Cryptocurrency's Ripple effect: What is XRP?

Blockchains may be borderless, but they’re not yet the global standard for financial transactions. While sending crypto like Bitcoin (BTC) anywhere with an internet connection is possible, high fees and slow transaction speeds deter many users.

These issues led early crypto developers to create Ripple, a blockchain specifically designed to support international transfers. Along with its native currency, XRP, Ripple is often considered the go-to solution for cross-border payments due to its speed and efficiency. 

In this guide, we’ll explore what XRP is, why it has value, how it functions on the Ripple network, and the impact of legal challenges on its future. We’ll also look at how you can acquire and trade XRP and the potential risks and rewards involved.

What is Ripple? The backstory behind the XRP cryptocurrency 

Ripple's origins go back to 2004 when Canadian software engineer Ryan Fugger launched RipplePay, a pre-Bitcoin peer-to-peer (P2P) network. RipplePay offered users a trust-based platform to exchange virtual currencies on credit without the need for centralized intermediaries.

After Bitcoin’s rise and its scalability challenges became apparent, a group of developers led by Jed McCaleb, Arthur Britto, and David Schwartz sought to create a faster, more cost-effective solution for cross-border payments. While exploring the digital asset space, they came across RipplePay and acquired it, rebranding the platform as OpenCoin in 2012.

Under its new leadership, RipplePay evolved into a blockchain-based ecosystem with a unique consensus algorithm and a private, permissioned community of node validators. The project also introduced XRP, its native cryptocurrency, designed to facilitate seamless international currency exchanges without intermediaries.

By 2015, OpenCoin reverted to "Ripple" and began building significant partnerships within the banking and financial sectors. Its network now includes major names like Santander, American Express, and the Canadian Imperial Bank of Commerce.

XRP’s key features

XRP's design prioritizes speed, scalability, and affordability, making it a standout choice for international payments. Key features include:

• Speed and efficiency: XRP currently ranks as one of the fastest cryptocurrencies for cross-border payments, with transactions taking only 3–5 seconds. This quick processing time gives XRP a major advantage over traditional financial systems as well as many other blockchains.
• Scalability: The XRP Ledger can also handle a high volume of transactions – up to 1,500 per second – without compromising speed or reliability. 
• Minimal transaction fees: XRP's transaction costs are extremely low, averaging less than a fraction of a cent, making it an affordable solution for transferring value – particularly for international payments, where traditional fees are often much higher.

Why does XRP have value? 

XRP is often referred to as Ripple's "bridge currency" because it facilitates seamless onchain conversions. When users send currency across the Ripple blockchain, it’s first converted into XRP before being settled in the recipient's desired currency.

Ripple offers the same cross-border payment services as traditional financial institutions but leverages decentralized blockchain technology to provide faster, intermediary-free transactions.

XRP’s key advantages include rapid finality and low network fees, making it an attractive option for international transfers. 

How does XRP work in Ripple's ecosystem? 

Ripple operates a semi-permissioned consensus protocol designed to expedite transactions on its decentralized blockchain. Instead of relying on energy-intensive mining like Bitcoin (BTC) or staking mechanisms found in Ethereum (ETH), Ripple employs a network of pre-approved validators, known as the Unique Node List (UNL), to validate transactions on the XRP Ledger. While the UNL’s exclusivity reduces decentralization compared to fully open networks, it allows Ripple to achieve faster and more cost-effective transactions, making it a practical choice for cross-border payments.

When institutions use the XRP Ledger for international transfers, the protocol automatically converts the transaction into XRP before settling it in the desired currency. UNL validators broadcast transaction details on the ledger using Ripple’s consensus algorithms, ensuring that transactions are processed efficiently without a centralized intermediary.

By positioning XRP as the "bridge" currency, Ripple enhances both the speed and cost-effectiveness of cross-border payments compared to traditional financial systems.

How to buy XRP (and get into the "XRP army")

Despite Ripple's focus on institutional clients and cross-border payments, XRP has garnered a dedicated following among crypto traders, known colloquially as the "XRP army." These traders firmly believe in XRP’s potential as a medium of exchange, even if they aren’t engaged in international transfers. XRP’s consistent position among the top 10 cryptocurrencies by market cap reflects robust liquidity and wide accessibility on numerous trading platforms.

Traders can easily find the latest exchanges offering XRP pairs by visiting popular crypto price aggregators like CoinMarketCap or CoinGecko. The "Markets" tab gives a comprehensive list of centralized (CEXs) and decentralized exchanges (DEXs) that support XRP trading, along with key information on each platform's liquidity, accessibility, and reputation.

From there, users can select an exchange such as Coinbase, Kraken, or Binance, set up an account, and deposit funds to start trading XRP.

Is XRP legal? Explaining the Ripple SEC court trial 

As Ripple expanded its institutional partnerships and XRP rose near the top of global cryptocurrencies by market cap, it drew increased regulatory scrutiny. In 2020, the U.S. Securities and Exchange Commission (SEC) filed a $1.3 billion lawsuit against Ripple Labs, Inc., challenging the legal status of XRP.

The SEC's central argument was that XRP should be classified as a financial "security" similar to company stock rather than a decentralized cryptocurrency. To support their claim, the SEC highlighted that Ripple "premined" the entire supply of 100 billion XRP tokens, as opposed to gradually releasing them through a proof-of-work (PoW) model like Bitcoin or Litecoin (LTC). The SEC also pointed out that Ripple Labs initially held 55 billion XRP in escrow, suggesting centralized control and the potential for market manipulation. Ripple, however, countered that XRP functions as a bridge currency and decentralized payment solution, asserting it should not be regulated as a security.

After three years of litigation, the Southern District of New York delivered a partial win for both parties. Ripple was fined $125 million for selling XRP to early institutional investors, but the court ruled that XRP sales to retail investors on secondary markets didn't meet the criteria for an unregistered security. The decision prompted a 20% surge in XRP's price and led to its relisting on several crypto exchanges.

Despite this legal victory, XRP's status in the United States remains uncertain. The SEC may still appeal the 2023 decision, meaning the final resolution could take years. While the ruling is largely positive for retail traders buying XRP on CEXs, the broader regulatory landscape for XRP remains unclear.

Is XRP a good investment? Determining whether to trade XRP 

As one of the most well-known cryptocurrencies, XRP has made a significant impact in the blockchain space. While its long-term investment potential remains a topic of debate, even skeptics acknowledge its prominence, supported by high-profile partnerships and a consistently strong market cap.

However, these factors alone don’t guarantee future price increases or a positive XRP price prediction. Ripple’s institutional backing doesn’t ensure XRP’s price will steadily rise. Ongoing legal challenges, including possible SEC appeals and competition from other cross-border payment cryptocurrencies like Stellar (XLM), present significant risks.

As with any cryptocurrency, traders should carefully weigh the risks and opportunities before incorporating XRP into their portfolios.

In the XRP army? CoinTracker can monitor your crypto 

Got XRP in your crypto wallet? CoinTracker’s got you covered. Whether you're an XRP enthusiast, a Bitcoin holder, or a fan of memecoins, CoinTracker seamlessly connects with hundreds of exchanges, wallets, and DeFi platforms to provide a comprehensive view of your crypto activity. With real-time insights, you can easily track your holdings’ cost basis, identify tax-loss harvesting opportunities, and prepare IRS-compliant tax reports for CPA review or filing through software like TurboTax and H&R Block.

Discover all the benefits CoinTracker brings to blockchain investors by signing up for a free account. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.