Corridors: Liquidity Rising

Last week a friend went on a business trip to New York …. told her we were able to exchange some dollars, laying around in the house. She traded her Euros for Dollars and without thinking, the trade was done …. Euros for Dollars within minutes … Our little corridor.

Thinking about this in the international banking business this is absolutely unheard of. Many obstacles are standing between an easy transaction what many people are forgetting … why doesn’t Ripple just open corridors all over the world and let those transactions lead the way … let those XRP do what they were designed for, be used in XCurrent 4.0 –> XRapid …… no no no wait the buzzword is: O D L —) On Demand Liquidity ! ! !

We first have to establish something before we go into the issue Corridors: What is an international transaction and how is it done today. If you want to send some money from Germany to Belize, for example, you could basically go to a MoneyGram or Western Union, or Ria and 1. pay a fee 2. take it for granted that the service takes between 1 to 4 days and 3. risk anything that could go wrong within those 1 to 4 days; this of course, embodies one word: SWIFT.

Well, corridors, what are those: Corridors are pairs of fiat. Pools of liquidity in which XRP is held by exchanges and / or market makers in a partnership …… allowing a work around.

If we look at Ripple, they offer Banks multiple ways of sending money:

Bank-to-bank Fiat Currency Relationship

A fiat currency relationship is a bank holding a liquidity position with another and this liquidity is used for payments. One of the banks will be the Nostro Account; this bank holds the assets and the receiving banks is the Vostro Account; the liability issuer. This relationship can be pre-funded or with credit. The bank that holds the assets can earn Forex revenues; this would be ideal for high-volume corridors.

Third party Liquidity Provisioning

In this relationship a bank authorizes a third party to provide the FX liquidity for delivery of payments. Third-parties can hold accounts with both transacting banks and provides the FX for the transaction. Third parties take care of the “corridor issue” for banks as they have it already in place.

Settlement Through Digital Assets (XRP)

With International transactions settled using XRP, the sending bank and the receiving bank hold XRP; the digital asset. Makes it ideal for the not so common settlements, the exotic corridors, so to speak. No Nostro Accounts have to be in place, what by itself is already a huge advantage. These settlements will make use of the XRP Ledger.

So obviously readers of this blog are more interested in the third option: where XRP is used.

Looking at this third option, using XRP, … well, let’s take a little deeper look. Exchanges are helping to move a currency payment into XRP and back into another currency. So … , it all starts with Crypto Exchange partnerships.

At the moment Ripple has 4 preferred exchanges they work with:

Bittrex: preferred digital asset exchange for US Dollar transactions.
Bitso: preferred digital asset exchange for Mexican Pesostransactions.
Coins.ph: preferred digital asset exchange for Philippines Pesos.
Bitstamp: preferreddigital asset exchange for US Dollar transactions.

What we need to know is that all start-ups are required to get an M.T.L., a Money Transmitter License for each state of planned operations; according to U.S. law. Digital Currencies are still very new, so the rules are not that black or white … This is the first step that need to be taken.

Ripple, according to FinCEN, is a Money Service Business and is required to obtain a Money Service Business License; Money Service Businesses are businesses that transmit or convert money. It is not only Banks, but also Non-Bank Financial Institutions that fall into this category. Often you will find these doing services in underdeveloped regions/ countries where you hardly find banks.

Exchanges of virtual/ digital currencies are Money Transmitters per FinCEN. Corridors can be opened with the appropriate licensing.

So relationships with exchanges need to be made, have been made. More exchanges will be chosen in the (near) future … we all have heard names like CoinBase, Binance, Bitrue, Coinfield, … we’ll just have to wait and see ! ! !

Second step is finding small or medium size payment companies, start using these and start with the transactions.

This is where MoneyGram and other money transfer companies come into play. Starting from scratch is time-consuming but using Moneygram, Ria and Transfer Go for example, MoneyGram, with its 20.000+ corridors, gives you a head start. There is already volume in many of these corridors, so XRP can go into low volume production, they can use to build up liquidity and attract Market Makers.

Another important reason why MoneyGram, Ria & Transfer Go are important, they will allow banks to use XRP without touching it. The MoneyGram, Ria & Transfer Go’s of this world will do the transactions and this will be way to get around regulations. This will bring a new revenue stream for money transfer companies, for how long it takes though, as regulations will be clearer and banks would like to do their own transactions for data and for saving money.

How Does Ripple View New Corridors?

ForEx trading, and its role in providing an active market for cross-border remittance processors and banks, is an important one.

An ‘efficient’ market is one in which a transaction can be completed using one spot rate – the current exchange rate between currencies.

