Cross-border payments is estimated to be a c. $44b market in 2020, according to McKinsey estimates. While this was negatively impacted due to restricted travel regulations as well as international supply chain disruption globally, an increase in the adoption of e-commerce as well as digital payments provided a lift to this sector.
However, cross-border payments remains behind in technology adoption, and has not improved dramatically since SWIFT came into existence more than 40 years ago. It continues to rely heavily on correspondent banking, which can take days, in a process that is opaque both in price, processing time, and traceability – that is if the currency corridor even exists in the first place. Much has been argued about the viability of using blockchain/cryptocurrency to improve on this, and two projects – Ripple and Stellar are among the most talked-about.
|Ripple (XRP)||Stellar (XLM)|
|Aim of project||Improve cross-border payments by using the Ripple network (RippleNet) to substitute correspondent banking.||Improve developing economies in the areas of remittances and bank loans to the underbanked.|
|Consensus model||Consensus protocol: there are 150+ validators on the network with 35+ on the default Unique Node List (UNL), with Ripple running 6 of them.||Consensus protocol: Stellar Consensus Protocol (SCP) is a quorum-based Byzantine agreement protocol with open membership.|
|Token||XRP, used for transaction fees||XLM (lumen)|
|Supply of tokens||1b (c. 480b circulating)||Originally 100b, reduced to 50b (c. 20b circulating)|
|Control||Relatively centralized: Anyone can be a validator, but Ripple decides which validators to approve for the UNL and makes up 6 of them.||Decentralized|
|Customer focus||Established financial institutions||Developing markets|
|How it works||Sender’s LCY converted to XRP, XRP sent to destination and converted to Receiver’s LCY||Sender’s LCY converted to stablecoin by a regulated institution (“Anchor”), exchanged to Receiver’s LCY stablecoin using Stellar’s exchange rate.|
When it reaches Anchor at receiving country, then converted to Receiver’s LCY by the Anchor.
|Per transaction fee||0.00001 XRP|
XRP was c. $1.8 at its most recent peak in Apr 2021.
|0.00001 XLM minimum, when network is below capacity.|
XLM was c. $0.7 at its most recent peak in May 2021.
Founded in 2012, Ripple Labs is an American tech company that developed the Ripple payment protocol and exchange network. Originally named Opencoin, the project was renamed Ripple Labs in 2015, and based in San Francisco, California.
While the company’s eponymous cryptocurrency is commonly known (referred to as “XRP”), its technology and ecosystem extend beyond the cryptocurrency, although Ripple does harness XRP for certain uses within its ecosystem.
The main goal of Ripple is to improve on the existing experience of cross-border payments, given its transparency, speed of transaction, as well as (potentially) lower costs.
How it works
If Ann wants to send $100 to Betty, Ann converts the $100 to equivalent XRP tokens, which can be instantly transferred to Betty’s account over the Ripple network, RippleNet. Upon suitable verification and authentication of the transaction by the network, Betty will receive XRP. She will have the option to convert it back to any other currency of her choice or retain it as XRP.
RippleNet also facilitates currency exchange. For example, if you are looking to swap USD for euros, you could first exchange your USD for XRP on the Ripple network, and then use those to buy euros.
Ripple connects financial institutions and payments providers using RippleNET. It is a real-time gross settlement system (“RTGS”) currency exchange and remittance network which can allow for cheap and fast transactions between participants.
The XRP token is used for representing the transfer of value across the Ripple network and works as a mediator for both cryptocurrencies and fiat exchanges. It is also used to pay transaction fees.
RippleNET provides solutions for global payments and on-demand liquidity. RippleNET customers want to eliminate the need for the Nostro accounts (used in the existing corresponding banking system) and to use digital assets like XRP to source on-demand liquidity.
Ripple does not have a blockchain like Bitcoin or Ethereum, but rather, the XRP Ledger Consensus Protocol, which uses a hash tree to collate the data at hand into a single value. This is then compared across the validating servers to provide consensus. This protocol includes:
- The server that runs the Ripple Server software, rippled
- A ledger that represents a record of the amount of currency in each account
- Last Closed Ledger which is the most recent ledger that has been ratified by the consensus process
- Open ledger
- Unique Node List, which is a list of public keys be associated with the active validating nodes
It does not use Proof-of-work or Proof-of-stake, but rather, a Consensus protocol, in which validators come to an agreement on the order and outcome of XRP transactions every 3-5 seconds.
