Yesterday IBM announced the “limited production” launch of World Wire, a global payments system that connects banks via the Stellar digital-asset network. The announcement’s emphasis was on cross-border payments, and six international banks have signed letters of intent to create “stablecoins,” or digital currencies that don’t fluctuate in value, for use on the system. For now, only two currencies are on the live World Wire network: Stellar Lumens (XLM) and Stronghold USD, a stablecoin backed by reserves in U.S. dollars.
It’s a big announcement by any measure, as a blue-chip technology firm partners with a long-running (though not precisely well-known) digital currency network to try and reshape the global financial system. But there are still plenty of unanswered questions beyond the headlines. We dug into three.
How Does World Wire Actually Work?
The basic model of World Wire is fairly simple. Banks can use it to transfer value to other banks in the form of digital currency, instead of using slower, more traditional rails such as the Swift network. World Wire’s role is essentially to make the “crypto” part of the whole thing invisible, handling the conversion between fiat currency and digital asset, and connecting that to banks’ existing technology.
This is fundamentally the same model that Ripple has been working to bring to fruition using the XRP asset network. We’ll dig into that competitive angle, but looking at Ripple points to a crucial component of World Wire’s functionality: exchanging digital assets for conventional cash. Ripple’s system uses a network of local cryptocurrency exchanges in its various correspondent nations.
But World Wire uses a “real time market making function” for the switch from fiat to digital assets. We reached out to Stronghold CEO Tammy Camp for more insight into World Wire, and she pointed us to this explanation of Stellar’s built-in currency market. It promises fast, market-rate conversions between both conventional currencies and various cryptocurrencies. This in itself could mark another true novelty—a real-time digital asset market specifically catering to banks.
Will World Wire make Stellar’s XLM More Valuable?
Markets certainly seem to think the news is great for the Stellar network’s native token, with Lumens (XLM) gaining more than 5 percent in the 24 hours since the initial announcement. But it’s unclear exactly how much World Wire will drive demand for XLM.
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The first factor here is the inevitable inverse relationship between World Wire transfer speed and XLM demand. Even when banks use XLM to move money globally, World Wire will automatically execute high-speed trades into and out of the digital token on either end. This matters because token velocity is a big determinant of the price of a digital asset: The more often a coin changes hands, the less market value it will wind up with overall.
The second factor is that, while XLM can be used as a transfer medium on World Wire, IBM is placing much more emphasis on stablecoins and even central bank-issued digital currencies. We’ll dig into that a bit more, but it seems to be another reason to doubt that XLM will see sustainable, demand-driven price growth thanks to World Wire.
Banks are basically conservative institutions, and Big Blue’s track record will make them much more confident in experimenting with something as wild and crazy as decentralized internet money.
Is This Bad News for Ripple?
As noted, World Wire is fundamentally very similar to Ripple’s cross-border bank transfer service, RippleNet. Both use a high-speed digital asset as a bridge between banks. So the immediate question is whether the World Wire announcement is a threat to Ripple’s plans for world domination.
First, the good news: IBM already runs a lot of global bank infrastructure, and it’s now cosigning Ripple’s basic model. That might encourage more banks to consider joining a digital asset network for international transfers, and some of those might decide to use RippleNet. In other words, IBM entering the field could expand Ripple’s total potential customer base.
But there are two points that are less positive for Ripple. First, while IBM’s brand will get more banks interested in digital asset-based transfers, it will also tend to attract those newcomers to World Wire. Banks are basically conservative institutions, and Big Blue’s track record will make them much more confident in experimenting with something as wild and crazy as decentralized internet money.
Secondly, World Wire appears to address a specific problem Ripple hasn’t yet convincingly put to bed—volatility. Ripple’s messaging remains frankly confusing, but often focuses on the role of XRP as a bridge between banks and their fiat-using customers. XRP has a free-floating market value, so even if banks can trade into and out of it in a few seconds, market fluctuations could in theory cost RippleNet users money. (Ripple did not respond to our request to comment on the volatility issue specifically in response to the World Wire announcement.)
Though it can nominally interact with many digital assets, World Wire foregrounds fiat-backed stablecoins, which at least sound like they’re not going to drop 10 percent on the way to their destination. According to IBM CTO Stanly Yong, World Wire is even working directly with national central banks to create national digital currencies to run on World Wire. It’s still an open question exactly when these assets will arrive, or how they will be structured—but again, banks are conservative, making the basic pitch very appealing.
Earlier this year, Ripple CEO Brad Garlinghouse tried to counter worries over XRP volatility by emphasizing that banks using slower Swift transactions for cross-border payments are similarly exposed to the volatility of foreign currencies. Depending on your perspective, that’s either a sensible counterargument or a distinctly Ripple-esque bit of misdirection. But either way, World Wire’s use of stablecoins on a distributed-ledger backbone promises a combination of speed and stability that Ripple hasn’t yet been able to convincingly offer.