MoneyGram pilot is important real-world test for Ripple's payments plan

The Ripple bulls are back, and this time they brought along a friend.

News that MoneyGram plans to pilot Ripple's cryptocurrency, XRP, as a means of improving cross-border payments ended a multiday slide in the cryptocurrency's price. Dragging it down were concerns that it was overbought and criticism of Ripple's centralized business model, which stands in stark contrast to the decentralization that is key to bitcoin, Ethereum and many other digital currencies.

Detractors online had also expressed uncertainty or outright scorn in recent days regarding what problem XRP is designed to solve.

But bankers know the problem all too well. To execute cross-border payments today requires financial institutions to rely on a complex web of relationships with correspondent banks in other countries. Worse, they must hold dormant cash in overseas accounts to provide liquidity for payments. Under the Basel III regime, these reserves count against banks as balance-sheet assets, forcing them to hold even more cash to cover their supposed liabilities.

International bank payments are slow and the associated fees often remain unknown until after a transaction has reached its final destination.

MoneyGram, a major player in the $600-billion-a-year remittance market, is similarly afflicted.

Enter Ripple. The San Francisco startup is offering on-demand liquidity and rapid foreign exchange through XRP, theoretically allowing financial institutions to send payments around the world without the need for multiple corresponding accounts. Fees would be lower and the payment flows more transparent.

“The payments problem doesn't just affect banks, it also affects companies like MoneyGram, which help people get money to the ones they care about,” Brad Garlinghouse, Ripple's CEO, said in a news release on Thursday. “By using a digital asset like XRP that settles in three seconds or less, our clients can move money as quickly as information.”

There are miles to go before a cryptocurrency-based system replaces correspondent banking, but MoneyGram's pilot looks like a step toward a world of faster, simpler, cheaper international payments.

“This is very much part of Ripple’s strategy to partner not just with banks but also with money transfer networks and emerging providers, such as mobile wallets,” said Zil Bareisis, analyst at Celent.

Last June, Stefan Thomas, Ripple's chief technology officer, said that compared with the status quo of correspondent banking, XRP-based liquidity would seem like “gold that you can teleport into any vault in the world instantly.”

The MoneyGram announcement gave XRP a shot in the arm.

Reports on Wednesday night that South Korea was preparing to ban all cryptocurrency trading sent digital-asset investors rushing for the exits. As tens of billions of dollars in value were temporarily erased from the market, XRP fell to a low of $1.62 before rebounding on the MoneyGram news and updated reports that South Korea was not looking to kill digital currency trading after all. XRP traded as high as $2.35 on Thursday morning before falling back to just above $2.00 by the early afternoon.

In late December, prior to its recent decline, the cryptoasset went on a tear, becoming for a few days the second-most-valuable digital currency in the world, after bitcoin. In early January, Ethereum regained the No. 2 spot.