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Ducass

Volatility could reduce viability as payment mechanism

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There is one thing that I am struggling to get my head around with respect to volatility and payments...

Let's say I am a big company and I need to pay $10m to a creditor for whatever reason. (Let's just say 1 XRP equals 1 USD  at time zero)

Step 1: I buy my XRP10m give the bank my $10m

Step2: The bank does an immediate transfer of my XRP10m to the other party/bank

Step 3: The receiving party/bank converts this XRP10m into USD (to expunge my obligation), but due to the fairly extreme volatility the price is now .99c instead of $1, therefore the receiving bank/counterparty didn't receive $10m but $9 900 000. The $100 000 was lost due to currency volatility...that's a problem for the ultimate receiver of the currency.

Okay so what if the original invoice WAS in fact in XRP...well then I have a whole new problem with respect to accounting/GAAP/IFRS that will come into play as XRP is NOT a currency...

I can carry on all day with examples of how this would be a nightmare to implement if you are a publicly traded company...

As a fairly experienced global corporate treasurer I would love to get a better payment system than the banks and SWIFT and I have seen some presentations on the "Ripple" software, which is very interesting, but using XRP in a large corporate might be more trouble than its worth.

Any comments appreciated as I don't want to look like I am bashing this, but international treasury is what I do EVERY day and I can't work out why I would even consider XRP as a payment currency.

There are also no NDF's, Forwards, options or derivatives that I could use to hedge my XRP exposure...

 

 

 

 

 

 

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1. Multi hop means you may not be exposed to exchange rate risk, or "holding" xrp. So all those hops collapse into 1 tx.

2. Your bank may deal with xrp directly or indirectly, to facilitate the experience you as a treasury manager desires.

3. I have not detailed this out yet, but I think PayChan can be used to 'hedge' the fx rate risk exposure over time, given a cooperative actor.

4. GAAP/IFRS recognition is still an issue... but IMHO the potential is there.

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The current xrp volatility is expected, it will be more stable by improving the liquidity / getting FI's to use XRP.
Miguel Vias (head of XRP markets at Ripple) said this in an interview:

Quote

LTP: As per the report, off-ledger activity for XRP has increased in 2017. Does Ripple have a plan to shield XRP from any “pump and dump” activities rampant on cryptocurrency exchanges?

Miguel: Erratic price activity is often a symptom of less than optimal liquidity. As markets mature, volume increases and volatility decreases as a direct result of that volume. So while we have no plans to actively dampen price movements, a direct consequence of our strategy to increase liquidity should be more stable markets.

 

Quote

LTP: In general, what are the mid to long-term price targets envisioned for XRP by Ripple? We don’t need exact numbers, just an idea on the general sentiment would suffice.

Miguel: To be honest, I rarely think about the price. At this stage in the development of XRP, markets focusing too intently on price can be very distracting, internally and externally. Instead, I am squarely focused on helping companies around the globe solve their real time liquidity needs using XRP. By building XRP’s fiat liquidity, and making that liquidity available for payments, we ensure that XRP will become the institutional digital standard for international value transfer. From there, the price should take care of itself.

https://letstalkpayments.com/the-tumultuous-rise-of-ripples-xrp/

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26 minutes ago, JoelKatz said:

You likely wouldn't use XRP this way until you could hedge the volatility risk. Instead, you would make your payment without XRP at either endpoint. XRP would be used internally to settle the payment using a protocol like ILP. At no time would you hold any XRP.

But once the volatility is more manageable and you can hedge it, then it makes a lot of sense for you to hold just one pile of XRP rather than a whole bunch of piles of different fiat currencies in all the corridors you need to pay into. Even if XRP is three times as volatile as fiat currencies, if you can keep one pile of XRP rather than ten piles of different fiats, and your exchange costs are halved, it starts to look like a pretty good deal. But we're not anywhere near there yet.

How soon do you think that day will come? What will help us get to that level faster? ILP? More volume/liquidity, more pairings, more exchanges? Better/different marketing approach? More banks on Ripple?

Or as you mentioned before, maybe there are others ways, perhaps better ways XRP can be utilized that don't involve banks directly. I'm curious what alternative scenarios have come up.

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Thanks for the responses...not quite sure how to answer in this forum/chat room, each answer would take a thesis...has anyone written any "whitepapers" and/or thesis' on these accounting and treasury issues as they pertain to "crypto currencies"?

