Call It “The Ripple Effect”

Recent court crypto ruling offers corporates an FX alternative.

Court ruling against the SEC on Ripple's XRP will have profound ripple effects.

The recent landmark judgment that handed crypto platform provider Ripple Labs a partial victory against complaints brought by the US Securities and Exchange Commission (SEC) is likely to disrupt the US market and drive broader adoption of Ripple’s XRP digital token, which is often used by businesses, government and financial institutions as a bridge currency. Other crypto firms such as crypto exchange operator Coinbase—which is also accused of selling unregistered securities on its platform—might use Ripple’s win as a legal precedent.

The judgment by the US District Court for the Southern District of New York ruled that XRP is not a security except when used for institutional sales. The ruling will also likely force US banks to innovate even faster amid the threat of greater disintermediation that broader usage of the digital token may bring. For starters, US corporate treasury departments will now have unencumbered access to XRP at a fraction of the cost of traditional banks in foreign exchange (FX) transactions.

Ripple also stands to gain from US banks using XRP for cross-border payments as a blockchain alternative to the payment-messaging cooperative SWIFT. And the US government is likely to be watching events closely.

The roll-out of the highly anticipated FedNow real-time payment service on July 20 allows 41 participating banks and financial institutions to offer their customers instant payments in the US. Designed by the Federal Reserve, the system uses technology powered by Volante—a Ripple partner—as one of the companies supporting the Fed initiative.

That has led to speculation that Ripple’s indirect involvement could speed the use of XRP. The Fed is on the record saying that it assessed XRP’s capabilities during research before FedNow’s launch. Indeed, central bank officials have said FedNow is an attempt to modernize America’s banking system and may limit the reach of private sector players such as Venmo and PayPal.

For now, FedNow is limited to domestic payments, but it is not inconceivable that it may be deployed in cross-border payments as part of the Fed’s modernization efforts. Digital-first banking services are increasingly taking center stage, but the current payment rails in the US look dated and mismatched concerning consumer demand.

Meanwhile, Ripple Labs could benefit if the Biden Administration pushes ahead with plans for central bank digital currency (CBDC). In May, it launched a CBDC platform that lets central banks, governments and financial institutions issue their own CBDC, leveraging the same blockchain technology used by the XRP Ledger.

Ripple’s partial victory is also a much-needed shot in the arm for the cryptocurrency sector, which remains weighed down by the specter of regulatory uncertainty. The hawkish stance of regulators, notably the SEC, has stifled innovation and driven business abroad, leading some analysts to claim the US is falling behind other major economies in the crypto space.

Considering such observations, the US Congress faces growing pressure to provide regulatory clarity and rein in so-called ‘regulation by enforcement’ that has hampered the domestic crypto and digital assets. Unsurprisingly, Ripple is highly bullish on the disruptive ability of cryptocurrencies, particularly in the payment space. In early July, it published a report in which the authors estimated that more than 65% of the US population is expected to use mobile banking by 2025.

Mobile money payments reached a staggering $1.26 trillion in 2022, according to the GSM Association’s State of the Industry Report on Mobile Money 2023, which the Bill and Melinda Gates Foundation funded. There are now 174 million money agents globally servicing the mobile payments sector, the authors note, in what must be the mother of all wake-up calls for banks.

Still, some legal analysts predict Ripple’s victory against the SEC could be short-lived if the regulator decides to appeal the judgment. Such an outcome would deal a heavy blow to the recuperating crypto sector.

Indeed, it would cause quite a ripple.