockchain. Each USDT unit is backed by a US dollar held in the reserves of the Tether Limited and can be redeemed through the Tether Platform. USDT can be transferred, stored, spent, just like bitcoins or any other cryptocurrency.

XRP differs from other crypto as it: (1) is design-optimized for speed of processing transactions, ideal for real-time settlements; (2) allows for execution of automated scripts; and (3) is centralized, created by Ripple (the company). Despite this, we think XRP is unlikely to be used for global settlement by banks – due to factors such as possible compliance risks as XRP can also be bought/sold on exchanges that may not be adequately monitored by regulators; and risks from large ownership by a single stakeholder (Ripple).

Banks and the Ripple Protocol

Ripple's Transaction Protocol (RTXP) is a real-time gross settlement system built upon a distributed open source Internet protocol. Ripple purports to enable "secure, instant and nearly free global financial transactions without chargebacks".

© 2018 Citigroup

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March 2018	Citi GPS: Global Perspectives & Solutions

Today's global payment infrastructure moves money from one payment system to another through a series of internal transfers across financial institutions. This makes the system slow, error-prone and costly. For instance, a typical cross-border payment by a U.S. bank to a Japanese bank requires several hops, which potentially delays the process (see Figure 98).

Figure 98. Global Payment Infrastructure Today

Settlement: up to 3 days

The Federal			Japanese		Bank of
Reserve	U.S. Correspondent &				Japan
	Liquidity Provider		Correspondent
	Lifting fees	$	¥		Lifting fees
	Operational costs	FX cost			Operational costs
		Operational costs
Operational costs					Operational costs
		Limited transaction visibility
U.S. Bank					Japanese Bank

Source: Ripple Labs white paper titled The Cost-Cutting Case for Banks (Feb. 2016)

The Interledger Protocol (ILP) solves for interoperability and could ultimately lead to building an entire network of trust and facilitate peer-to-peer payments. ILP could help reduce settlement times and facilitate low-value payments.

The protocol allows banks and non-bank financial services companies to incorporate the Ripple protocol into their own systems, and therefore allows their customers to use the service. The process facilitates payments, exchanges and remittance in a distributed process.

Figure 99. Ripple's RTXP Protocol for Real-Time Value Exchange

Brazil

	Correspondent Bank
Germany				Japan
Correspondent Bank		XRP Pool		Correspondent Bank
		US

Respondent Bank

Source: Ripple Labs white paper titled The Cost-Cutting Case for Banks (Feb. 2016)

© 2018 Citigroup