Digital currencies continue to achieve relevant milestones. Last week, the digital currency company Ripple and a consortium known as R3 which includes over a dozen of banks announced a partnership to reduce settlements on international payments. The R3 consortium includes household names such as Barclays and BMO which adds a lot of credibility to this effort.
The trial solution looks to leverage Ripple’s XRP digital currency to avoid or reduce the usage of “nostro-accounts” in international transactions. That type of accounts are typically used to hold foreign exchange assets such as British Pounds in order to settle international transactions. The usage of “nostro-accounts” is widely adopted within the banking community but the process can result very expensive and lengthily. By using Ripple’s XRP, R3 has been able to reuce settlement times and expedite liquidity by a significant order of magnitude.
Ripple is a great choice for this type of scenario as its network does not only process XRP but also traditional currencies. The Ripple-R3 pilot is a major milestone for the digital currency space and is also very relevant that the solution is based on a currency other than Bitcoin. The deal also brings some important lessons for the digital currency market.
Some Thought About the Digital Currency Space
The Ripple-R3 deal has sparked some debate and ideas about digital currencies that I think is worth discussing. Here are some key points:
We Are Headed Towards a Multi-Digital-Curency World
By now, it is very obvious that we are transitioning towards a world with multiple digital currencies. A few years ago, it seemed that Bitcoin was going to become the sole dominant digital currency but other alternatives have emerged and capture a meaningful share of the market. As a result, aspects such as digital currency exchange models will become increasingly important in the near future.
Is Not All About the Blockchain
Even though both Ripple and R3 leverage blockchain technologies, the core of the pilot was based on the capabilities of XRP as an foreign exchange asset. The trial represents an important achievement for digital currencies independently of the blockchain infrastructure.
The Blockchain Will Become Even More Important on a Multi-Digital-Currency World
In a world with multiple digital currencies, the blockchain will become even more relevant as the underlying network powering most of those digital assets. The blockchain can guarantee interoperability and seamless exchange between many different digital currencies.
Regulated Digital Currencies and a Necessary Evil
Decentralization is one of the key capabilities of digital currencies such as Bitcoin. However, many times people mistakenly associate decentralization with deregulation. The lack of a central authority does not necessarily negate the regulation of a digital currency. as the Ripple-r3 pilot shows, regulation is required to make digital currencies more applicable in mission critical and large scale scenarios for digital money exchanges.
Multi-currency Networks Might be the End Winners
Complementing some of the previous points, networks such as Ethereum and Ripple that can support different digital currencies might be better positioned than single-currency networks like Bitcoin for a multi-currency world. As companies adopt different digital currencies, the consistency of the underlying platform/network will become increasingly important.