Key Takeaways:
Ripple Labs, the startup behind the popular Ripple blockchain and XRP cryptocurrency, has announced plans to enter the $150 billion stablecoin market by launching a dollar-pegged digital currency.
Ripple is Dropping a New Dollar-Backed Stablecoin
The move would pit the company against stablecoin giants like Tether, the issuer of the largest stablecoin Tether USD (USDT), and Circle, the BlackRock-backed firm behind USD Coin (USDC).
As per an April 4th press release, the stablecoin will be backed 1-to-1 with an equivalent sum of assets, including US dollar deposits, US treasury bonds, and cash equivalents, held by Ripple in its reserves.
The crypto firm noted that its reserves would be accounted for in publicly available monthly attestation reports, but did not say who will be auditing it.
The Stablecoin will Debut on Ripple and Ethereum Blockchains
The soon-to-be-launched USD stablecoin will be issued on the XRP Ledger and Ethereum blockchains, with plans to expand the offering to other blockchains and decentralized finance (DeFi) protocols and applications.
Stablecoins are cryptocurrencies designed to maintain a relatively stable value by being pegged to a basket of assets including a commodity or fiat currency. Typically, these tokens are backed by a country’s currency, with the US dollar being the most popular option. They tend to be less volatile and are most commonly used as trading pairs for other cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), or Solana (SOL).
In its release notes, Ripple highlighted that the current stablecoin market is worth around $150 billion and is projected to grow up to $2.8 trillion by 2028. Stablecoins are considered the most traded form of cryptocurrency.
CEO Brad Garlinghouse noted that there is “clear demand” for the assets in the market as they deliver “trust, stability, and utility”, and the company is making the bet “to meet this growing demand”.
US-based payments giant PayPal recently launched its USD-denominated stablecoin called the PayPal USD. The digital currency backed by US dollars and dollar equivalents is issued and managed by Paxos, the company behind the Paxos Dollar. Last month, Tether USD surpassed the $100 billion mark in circulation.
Ripple USD is a Response to Existing Failure by Stablecoins to Protect their Value
In an interview with CNBC, Garlinghouse said he is not deterred by existing competition in the market. The chief executive also said Ripple decided to introduce a stablecoin to the market in response to the “de-pegging” event where Tether’s USDT and Circle’s USDC briefly lost their $1 peg.
In 2022, USDT temporarily lost its 1-to1 ratio with the dollar amid market instability caused by the collapse of Terra USD (UST), a once popular so-called algorithmic stablecoin. Last year, USDC temporarily slipped below the $1 valuation after Circle revealed its exposure to the collapsed California-based, tech-focused lender Silicon Valley Bank.
Ripple’s stablecoin would also serve the role of an On-Demand Liquidity Product on the XRP Ledger, where it will be used as a “bridge” currency to settle transactions between banks and other financial institutions.
Ripple’s Struggles to Attract the Mainstream Market
Ripple aims to provide an efficient, faster, cost-effective blockchain-based alternative to the existing SWIFT banking system for international transactions. However, the company has faced several obstacles in finding a proper use case for the XRP Ledger with banks and payment institutions.
Santander Bank initially planned on using XRP for cross-border payments but chose not to after discovering that Ripple wasn’t widespread enough to support its demands.
Similarly, MoneyGram ended a partnership with the crypto firm to use XRP for international money transfers, citing increased costs associated with partnering with exchanges and other necessary counterparties in local markets.
Despite the setbacks, Garlinhouse insisted that the company hasn’t given up on the idea of using XRP as a payment token for the blockchain, before adding that the forthcoming stablecoin would serve as more of a complimentary product for the Ripple ecosystem.
Meanwhile, Ripple has been in the middle of a major US Securities and Exchange Commission (SEC) lawsuit since late 2020, where the financial watchdog accused the company of selling XRP to investors without first registering the tokens as a securities offering.
The company sold $728.9 million worth of XRP to various sophisticated buyers, including hedge funds, during an ICO round in 2017. The SEC is seeking $2 billion in fines from Ripple as part of the lawsuit.
Recently, a judge for the US District Court for the Southern District of New York ruled that XRP is not in and of itself a security, but a direct sale of the tokens to institutions should be counted as unlawful. Ripple claims that it sold the tokens through an exchange platform and broke no laws.
At the time of writing, Ripple (XRP) is trading at $0.5814 – up 1.7% in the last 24 hours.
The cryptocurrency is up 13% in the last 12 months, according to data from CoinGecko.
