A new rival for bitcoin – and for cash

Cryptocurrencies are the financial world’s biggest thing at the moment. It’s almost impossible to escape the hype surrounding bitcoin (BTC), of course – it is the world’s biggest and best-known cryptocurrency. At the time of writing, one bitcoin is worth something in the order of $5,700, having risen over 770% in the last year, giving it a market capitalisation of over $95bn. But it’s far from the only cryptocurrency making waves. Ether (ETH) has had an even more impressive rise than bitcoin, soaring by some 2,700% in the last 12 months. Its current value of $327 makes it the world’s second-biggest cryptocurrency with a market cap of $31bn. But even more impressive than that is the performance of ripple (XRP). This is the third-biggest cryptocurrency by market capitalisation, currently worth some $10bn, and has seen its price climb by more than 3,300% in the last year. However, because of the number of tokens that have been issued – 100 billion were created at the outset – it doesn’t command anything like the nominal price of bitcoin, or even ethereum: the dollar/XRP exchange rate is just $0.25.

That’s no bad thing. Bitcoin’s value derives in part from its fame among speculators and partly from being the cryptocurrency world’s favourite store of value. Ether is used on the hugely popular blockchain and smart contracts platform Ethereum, on which many of the current crypto-bubble initial coin offerings (ICOs) are built. The trouble with bitcoin is that, while it is fine as digital gold – a place to store your wealth – it is terrible at being a currency. The network just doesn’t have the capacity. It can take days for transactions to be settled, and if you’re only spending a small amount, the fees you have to pay can sometimes outstrip the value of your transaction. Ripple aims to overcome those restrictions and claims to be “the fastest and most scalable digital asset, enabling real-time global payments anywhere in the world”. It “consistently handles around 1,500 transactions per second”, and claims to be scalable to handle “the same throughput as Visa” (50,000 transactions a second). Payments can be settled in just four seconds.

Ripple was created by a California-based start-up of the same name as a way for financial institutions to make cross-border payments quickly and securely – the firm says it can save banks $3.76 on each payment. And an impressive number of finance houses seem to be buying into its potential. More than 100 institutions have now joined its blockchain network, RippleNet, including UBS, Standard Chartered and Santander. Ripple was selected by the Bank of England to participate in trials for an overhaul of its interbank settlement system, where it demonstrated a proof of concept to transfer funds between two central banks.

Hence Ripple is a curious hybrid.“Most fintech start-ups fall into one of two camps: those that want to compete with banks and those that want to save banks from themselves,” as Brian Patrick Eha puts it in American Banker. “Ripple is the rare exception that wants to do both.” While it could be tremendously disruptive to international banking, it is working with the major financial institutions in the hope that they will adopt its technology. “Rather than rail against the status quo, they decided to work with banks to improve it.”

In the news this week…

► Digital challenger bank Monzo announced this week that it will introduce charges to withdraw money from cash machines abroad after 18 December. Current-account customers will be able to withdraw up to £200 a month free of charge; after that, they will be charged a fee of 3%. Debit-card transactions will remain free, however. Monzo had asked its customers to vote for one of three charging options after saying its cash-machine costs had doubled in the last year. Rival Starling Bank said it had “no plans to change its pricing policy for cash withdrawals abroad”.

► Julian Assange, founder of anonymous whistleblowing website WikiLeaks, took to Twitter this week to thank the US government for imposing financial sanctions on his organisation. After WikiLeaks published classified documents relating to the US armed forces’ actions in Iraq and Afghanistan, the site was prevented from using mainstream banking institutions. That meant that he was “forced to become an early investor in bitcoin”, says Fortune. According to Assange, he and his organisation have made “50,000% returns”.

► The way that bitcoin works means that every transaction has to be verified before it is accepted onto the distributed ledger that makes up the blockchain. This is done by bitcoin miners who perform complex mathematical calculations, which takes a great deal of computing power. Exactly how much power is up for debate, but a report by Dutch bank ING claims each bitcoin transaction takes up about 200kWh of electricity. That’s enough to power an average UK home for almost three weeks, and makes it one of the most power-hungry ways of spending. Ethereum, the second-most popular cryptocurrency, takes 37kWh of electricity. Even that is much higher than the cost per transaction on the Visa network, which ING puts at 0.01kWh. In the course of a year, bitcoin consumes 21tWh, as much energy as Azerbaijan. If bitcoin were a country it would rank number 71 in global energy consumption. Ethereum’s annual consumption of 4.4tWh ranks it at 121, between Moldova and Brunei. The calculations were performed by cryptocurrency analyst Digiconomist.