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Why won’t Coinbase list XRP? Because they’re competitors

Posted: 8 March 2018 4:30 pm
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They have different job descriptions, but Coinbase and Ripple are both in the business of moving money.

Coinbase has stamped out rumours that it will be adding XRP to its listings, effectively pouring cold water on speculation that XRP would be the next token to arrive on Coinbase and shrinking its prices.

Initial speculation had it pegged to arrive by the end of July, but now Business Insider suggests that it might never arrive at all because Ripple and Coinbase might soon be in direct competition with each other.



Coinbase is gearing up for a hiring frenzy and has made no bones about their goal of spreading across a much more diverse set of industries through strategic acquisitions, which seems likely to put it in competition with Ripple at some point.

It's important to note that unlike most cryptocurrencies, Ripple is a straightforward business. This has turned off many speculators, but might have drawn in many more who feel more comfortable banking on a business's success than on a community's crypto. As a business, Ripple aims to use new cryptocurrency technology and their in-house software to provide more efficient international money transfer services to their clients, which mostly include banks and multinational corporations.

Ripple got there first and has seen a lot of success to date, with a number of clients signing up for its services. But it's also running into many hurdles, mostly around international money transfer regulations. But when those barriers go down, they'll mostly go down for everyone and there might be a lot more movement in that space.

Coinbase vs Ripple

OPINION: It's not possible to say with certainty that they will ever become direct competitors or to predict which of them might get an edge if they do, but there's reason to believe that Coinbase might be able to offer a more competitive product.

The Ripple product suite

Ripple currently has two flagship products: xCurrent and xRapid.

In super simple terms, xCurrent is a blockchain-based messaging system. It lets businesses securely communicate in a reliable, permanent and tamper-proof ledger.

This lets them perform cheaper and quicker international transfers by basically sending blockchain IOUs instead of actual money. If there are a lot of customers on either side transferring money between the banks, it makes a lot more sense to just maintain a ledger rather than to endlessly ping-pong money across the border.

By bringing enough businesses into the Ripple network, communicating with each other on the blockchain and maintaining a ledger of these IOUs, it's possible to make international transfers much cheaper and quicker.

The second product is xRapid, which is a completely different can of worms. xRapid is a system for actually transferring monetary value in the form of the Ripple XRP cryptocurrency rather than simply moving information. This is necessary for many transactions where xCurrent won't work, such as situations where the receiving bank doesn't have enough liquidity to pay out the recipient right away or for remittance companies that want to be able to securely hand out cash.

This distinction between simply transferring IOU information and actually transferring monetary value is critical. The first one is a relatively straightforward application of blockchain technology and derives a lot of its value from the network of agreement banks rather than the technology itself.

But the second one is a logistical, technical and legal nightmare, while being an all-around much more unique and hard-to-create product.

If Coinbase ends up with an edge, it might be the result of its ability to more effectively facilitate these xRapid-style transfer solutions and to overcome some of the remaining obstacles, specifically the volatility and liquidity issues that might prevent effective use of an xRapid-style system.

Volatility and liquidity issues

The volatility of Ripple XRP and the difficulty of actually putting a value on the cryptocurrency are tough problems to solve.

The success of an xRapid-style system largely comes down to XRP's dependability as a transfer medium and store of value. It can be transferred almost instantly and converted to fiat currency equivalents on the spot, but Ripple clients will need to invest considerable amounts pre-funding their systems. Basically, they need to fill a swimming pool with Ripple XRP so they can dip into it from anywhere in the world whenever they need to.

But the larger and less predictable a company's payment obligations are, the more XRP they need in the pool. The regular price swings of XRP mean you need to fill it up even more, and no matter how much XRP you put in the pool, it might still not be enough if its prices crash. To say nothing of the liquidity issues that might arise when several companies need to cash out large amounts of XRP at the same time and end up inadvertently dropping the price further. Plus, filling that XRP pool means locking up a lot of capital which is lost revenue in its own right.

At the moment, the cost of filling that pool and accurately predicting how much might overflow or evaporate makes it difficult to justify wide use of XRP from a business perspective and might instead see it restricted to a select handful of payment corridors.

What's the solution?

The heart of the system is digital currency that carries real-world monetary value and can be quickly zipped anywhere in the world as needed.

A system with stable token prices might have a competitive advantage over a highly speculative fluctuating one. The easiest way for Ripple to stabilise its token value might be to offer to buy it back from clients at a set price. The problem is that Ripple's probably not good for it. With a $35 billion token market cap, it's safe to assume that Ripple doesn't have enough cash reserves to buy it back at $1 each. Even if it could, the money transfer market Ripple's aiming at is much bigger still, with most estimates clocking the total size of annual consumer and business transfers in the trillion-and-something dollars per year range.

Ripple's ability to successfully roll out a global payment system with XRP as the settlement layer might be dependent on XRP's future price growth, while XRP's future price growth might be largely dependent on its ability to implement XRP as a more widely used payment system.

To avoid this chicken and egg problem, a stable token might be much more suitable for international transfers, with some kind of dependable collateral behind it to give it value.

There are already some so-called stablecoins which use these kinds of systems. The DigixDAO and MakerDAO stablecoin systems use straightforward collateral of gold and Ether respectively, purchased with the proceeds earned from the value of their tokens, while a project called Havven will be bravely attempting its own self-sustaining no-collateral stablecoin system. And then there's Tether which is backed by $2.5 billion worth of un-audited smiles and winks.


But Coinbase might be in a better position to solve this problem. It might be able to build its own price-stable token from the ground up, keep it off exchanges and essentially act as its own central bank by offering to redeem it for fiat where needed. It could be distributed in measured amounts to operate in the same payment corridors as XRP, with the price stability of this hypothetical product giving it a competitive edge over xRapid.

It wouldn't be the first exchange to issue and buy back its own homemade cryptocurrency.

But it might not even need to. Coinbase has always been in the money-transfer business, and as a regulated exchange, Coinbase is all about enabling conversions between cryptocurrency and fiat currency for its customers. It offers payment solutions for merchants who want to accept cryptocurrencies and lets its customers send cryptocurrency to each other by email. It initially billed itself as an integrated wallet/exchange system and its GDAX digital asset framework emphasises the importance of liquidity, global distribution and demand.

As Business Insider said, "Romero, the general manager, said explicitly that he wants to build Coinbase into the Google of cryptocurrency. And if there's anything we know about Google, it's always looking to break into new markets."

Ripple created a cryptocurrency with the aim of seeing it used for international payments, while Coinbase just skipped straight to using cryptocurrency for international payments. People are used to seeing cryptocurrencies compete with each other as well as exchanges compete with each other, but as the ecosystem knits together, the lines might get increasingly blurry.


Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, SALT, BTC and XRB.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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