3 Bearish Signals for XRP

It has been quite the year for XRP (CRYPTO: XRP). The token hit a five-year high of over $3.50 in July as optimism surged about the end of the long legal battle that its developer, Ripple Labs, had been engaged in with the Securities and Exchange Commission, among other things. However, since then, the crypto's price has trended downwards.

XRP acts as a financial bridge and is the native asset of the XRP Ledger. It excels in making cross-border international payments easier. Let's say a U.S. company wants to pay a supplier in Europe. Rather than converting dollars into euros, it might put the dollars into XRP and then transfer the crypto to the supplier's wallet. The recipient could then convert that XRP into their own currency.

XRP plays a key role in Ripple Lab's operations. But that role may diminish if the business shifts its focus. That and other headwinds might make it difficult for XRP to regain its summer highs.

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1. Ripple's CTO is stepping down

On Sept. 30, Ripple Chief Technology Officer David Schwartz announced that he would step away from his day-to-day duties with the company by the end of the year. Schwartz has been involved with XRP for 13 years and was one of the architects of the XRP Ledger, its underlying blockchain.

While he will join the board of directors and stay involved as CTO emeritus, his departure will leave a void. Schwartz is a respected voice in the cryptocurrency world, and he has played an important role in the evolution of XRP. Ripple has not yet announced who will replace him.

2. SWIFT is adopting blockchain technology

SWIFT is the dominant global payment messaging cooperative, comprised of 11,500 banks and institutions in over 220 countries. If you transfer money internationally, your bank probably uses the SWIFT network to do it. However, that process can be slow and relatively expensive, which makes SWIFT ripe for disruption.

Indeed, earlier this year, Ripple CEO Brad Garlinghouse predicted that XRP would take about 14% of SWIFT's market share by 2030. Sounds great, right? Not so fast.

The challenge for XRP and many other crypto projects is that established players in the finance space won't just sit back and wait for blockchain upstarts to dethrone them. They're looking for ways to integrate blockchain into their operations, particularly now that some of the regulatory roadblocks have been removed.

For example, SWIFT is working with blockchain software specialist Consensys and 30 financial institutions to develop its own payments ledger. It has explored blockchain solutions through several pilot projects. At the cooperative's annual conference in September, SWIFT CEO Javier Perez-Tasso told members that it was ready to take the next step with a prototype blockchain.

SWIFT already has a huge network of banks as well as infrastructure to support the necessary compliance and security features. If it can incorporate the benefits of blockchain, there will be less need for XRP. That said, frictionless payments are only one part of Ripple's business. It also offers custody and stablecoin solutions. However, the growth of Ripple's dollar stablecoin, Ripple USD (CRYPTO: RLUSD), may not necessarily translate into success for XRP.

3. Ripple Labs and XRP... It's complicated

Ripple Labs is a private company that created XRP and the XRP Ledger blockchain. If Ripple moves away from the global money transfer space or if companies prefer to use Ripple USD, it would erode XRP's main use case. There may be XRP fees for some Ripple custody and Ripple USD transactions, but it won't be central to the business.

Back in 2012 and 2013, the XRP Ledger founders pre-mined and launched 100 billion XRP tokens. Of that volume, 80% went to Ripple, which later locked 55 billion of them in escrow with a monthly release schedule. Today, Ripple controls 40% to 45% of the XRP in circulation, much of which is in escrow. Sales of XRP are a key source of revenue for the company.

For holders of XRP, the danger is that Ripple may shift in a direction that results in XRP ceasing to play a major role in its ecosystem. Its XRP sales would become a way to fund its new business avenues without necessarily contributing to the token's long-term future.

An uphill road ahead

XRP is one of the top 10 cryptocurrencies by market capitalization, and it has a lot going for it. Not only has it weathered years in regulatory limbo, but it has also built a business around a real-world use case for cryptocurrency. That sets it apart from tens of thousands of other crypto projects.

Even so, as big financial institutions turn their attention to the blockchain, there is a risk that XRP will get squeezed out. It isn't a certainty -- and this is not necessarily a winner-takes-all game. XRP will only need to take a small percentage of the global payments market to grow, so it could still be a profitable asset to hold from here. Just don't let the hype about the token blind you to what are also its very real challenges.

Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.