While anyone can download Ripple’s validation software, it maintains unique node lists which users can select to verify their transactions. Ripple decides which validators to approve for this list and makes up 6 of these validation nodes. Hence, although there is no central authority that decides the setting up of nodes and transaction confirmations, at present, the nodes are controlled by several financial institutions (including UBS, RBC, Westpac and the others mentioned above) in addition to Ripple Labs. This is in contrast with other blockchains, whereby anyone with sufficient computing power can meaningfully participate as a validator, or “miner”.
The Ripple network has two types of nodes: validator nodes and tracking nodes. The first ones collect transactions and send proposals out to their fellow validators. The transactions usually fail to reach consensus when the percentage of peers that recognize the transaction falls below a threshold. After the voting process starts, it should get approval by more than 50% of the nodes in the first round and then proceed for higher approvals. The transactions are written into the ledger once 80 percent of the nods approve the transactions.
Encounters with the law
- 2015: Ripple received a $700k civil money penalty from the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCen”) for “willful violation of the Bank Secrecy Act by acting as a money service business without register ding with the FinCEN.’’
- 2017: R3, developer of for-enterprise distributed ledger technology Corda, sued Ripple for the specific performance of an option agreement in which Ripple agreed to sell up to 5b XRPs for a price of $.0085. Ripple filed a counter lawsuit claiming that R3 reneged on several contractual promises and was simply acting in a spirit of opportunism.
- 2020: U.S. SEC filed a lawsuit against Ripple for being an trading $1.3b of the cryptocurrency without registering it as a security. They point to its role in funding Ripple and claim Ripple’s platform is not decentralized. This suit is still on-going.
Founded in 2014, Stellar is a blockchain-based distributed ledger network that connects banks, payments systems, and people to facilitate low-cost, cross-asset transfers of value, including payments.
Stellar is operated by the Stellar Development Foundation (SDF), a non-profit organization. The Stellar project received initial funding from Stripe, along with donations from BlackRock, Google, and FastForward etc. The main goal of Stellar is to improve on the existing experience of cross-border payments, given its transparency, speed of transaction, as well as (potentially) lower costs.
Interstellar is the for-profit, commercial arm of Stellar. It provides businesses with building, consulting and integration of Stellar blockchain for international payments. Some of its customers listed are Lightnet, which is aiming to be a pan-Asia cross-border remittance network, and Tempo, a European remittance provider.
In Jul 2021 , the SDF was rumored to be collaborating with Advent International in a takeover of MoneyGram, and in Oct 2021 Stellar and MoneyGram announced a partnership to utilize its blockchain technology for USDC transactions.
How it works
If Ann wants to send $100 to Betty, Ann sends the $100 to an Anchor (a fiat-on/off ramp on Stellar, elaborated in the next section), and the Anchor converts it to the fiat-backed token.
Fiat tokens are converted over the Stellar network into the Betty’s currency via a path payment operation, using either the exchange rates on the Stellar Decentralized Exchange (DEX), which is built into Stellar’s ledger system, or facilitated through a market maker.
When funds arrive in the destination country, they can be transmitted to either the Betty’s wallet, bank account, or another local rail.
Stellar records the movement of currencies and facilitates cross-border payments using a system of Anchors.
- Anchors are licensed and regulated financial institutions, money service businesses, or fintech companies that provide fiat on/off ramps to the anchor country’s banking system.
- Anchors often also provide ‘stablecoins’, one-to-one fiat-backed tokens, that users can redeem for fiat at any time.
- Anchors handle local regulatory processes such as KYC/AML.
Anchors also interoperate with one another, and with other Stellar-built applications. Businesses using Stellar can connect directly to the network of Anchors.
The Stellar Consensus Protocol (SCP) is a quorum-based Byzantine agreement protocol with open membership. A quorum is a set of nodes sufficient to reach agreement. A quorum slice is a subset of a quorum that can convince a node about agreement. An individual node can appear on multiple quorum slices. Stellar introduces quorum slices to allow each individual node to choose a set of nodes within its slice thereby allowing open participation. These quorum slices and quorums are based on real life business relationships between various entities thereby leveraging trust that already exists in business models. To reach global consensus in the entire systems, quorums must intersect. Consensus is reached globally from decisions made by individual nodes.
Every token on Stellar is exchangeable with any other token on the network, and the Stellar protocol itself connects buyers and sellers.
XLM (Lumens) is used primarily as a nominal barrier or cost to reduce spam on the network – each Stellar wallet requires a minimum balance of 1 lumen and the minimum per-transaction fee is 0.00001 lumen.