However, if there is not a lot of liquidity being traded between two currency pairings, it can sometimes result in ‘slippage’ of a rate as an exchange must dig deeper into its order book to find enough offers to meet the size of a large transaction.

Eventually, RippleNet’s ODL will be able to compete in efficient corridors (such as between the US Dollar and the Euro), but for the moment, inefficient corridors are regarded as low-hanging fruit.

David Schwartz’s Take

In a Reddit post from two years ago, David Schwartz elaborated on this point, and indicated that the creation of RippleNet’s products to replace SWIFT kept the long-term vision in mind with regards to using a digital asset (XRP) as a bridge between currencies.

Basically, Ripple’s plan is to ‘start with xCurrent’ (their real time messaging solution), and then ‘flip the switch’ using digital assets when XRP exhibited sufficient liquidity in a corridor:

“It’s (lack of corridor liquidity) a painful chicken and egg problem.

So instead we designed a modern payment system that could support any form of settlement through ILP. The improvements on the payment side were so drastic that banks found value in the system even if the settlement still takes place using the correspondent banking system.

As this system gets adopted by FIs, more and more payments will be able to be bridged by XRP the minute XRP has the liquidity to bridge them.”

This last part is the most exciting portion of his description of Ripple’s strategy, of course, because it indicates that eventually, XRP will be used for many corridors as its liquidity increases. It has shown that XRP’s average daily trade volume has been steadily increasing over time, even during the later stages of the crypto bear market.

Ripple’s In-house Liquidity Experts and Traders

In a recent interview, Brad Garlinghouse mentioned that Ripple no longer feels OTC sales of XRP are necessary as part of its ODL roll-out. He indicated that new customers could acquire XRP at market on exchanges dynamically, and that there was sufficient liquidity in newly targeted corridors.

This was a bit of a surprise for me, given Ripple’s recent acquisition of Algrim; but it also makes sense:

If Ripple is advocating that new customers utilize ODL by dynamically sourcing the XRP as transactions are processed, that means that the only thing they have to do to support these new corridors is to monitor liquidity and perhaps step in when needed. Having the team from Iceland ready to help supports this notion.

XRP Loans

In the same interview where Brad Garlinghouse mentioned that sales of OTC were no longer needed, he also stated that low-interest loans of XRP may be possible for institutions that wish to replace their Nostro account holdings with a stack of crypto.

It was a nice surprise to hear, since the last time I’d heard Ripple discuss the potential of XRP Loans was in an XRP markets report from over a year ago.

The notion of loans is an interesting one, since it potentially opens the door for other institutions or even individuals to enter the space; loaning XRP for interest is a fascinating prospect, although I’d wager the ‘low-interest’ portion of Brad Garlinghouse’s comment might provide a short-term monopoly on that business for the company, since it is the largest holder of XRP in the world.

How Ripple’s ODL Works Currently

Of course, the execution of a plan at a low level will sometimes reveal unexpected patterns or ways to minimize slippage. the implementation of Ripple’s ODL product is no exception, and XRP Community fans and researchers have noted certain patterns.

The most experienced researcher of Ripple’s ODL product and its resulting transactions on the XRP Ledger is, arguably, @H_M_X_ (Twitter avatar). He’s published his detailed approach for separating out these ODL-generated payments from the background noise of the ledger, using a combination of techniques. He’s open-sourced his tools and techniques on Github in the event that others would also like to use his approach on their own: @H_M_X_’s Github Repository

Using a US-to-Mexico example, the basic ODL transaction steps include:

Purchase XRP with USD at Bitstamp (**Originating** Exchange)
Send XRP to Bitso (via **RippleNet**)
Purchase Mexican pesos with XRP (**Beneficiary** Exchange)

These steps are reflected in Ripple’s public-facing collateral:

While we don’t have an insider’s viewpoint into how time frames and amounts of transactions are organized, we can see the ledger-based portion of how ODL works.

@H_M_X_ noted that transactions of various sizes are communicated in periodic intervals, in an effort to reduce slippage and access the best rates:

Of course, there may be other considerations at play as well, such as regulatory prohibitions of transaction sizes, or other requirements, but those are the aspects that are opaque to outside viewers.

@H_M_X_ has done an amazing job of isolating and identifying these ODL transactions, and noted that the number of payments in his tracked corridors has been growing quickly:

It’s an inspiring reminder of what’s in store for XRP holders as the digital asset continues to be adopted as a bridge asset for more and more remittance processors and banks.

To even show more of the great work done by @H_M_X_ , we will share two more graphs.

The count of transactions of only the destination tags that are suspected to be ODL customersThe amount of the transactions.

