GCR Sustainability Rating: What's the deal with Ripple's XRP?

Updated: Apr 3

Faster, cheaper, and greener. So much for the basic idea of Ripple XRP. Does that translate to our ESG rating as well? We put the cryptocurrency to the test and realized not everything is as simple as it first seems.



The current age of information technology has produced many great achievements. One of them is undoubtedly Beginners' Guides. Yes, that's right - I'm a diehard advocate of online tutorials, be it in blog, podcast, or video format. How else do you get up to speed on a new topic in no time?


Or into a new cryptocurrency, as in my case. Because today's blog post is about Ripple XRP and thus about a coin that, firstly, I currently don't hold myself and secondly, seems less omnipresent than Bitcoin and Co.


Cointelegraph's Beginner's Guide to Ripple helps me understand why that is: Because Ripple itself is not a cryptocurrency, but primarily a network for money transfers, which is mainly used by financial institutions (currently). The digital currency tailored to this network is called XRP. Let's keep that in mind as we dive right into our sustainability analysis.


Download the scoresheet to find out how Ripple performs in our ESG analysis:


GCR_ESG-Rating_XRP_2022
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How environmentally friendly is XRP?

Ripple demonstrates a high level of self-awareness when it comes to its own ecological footprint. This is evident from the Green Currency Interactive Tool, which shows the power consumption of the most commonly used transaction methods and currencies. XRP performs very well with 0.00047 terawatt-hours per year (tWh). Our own calculation of the power consumption per transaction reflects the result with an estimated 0.0060-kilowatt-hour (kWh).


"Whether it’s in cash, on a credit card or with crypto, every transaction you make consumes energy, and therefore, emits pollutants into the environment. The impact of this is startling when you look at the total transactions across an entire year—for any form of currency." [1]

Not resting on its laurels, Ripple has publicly committed to becoming carbon neutral by 2030. To do so, the company has joined the Crypto Climate Accord in 2021 and is working with various internal and external foundations as well as universities to decarbonize public blockchains (starting with its own XRP ledger) and further investigate the energy consumption of the entire financial system.





Although XRP is not yet completely carbon neutral, the coin can be held without hesitation for ecological reasons. This is also reflected in the environmental score A in our sustainability rating.


"(...) We know it will be more difficult to ‘reverse engineer’ a systemic characteristic like sustainability the longer we wait. The time to solve this problem is now." [2]

How social is XRP?

Ripple's strategy refers to industry-wide changes and fast, easy exchange of financial resources. Hence the very different target groups: Financial institutions and payment services leverage XRP as a bridge currency to facilitate faster, more affordable cross-border payments, while individuals use XRP to move different currencies around the world.


"Digital assets and distributed ledger technology (DLT) have the potential to transform how unbanked and underbanked populations access basic financial services and send and receive money across borders, making it more accessible, affordable and secure." [3]

Financial inclusion is one of the main concerns of Ripple. Accordingly, the average transaction fee is low at 0.0025 USD and has a positive impact on our social score. Where XRP performs poorly, however, is in asset allocation.


To understand the problem, we need to talk briefly about the algorithm. Bear with me: The principle of XRP is similar to that of a public company that gradually brings new securities to the market. Meaning XRP cannot be mined, but has already been "pre-mined". There exist 100 billion units of XRP, which are publicly released at a given time.


Now for the problem: About 48% of these coins currently serve as reserves that Ripple Labs - the management behind the Ripple network - plans to gradually make available for purchase through a feature called "escrow". Furthermore, large holders who own more than 1% make up for over half of all released XRP.


Escrow is a feature of the XRP Ledger that allows you to send conditional XRP payments. These conditional payments set aside XRP and deliver it later when certain conditions are met. [4]

Consequently, there is no such thing as a fair distribution of assets today. This results in a hefty deduction in our rating and leaves XRP with a score of B- in the social dimension.


How well is XRP managed?

Back to Cointelegraph’s Beginner's Guide to Ripple. Reading through, you quickly get a sense of the level of entanglement between XRP and Ripple. According to Forbes, the Ripple network owns about 6% of the total number of coins. So there is an obvious interest in making XPR more widely known and usable in the daily routine as a means of payment. This is not a bad intention per se, but it increases the risk of conflicts of interest.


The downside of XRP's consensus algorithm becomes even more apparent when we look at the ongoing legal battle between Ripple and the U.S. Securities and Exchange Commission (SEC). In December 2020, the SEC accused Ripple of participating in an "unregistered, continuous securities offering of digital assets" to investors. It argued that, unlike other cryptocurrencies, the 1.3 billion coins in question were created by the company and used to fund its own business, which amounted to corporate investment. The dispute has not yet been resolved.

XRP receives a score of B+ in the governance category due to the close ties to the Ripple network and the resulting dependencies, legal difficulties, and distinctive profit orientation.


Bottom Line

Put simply, our ESG analysis of XRP can be roughly described as follows: strong start in the environmental category with a dip in the social score and a cliffhanger regarding the governance. As a result, we rate the cryptocurrency with an overall grade of B.


The question remains whether Ripple is willing to at least partially rethink its business model in favor of social impact and improved governance of its cryptocurrency. Otherwise, it will be challenging to achieve a better overall rating.



[1] How Green Is Your Currency? Green Currency Interactive Tool: https://xrpl.org/carbon-calculator.html

[2] Cryptocurrency Sustainability: The Path Forward: https://ripple.com/insights/cryptocurrency-sustainability-the-path-forward/

[3] Unlocking Economic Barriers and Opportunities For All: https://ripple.com/impact

[4] Ripple escrow: Unraveling the mystery: https://www.xrparcade.com/escrow/


Please note that we regularly review and update our ratings. It is therefore possible that the scores mentioned in the blog post no longer correspond to the current rating. You can find an up-to-date overview of all ratings at any time at greencryptoresearch.com/ratings.

 

What is the GCR Sustainability Rating?


The GCR Sustainability Rating is the first ESG rating tailored to cryptocurrencies and adjusted accordingly. It reflects the holistic assessment of a cryptocurrency and is composed of three individual scores:

The GCR Sustainable Rating is a relative ranking, meaning that the best cryptocurrency in each category receives an A rating, while the worst receives a D rating. The overall rating ("GCRS rating") is based on three individual ESG categories. An average score is calculated for each category. The overall rating corresponds to the worst ESG score so that failures in a single category cannot be compensated for by good scores in the other two. Thus, if a cryptocurrency is judged not to be environmentally sustainable, it cannot make up for the poor rating with adequate social standards or good governance.



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