A Deeper Look Into XRP Collateral: David Schwartz’s Insightful Response

David Schwartz

Jimmy Vallee, the Managing Director of Valhil Capital, has proposed a modified version of the XRP buyback theory. This has led to discussions regarding the practicality of utilizing XRP as collateral. As a result, David Schwartz, the Chief Technology Officer at Ripple, has responded to these debates.

As previously reported, Jimmy Vallee proposed the XRP buyback theory in 2021. This theory is based on the idea that XRP could become the global reserve currency. Under this assumption, Vallee suggested that governments should hold significant amounts of XRP, which would require the proposed buyback.

The securities lawyer said the XRP buyback would not occur on the secondary market. Instead, it would occur at a fixed price compared to the purchase of gold when the United States linked the dollar to the precious metal. Given XRP’s limited supply in comparison to fiat currency, Vallee suggested that the value of one XRP could range from $37,500 to $50,000. Not surprisingly, this projection and the theory itself have generated extensive discussions over the years.

Related Reading: Deaton Speaks Out: XRP & Ripple Used as Regulatory Sacrifices by the SEC

During an interview on Thursday, Vallee proposed an alternative plan where XRP holders could use their holdings as collateral for a new bank tentatively named the “People’s Bank.” Under this proposal, XRP holders would not sell their holdings to the government but utilize them as collateral.

Vallee’s latest proposal has not received much attention, but it has sparked discussions regarding whether XRP is a suitable asset for collateral. The debate was initiated by rippleitin.nz, a validator on the XRP Ledger, who claimed that XRP has no value that could be lent or borrowed against.

“I wonder if anyone has told Jimmy that XRP has no value to borrow or lend against,” the validator tweeted, adding, “How can you use it as collateral?”

Rippleitin.nz supported their argument by stating that collateral must have a “redemption value,” which XRP lacks. They also claimed that XRP only holds value when transferred from one holder to another. Therefore, it is unsuitable as collateral.

https://twitter.com/rippleitinNZ/status/1639918879349805057?t=MsJ5LoQ4kIr6s6Z3sko_pg&s=19

Yesterday, Schwartz responded to rippleitin.nz’s arguments via a series of tweets. He argued that a company only repurchases its stock at its redemption value if there is a contractual obligation. Otherwise, the company, like any other buyer, would purchase the stock at a fair market price determined by supply and demand factors, similar to the value of XRP. As a result, the value of XRP is not guaranteed.

Schwartz noted that stocks are excellent collateral for loans mainly because of their liquidity. He argued that the possibility of redemption is not often a major consideration. Schwartz went on to suggest that XRP’s liquidity and easy-to-track spot market price are qualities that could make it a suitable collateral. 

Read also: Could Coinbase Have a Stronger Fair Notice Defense Than Ripple?

Despite admitting that XRP is volatile, Schwartz pointed out that loans backed by XRP could be overcollateralized, guaranteed by other forms of payment, or have high-interest rates as a last resort.

Schwartz pointed out overcollateralized crypto-backed loans are widespread in decentralized finance (DeFi). This type of loan allows users to borrow against their assets and engage in other trades while still retaining ownership of those assets over a long period.

Disclaimer: The information in this article should not be considered financial advice, and FXCryptoNews articles are intended only to provide educational and general information. Please consult with a financial advisor before making any investment decisions.

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