Ripple’s legal pressures keep mounting.
The United States Securities and Exchange Commission (SEC) filed a lawsuit against Ripple Labs in late December, alleging the company and its executives sold over 14.6 billion XRP as unregistered securities since 2013. Major cryptocurrency exchanges (most notably Coinbase as the company prepares to offer an IPO) have subsequently dropped XRP.
With partnerships which include American Express, Santander, and the United Bank of Canada, Ripple’s ability to conduct cross border payments via its XRP token seemed to signal scalability for cryptocurrency. If the primary use case of cryptocurrency is providing the unbanked access to financial services, then XRP was uniquely situated to connect individuals in developing countries with financial institutions (while providing these institutions a seamless experience in exchanging unlikely currency pairs).
However, most banks offering cross border payments do business in the United States. Should a court rule that XRP is security, then banks will be forced to drop the token given its new classification, and cease business with anyone utilizing an unregistered security. Although Ripple’s founders are fighting the charges (filing a petition for a writ against the SEC alleging the agency harmed their investors), the company is dogged with regulatory problems and serves as a warning to others in the crypto community.
With so much of the global population unbanked, and Western populations rapidly accelerating the use of digital financial services due to COVID-19, cross border payments will remain a focus as companies embrace low-friction transactions. Given Ripple’s legal snafus, the company is unlikely to become a market leader. There is a void in the cryptocurrency space for a project fulfilling what XRP could have been.
Like Ripple, Reserve is a crypto project positioning itself as a solution for cross border payments, specifically in countries with high degrees of inflation (Venezuela is the current case study ahead of a global rollout). By utilizing a stablecoin (RSV) with its value determined by a pool of more volatile digital tokens (RSR) investors can profit from, Reserve is building a network of payment rails for digital and fiat currencies. Like Ripple, Reserve boasts mainstream institutional backers entering crypto from the financial and tech sectors, most notably former senior leadership from PayPal; PayPal cofounder Peter Thiel is listed as an investor, along with founding member Jack Selby and former VP of marketing Eric Jackson.
“We’re in communication with PayPal and we are working with them … on getting more significant approval for using PayPal as a liquidity mechanism to allow our users to cash in and out via PayPal,” said Reserve cofounder and CEO Nevin Freeman during a December 30th community call. “We think the odds are pretty good and the timeline PayPal has represented to us as being plausible is essentially in Q1 of this year.”
A stable-coin project utilizing PayPal’s payment rails would provide individuals in developing parts of the world a safer vehicle to park their capital, protecting it from inflation and providing holders access to modern financial services. It would also in theory allow PayPal to enter new markets around the globe previously hostile to Western companies.
Like many financial institutions starting to offer cryptocurrency services, PayPal recognizes the value certain digital assets have for both retail investors and those looking for an alternative to unstable fiat currencies; the company recently entered the cryptocurrency space by allowing users to conduct financial transactions with four of the top cryptocurrencies by market cap (Bitcoin, Ethereum, Litecoin, and Bitcoin cash). Although Freeman said in the December call that PayPal is “not having serious conversations with any cryptocurrency project” regarding possible listings on its platform, he did note that “it’s plausible they will end up thinking about” it and Reserve’s team was “interested in that conversation.”
Disclosure: The author of this piece and owner of Paradox owns some RSR tokens.