According to press reports, Ripple has finally managed to persuade a bank to adopt its XRP native token. Euro Exim Bank, described by Coindesk as “a London-based bank primarily focused on providing financial services for export and import companies,” has signed up to use Ripple’s xRapid service, for which XRP is the native token, for international customer payments. It aims to start using it by the end of the first quarter of 2019. Graham Bright, Euro Exim Bank’s head of compliance and operations, said that problems with the international messaging service SWIFT led to the decision to move to xRapid.
Brad Garlinghouse, chief executive officer of Ripple Labs Inc., speaks during a panel discussion at the Singapore FinTech Festival in Singapore, on Monday, Nov. 12, 2018. Photographer: Wei Leng Tay/Bloomberg© 2018 Bloomberg Finance LP
For Ripple’s chief executive Brad Garlinghouse, this must come as something of a relief. In 2018, he predicted that by the end of the year, “major banks” would use xRapid for liquidity, and added that he expected “dozens” to be using it by the end of 2019. Euro Exim Bank is hardly a major bank, but even a small bank is surely better than none at all.
There’s only one problem. Euro Exim Bank isn’t a London-based bank. It’s an offshore bank registered in a tax haven. It has a London office, which is registered as a small company in the U.K., but that’s not a bank.
Euro Exim Bank’s website says that it has a class A international banking license from the Caribbean tax haven of St. Lucia. This authorizes it to “carry on international banking business from St. Lucia.” But it does not authorize it to carry on banking business in St. Lucia, and the company’s website specifically says that it “does not provide any services to any natural person or legal entity in St. Lucia.” So, Euro Exim Bank is not a St. Lucia bank.
The U.K.’s Financial Conduct Authority (FCA) website shows that Euro Exim Bank’s U.K. registration was terminated in February 2017. At the present time, therefore, it is not licensed to “provide regulated products and services” in the U.K. Regulated products and services include the following:
- Accepting deposits
- Providing credit to consumers
- Giving investment advice
- Arranging deals in investments
Euro Exim Bank is not authorised to accept deposits or lend to customers. This is what banks do. So Euro Exim Bank is not a London bank. In fact it is not a licensed bank anywhere in the European Economic Area (EEA), which comprises the EU (currently including the U.K.) plus Norway, Iceland and Liechtenstein. It may be regulated by St. Lucia’s regulator, but that doesn’t make it a regulated bank in the U.K. or Europe. If you want to run an onshore banking business in the U.K., with access to the EU, you have to be licensed by the U.K. regulator. Euro Exim Bank isn’t.
In fact, Euro Exim Bank does not have an onshore banking license anywhere in the world. But according to its website, it accepts corporate deposits:
Euro Exim Bank unveils its newest product, Prestige Plus savings accounts. This is designed to provide flexible and integrated savings solutions with ease of opening accounts from anywhere in the world. These can be operated as corporate savings accounts as well as personal savings accounts and access is available online 24×7. With adequate due diligence and security assurance, we provide our clients safe banking facilities.
We know that these corporate deposits can’t legally come from residents of the U.K., the other countries of the EEA, or St. Lucia. The U.S. also takes a dim view of companies that attempt to attract deposits or lend to its residents without registering with a U.S. regulator, and there is no mention of any U.S. regulator on Euro Exim Bank’s website, nor indeed any other regulator apart from St. Lucia. So these can only be offshore deposits placed through legal entities outside the jurisdiction of any of these countries. Euro Exim Bank’s banking business is entirely offshore.
As an offshore bank, Euro Exim Ban has no access to central bank liquidity or settlement services in any currency. It offers comprehensive payment services to its customers, but it cannot clear funds on its own account. As it stands, therefore, it must rely on a network of correspondent banks to clear funds on its behalf. As Euro Exim Bank’s director Kaushik Punjani told Coindesk, this means his customers have “traditionally been restricted from settling transactions quickly and cost efficiently.” Understandably, he wants to offer them a better service.
Relying on correspondent banks also creates the risk that the bank to which you have entrusted funds for clearing collapses in the middle of the transaction (this is known as Herstatt risk, after a German bank that went down in 1974 taking uncleared funds with it). Furthermore, large regulated banks can be reluctant to provide correspondent banking services to offshore entities that they don’t control, because of the risk of inadvertently violating money laundering rules and sanctions.
It’s thus completely understandable that Euro Exim Bank might look for cheaper, faster and more reliable alternatives to traditional correspondent banking. For me this makes far more sense than Graham Bright’s stated reason for the decision. If the only reason for adopting Ripple payment services were the failure of SWIFT messaging, then xConnect would be sufficient. There would be no need to use XRP. But if Euro Exim Bank is finding it difficult to establish and maintain correspondent banking relationships, then xRapid could be a solution.
But this means that the claims in some press reports that Euro Exim Bank’s adoption of xRapid is somehow a game changer for Ripple are hugely overblown. Euro Exim Bank is simply looking for a better way of making cross-currency payments than correspondent banking. In that, it is no different from other payment services providers, four of which signed up to use xRapid at the same time as Euro Exim Bank did. The fact that Euro Exim Bank has an offshore banking license is in this respect entirely irrelevant.
I find Euro Exim Bank’s experiment with xConnect for trade finance a whole lot more interesting than its adoption of xRapid. Now that’s innovative. I’d prefer to see the press getting excited about this than about yet another payment services provider trying to escape from the traditional correspondent banking network.
For Ripple, Euro Exim Bank’s adoption of xRapid makes little difference. The real game changer would be a major clearing bank such as Citigroup opting to use xRapid. That would send shock waves across the financial world. But so far, Ripple has wholly failed to convince any clearing bank that xRapid is better for their business than the settlement services provided by central banks. Despite all the hype, Ripple still has an awfully long way to go.