The Vision For The Future

In the same Reddit thread where he discusses the challenges associated with new corridors, David Schwartz provided the following inspiring comment:

“We’re not trying to fight for a bigger slice of a tiny pie but for the biggest slice we can get of all the payments in the world, as the payment volume goes up because payments become faster and cheaper.”

It’s a comment that reveals the big-picture, win-win thinking that’s driven many of the visionary solutions that Ripple has created; and based on the number of banks and other FIs that have been signing on, it appears that RippleNet may be more than a niche solution in banking; it may indeed grow to become the world’s payment backbone.

What would this mean for XRP?

There are limited quantities of XRP available for usage as a bridge asset, but it is divisible by one million, down to individual ‘drops.’ There will be no problem with enough units to represent value as it flows across the world’s borders.

Almost any significant percentage of the global payments utilizing ODL would translate into new a intersection of supply and demand that may make XRP holders quite satisfied.

Will Utility Outrun Speculation?

Brad Garlinghouse noted that, when the current corridor for the Mexican peso is activated within the ODL solution, it typically will comprise 80% of Bitso’s liquidity for the XRP-MXN pairing.

It’s an anecdotal example based on one of the first corridors to go live for ODL, but it may offer a glimpse into how Ripple’s solutions can significantly outstrip speculative traders. One reason to hesitate before extrapolating based on that example is that speculation should follow utility.

Markets will eventually correct themselves, even as obsolete industry icons like Bitcoin continue to coast on their fading momentum.

Recently Bitso was in the news regarding Ripple and XRP. Ripple has invested into the Mexican exchange in order to ensure liquidity of the cryptocurrency XRP. This enables the flow of cross-border payments. Besides the investment, Ripple’s SVP of product, Asheesh Birla, will join Bitso’s board. This may help for expansion to other countries in South America like Argentina, Brazil and the alike. Bitso plays a key role for Ripple and this will only prove to be a smart move. The Mexican corridor is already in place, let’s see where this Bitso investment moves us.

New Gateways are Forming

Another great example and very up to date is South Africa’s Xago launching an XRP-exclusive gateway. The first thing that needs to be addressed is South African liquidity. The price of XRP, yes, everybody is waiting for it to rise, but the liquidity is step one, price follows. Moving money across the world, starts with liquidity and companies like Xago make this happen. Seeing how important this is, we reached out and had a nice interaction with the Capetown-based Company. Debra Ogilvie-Roodt, Xago’s Chief Commercial Officer, took the time and shared some insights into Xago’s world

Interview with Xago: Debra Ogilvie-Roodt

Starting off our conversation, we would like to know a little more about Xago and the people that work for the company, how it all started

Hodor / XRPTwin:Can you tell us something about the company and the people that work at Xago, how did it all start and what are the backgrounds?

Xago / Debra Ogilvie-Roodt:It’s been a long road for us! The journey of Xago started in 2012 when Jurgen Kuhnel was at the time attempting to build a QR code payment system. During this period Bitcoin was becoming more prominent in South Africa and Jurgen & Sonya saw the potential and began to explore this avenue because they believed that QR code payments and Bitcoin made for a frictionless experience in removing the third party processors. Jurgen and Sonya then started attending Bitcoin meetups and became the first Bitpay affiliates for South Africa. It was then that the decision to focus all efforts on building a crypto payment platform was made and in 2016 and approached Mark Chirnside, a payments expert and together built a proof of concept.

It was during the development of this proof of concept that they became aware of Ripple and XRP and quickly realised the utility of this solution and the impact it could have on payments.

We then found a technology partner called Tenacious Digital, where our current CTO, Grant Pidwell, was a director, to develop the gateway backend for us. It was at this point that we finally had real tangible code and tech that would prove our theory. We then managed to secure additional funding from a number of Angel investors, and continued to build out the gateway and vision before securing a significant investment from African Technology Investments in order to build the team and launch our first product, the Ripple Gateway and XRP only exchange. This is the first step in fulfilling our long term vision of moving money faster more efficiently and of course reducing costs.

Maybe a long answer but we found it too informative to leave out words and to shorten Debra’s answer !!!

Hodor / XRPTwin:So, Xago transfers assets using the Ripple Network. When did Ripple come into play; better question why Ripple?

Xago / Debra Ogilvie-Roodt:As mentioned above we initially believed that Bitcoin was the solution we required, however Sonya, who became a serious advocate for blockchain technology, then suggested that we look at Ripple because of the speed of transactions, cost of transactions and number of transactions per second, it certainly seemed like the most competitive product for a retail payment environment. We engaged with the market and received positive feedback on Ripple and the use of XRP and we then forged ahead and built our proof of concept showing how you would be able to effect a Ripple payment, using your phone number at a retailer utilising their existing hardware and software.

