Many consider data transparency the foundation of truth. It gives people access to information and an opportunity to form their own, unbiased opinions. At Ripple, we provide transparency about Ripple’s sales of the digital asset XRP through our quarterly reporting, and we continue to find other ways to share new useful data and insights about XRP.
The most recent example is our analysis of whether XRP offers a way to eliminate pre-funding in today’s correspondent banking network.
During CEO Brad Garlinghouse’s recent comments at The Economic Club of New York, he discussed with Fox Business anchor Liz Claman about the use case for XRP in cross-border payments. Garlinghouse explained that companies like MoneyGram have adopted Ripple and deployed XRP as a bridge currency to increase transaction speed, cut costs and better compete in the marketplace. He also mentioned MoneyGram’s ability to avoid tying up several hundred million dollars every year in those pre-funded nostro/vostro accounts using XRP with On-Demand Liquidity on RippleNet.
But, what sparked the most discussion, was Garlinghouse’s reply to Claman questioning currency fluctuations and whether a digital asset was too volatile for fiat payment flows:
“If you multiply 270,000 seconds [just over 3 days] in a low-volatility asset and you compare that to 3 or 4 seconds in a highly volatile asset like XRP, it turns out you are taking less volatility risk with an XRP transaction than you are with fiat.”
Claman’s question is an easy, recurring criticism leveled at digital assets. But is it true? We dug out our calculators and sharpened our pencils to do the math and test Garlinghouse’s back-of-the-envelope calculations.
For purposes of this exercise, we defined two payment use cases for our calculations:
- A fiat transaction that compares the spot USD-MXN rate to the spot rate after a delay; and
- An XRP transaction which compares the implied USD-MXN rate through XRP, varying the time you hold XRP after purchasing the USD.
To avoid overlap between XRP settlement times and the market update rates, we chose one minute as the smallest XRP transaction time for our work (even though this typically happens in mere seconds). We then compared XRP and fiat volatility exposures under three different types of market conditions: the last full month, a rally and a period of decline.
- The XRP = 3-day Fiat column is how long XRP must be held as the exchange medium before it experiences the same volatility as a fiat-only transaction over three days;
- The Fiat = 1-minute XRP column demonstrates how fast a fiat payment would have to occur to limit its volatility to the same as a 1-minute XRP transaction;
- And the XRP 1-minute/Fiat 3-day column is the fraction of three-day volatility you typically witness in a one-minute XRP transaction.
The data clearly shows that Garlinghouse is correct—a typical XRP payment has 1/10th the volatility exposure of a typical fiat SWIFT payment.
In general, the relationship between the third and fourth columns shows that one to two hours of fiat volatility is roughly equivalent to one minute of typical XRP volatility. Even during a highly volatile rally period, XRP must still be held for an hour (versus the seconds it’s normally held) to attain the same volatility as a fiat payment.
Ultimately, the speed of an XRP transaction means that transaction partners are in and out of the digital asset so fast, there’s no need to hedge. The resulting risk is much lower with a digital asset and is one of the reasons companies like MoneyGram have been so effusive about the advantages of Ripple and XRP.