Ripple Labs is the private company behind the Ripple blockchain, several software platforms, and the XRP cryptocurrency which the company mined in full before it launched it into the market. The company has a manifest purpose which is to use blockchain technology, the internet, and cryptocurrencies (especially XRP) to disrupt the world’s legacy international payment system.
When a bank needs to send money overseas whether to another bank or to a branch in the company in another country, it uses a messaging system called SWIFT. The system has been around since 1975, and it’s changed little if anything. It’s the only way to do business for the most part. It’s slow, expensive, and unreliable. It’s also a monopoly, so it has little incentive to improve. That’s what Ripple wants to change for the world’s banks, and, ultimately, for customers as well.
The Californian company is disrupting the international payments system one bank at the time by securing strategic partnerships with banks and financial institutions all over the world. And now, they’re trying to start collaborative efforts with a special kind of bank: the central bank.
Central banks are nothing like the traditional banks you and I can use to store our savings or have financial services of all kinds. There’s usually only one central bank in every country; except in Western Europe, where there’s a single central bank serving all the countries in the Eurozone.
A central bank is a national institution responsible for issuing the local fiat currency. As the money is released into the market, the central bank also decides the interest rate associated with that money (because the government will have to repay the central bank in time, central banks issue currencies as loans to the financial system). Money isn’t backed by gold anymore or any other physical asset. It’s all about confidence among governments, the bank, and the market.
That function alone makes every central bank an essential player in any national economy. Those interest rates will determine how expensive it will be to get a loan from retail banks. A high-interest rate can slow an economy down. A low one tends to bring momentum into the economy, but if it’s too much, it also creates inflation.
The other jobs central banks perform is, basically, to be the country’s banks’ bank. When a conventional retail bank needs a loan, it can ask it from the central bank. As such, the central bank is also responsible for the country’s payment system. And that’s where they could be crucial partners for Ripple.
If a country’s central bank adopts Ripple as a payment system that wouldn’t force every bank in the country to follow suit. However, it would be a blessing of sorts that would surely help adoption. At the very least, it would make it easier for the country’s banks to do business with the central bank. That alone would save everybody a lot of money because transfers involving central banks are usually sizeable.
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