A peak at the office!

Hodor / XRPTwin:The Exchange only allows customers with a South African Bank account, will you look into adding customers from other countries in the (near) future? Will this be the same for the currency that is used, the South African Rand?

Xago / Debra Ogilvie-Roodt:Right now, we are fully focused on making our exchange a success in South Africa and building XRP / ZAR liquidity. We custom built our exchange and added unique features, such as the pegged order system, as we need to create price parity in order to fully realise our vision of building a payment platform that reduces cost. We do have a number of other African countries on our roadmap where we will be able to add other Fiat to XRP pairings but this will only be further down the line.

Hodor / XRPTwin:What role will you have in South African Business’ accepting XRP as payment? Is this something you are trying to achieve?

Xago / Debra Ogilvie-Roodt:Accepting XRP is a use-case we are looking at, but our main goal for utilising the XRP Ledger is to open up new payment channels for the retailers. This can be, for example, accepting any crypto at their point of sale where we act as an aggregator using XRP as our value transfer. For domestic use-cases this can be done without utilising a decentralised ledger, however, we see a future where we open up retail payments that incorporate the power of XRP in order to affect cross border transactions at the point of sale.

Today cross border transactions in Southern Africa averages 9.5% in fees and sometimes take up to 5 days to clear. The reason for this is because of the exotic currencies and small amounts that people are sending. The current local money transfer platforms have to batch payments and introduce processes like derisking (not holding onto these exotic currencies) in order to open up these channels. Most people sending money back home are usually doing this because of a serious need and have no choice but to pay these massive fees and wait.

We believe that if we can solve the liquidity issue and bring the XRP premium in line with the USD price we will be in a position to lower the fees and speed up the flow of funds between these customers. We would then integrate with retailers to use the point of sale as cash-in /cash-out facilities.

Hodor / XRPTwin:Will two-factor authentication technology in some way slowdown adoption as this is time consuming and not every customer likes 2 FA?

Xago / Debra Ogilvie-Roodt:We have designed our system where 2FA is mandatory and believe that other crypto providers should do the same. We would much rather enforce security, slowdown adoption and bring security to the font of mind of all users, particularly given that settlement is final with crypto. As a consumer you need to understand that there is no recourse once the transaction has taken place. We also believe that we should follow similar processes set out by banks to protect your assets and 2FA plays an important role in protecting the users assets on our exchange.

Hodor / XRPTwin:How far is South Africa with crypto currency regulations? How does the country look at the regulations situation in the United States?

Xago / Debra Ogilvie-Roodt:Regulation really differs quite dramatically from country to country with each central bank taking their own view and approach to crypto, and whilst we try to keep informed of the role regulation is playing with regards to crypto globally, at present we are focused on South Africa and Africa as these are the markets we will serve. In South Africa, our Central Bank has been quite progressive, and though there is no formal regulation we have had papers published by the Central Bank to provide guidance on what regulation will most likely look like, what will be expected of exchanges and the requirements we will need to meet. The most important of these being KYC requirements and customer due diligence in order to comply with strict AML/CTF policies. When the regulation comes out, we expect that it will incorporate all these policies and therefore have built our business platform and procedures so that we will be ready for it. We are engaging continuously with the Central Bank as we believe that working closely with them can only be beneficial for the long-term vision of our business.Hodor / XRPTwin:As we all know Mojaloop, made available by the Bill & Melinda Gates Foundation, also tries to bank the un-banked? Have you spoken to the Foundation or have you looked at Mojaloop?

Xago / Debra Ogilvie-Roodt:We have engaged with the Bill & Melinda Gates Foundation regarding Mojaloop but at the time our product was not at a stage where we were ready to formally open discussions. We do hope to pick-up the discussions as we believe collaboration would be beneficial for the ecosystem as a whole and we aspire to their vision of financial inclusion.

This final question is just a confirmation Xago is on the right path and ready to lead the way in the African continent with Ripple at their side. We want to thank the team for their great efforts in making time for us, especially Debra Ogilvie-Roodt. We will hear a lot of this team in the (near) future.

We have not nearly touched everything in this blog regarding corridors, as it is a massive topic.

Where it started so smooth with a “friendly transaction”, we figured out there is a lot more to get the payment done in real life. We are definitely getting much closer to a situation where sender and receiver are sharing the same amount of money; wherever you live in the world at whatever time it is in the world. Let’s stay close with all the changes that are coming.

Thank you Ripple , @H_M_X_ , Rick, Xago, especially Debra and Hodor (and XRPTwin a little bit) for the teamwork getting this blog done.

This one is specifically for Hodor, my Big Blog Brother ! ! !