I just hope someone is addressing the practical implications of using something like XRP in a large corporate company with auditors, risk committees, audit committees, corporate governance etc. it won't be a short road.

As much as I want the payment world to be shaken up, I find it hard to believe that large corporate companies will do payments in this way any time soon.

I do however believe there are multiple applications for "blockchain" or however you want to define the basic tech. That is VERY exciting.

Sorry I had to just get this...the FX market is TRILLIONS of dollars a day...meaningful liquidity in XRP is likely to be a little while off...

 

 

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1 hour ago, Ducass said:

As much as I want the payment world to be shaken up, I find it hard to believe that large corporate companies will do payments in this way any time soon.

I do however believe there are multiple applications for "blockchain" or however you want to define the basic tech. That is VERY exciting

You might be surprised by how quickly this happens when large savings are available. 

If large companies can quantify their Nostro costs, and then compare it to a Ripple implementation for doing parings in the Pacific-Asia corridor - where there is no equivalent to the "Euro" - it can happen. 

In fact, I'd bet it happens very quickly for micropayments (any payment under ~ 12 USD). 

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I certainly agree with the low value payments example, I might even buy some XRP for that! Mostly because of the fact that banks are a complete rip-off when it comes to facilitating payments...

The management of Nostro accounts in a bank is costly, a pain in the arse and I remember as a young trader getting the crappy job of sending money to ineffeciently "fill up" our Nostro's on a daily basis. You (back office) was always guessing how much they needed to fund every day. Now THIS particular area is perfect for a distributed ledger application, but in my world it would still be multi fiat currency between many participating banks, not related to a crypto currency at all...the number of currencies should be less of an issue if the daily management is reduced by a blockchain/ledger solution. 

@JoelKatzAs I am sure you understand that the decision to hold a number of currencies is not only payments driven, but a function of the amount of risk one is permitted to have (Usually some VAR number approved by the board/risk committee) in your near monetary assets. (Quick definition lol) The VAR calculation can also be massively skewed by XRP if it doesn't have interest rates and debt issued in "it"...etc

This is really complicated, but I like it!

 

 

 

 

 

 

 

 

 

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Guest

Welcome Ducass. It's great to have your professional perspective in the forum.

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On 28/06/2017 at 3:02 AM, Hodor said:

You might be surprised by how quickly this happens when large savings are available. 

If large companies can quantify their Nostro costs, and then compare it to a Ripple implementation for doing parings in the Pacific-Asia corridor - where there is no equivalent to the "Euro" - it can happen. 

In fact, I'd bet it happens very quickly for micropayments (any payment under ~ 12 USD). 

Already happening in Thailand, where you can use any coin to top-up your mobile phone as an example with bx.in.th wallet. 

Edited by Charliemango2

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This article was written by translator. I want you to understand.

This is my idea of understanding ripple and there are no newspaper articles

RCL and ILP are similar to the current financial system.

If a large company directly purchases XRP and uses it for settlement, liquidity is required as a premise

Price volatility will also follow. The company wants to use XRP directly, and it must have a lot of liquidity.

But if it is used internally by the bank, I think it is different.

Banks need exchange rates rather than liquidity.

If you use XRP depending on the exchange rate, no liquidity is needed.

However, if the exchange rate increases, the liquidity will increase by itself

I think a market with high volume and low volatility will be created.

It will be the same as the current foreign exchange market.

The foreign exchange market with low daily volatility and high transaction volume ..

Is not the foreign exchange market now?

Would not it? What do you think? ^^

Edited by rippler

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2 hours ago, rippler said:

However, if the exchange rate increases, the liquidity will increase by itself

I think a market with high volume and low volatility will be created.

Yes. 

Higher - and appreciating - prices make for more liquidity in a couple ways. 

1) More interest by speculators leads to more trading

2) Higher value asset transfers are possible without affecting price

JoelKatz covers these points here:

He explains Ripple's general strategy for XRP here:

https://www.xrpchat.com/topic/5280-valuation-models-xrp-the-digital-currency-vs-ripple-the-company/#comment-50182

Here he explains why higher prices (i.e., exchange rate) are good for reducing volatility:

https://www.xrpchat.com/topic/6360-value-of-using-ripple-over-other-currency-on-the-ripple-network/?do=findComment&comment=61891

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