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BALANCE SHEET OPERATIONS

OF A CROSS -BORDER SETTLEMENT PROCESS


WITH THE USE OF

XRP
V1.4
Content 2

1. Content

1. Content ................................................................................................................................................................................................... 2

2. Remarks .................................................................................................................................................................................................. 3
2.1. Abbreviations..................................................................................................................................................................................... 3
2.2. Prerequisites ...................................................................................................................................................................................... 3
2.3. Additional notes ................................................................................................................................................................................ 3

3. Considerations on cross-border payment processing ............................................................................................................................. 4


3.1. Traditional cross-border payment processing ................................................................................................................................... 4
3.2. Cryptographical ledgers ..................................................................................................................................................................... 5
3.3. xRapid ................................................................................................................................................................................................ 6

4. Initial situation ........................................................................................................................................................................................ 7


4.1. Before the purchase contract ............................................................................................................................................................ 7
4.2. After the purchase contract ............................................................................................................................................................... 8

5. The settlement process ........................................................................................................................................................................... 9


5.1. Payment order ................................................................................................................................................................................... 9
5.2. Validation of the settlement path ...................................................................................................................................................... 9
5.3. Simultaneous creation of the corresponding liabilities (and claims) ............................................................................................... 10
5.4. Execution of the transactions .......................................................................................................................................................... 11

6. Final comparison ................................................................................................................................................................................... 12

7. Update history ...................................................................................................................................................................................... 13


6.1. Version 1.1 ....................................................................................................................................................................................... 13
6.2. Version 1.2 ....................................................................................................................................................................................... 13
6.3. Version 1.3 ....................................................................................................................................................................................... 13
6.4. Version 1.4 ....................................................................................................................................................................................... 13
3 Remarks

2. Remarks

2.1. Abbreviations

 BUSA US American private commercial bank


 BGER Germany private commercial bank
 MUSA US American market maker (XRP liquidity provider)
 MGER German market maker (XRP liquidity provider)
 PUSA US American legal entity (e.g. private person)
 PGER German legal entity (e.g. private person)
 XRP digital asset (cryptographic token) that is used for cross-border settlement processes

2.2. Prerequisites

 there is one market maker at each location


 MUSA has an account at BUSA and an account (wallet) at the XRP ledger
 MGER has an account at BGER and an account (wallet) at the XRP ledger
 PUSA has an account at BUSA
 PGER has an account at BGER
 every account (wallet) is positive and operational
 PUSA and PGER signed a legally binding purchase contract:
o PUSA bought a product from PGER for 100 USD and they agreed on a payment by bank transfer
after the product has been transferred to PUSA.
o After PGER has delivered the product to PUSA he waits for his payment.
1 2 3
 The settlement is processed by xRapid which uses the Interledger Protocol and the XRP ledger .

2.3. Additional notes

 Any fees and taxes throughout this process are ignored.


 Balance sheets are presented in a simplified form and their values in their domestic currency:
o Balance sheets of MUSA, PUSA and BUSA are presented in USD.
o Balance sheets of MGER, PGER and BGER are presented in EUR.
 Positive balance sheet operations are marked in green, negative ones in red.
 The current exchange course between USD and EUR has been assumed to be 1 USD = 0.88 EUR.
 For an easier understanding, the price of XRP is assumed to be 0.25 USD (= 0.22 EUR).

1
https://ripple.com/ripplenet/source-liquidity/
2
https://interledger.org/rfcs/0003-interledger-protocol/
3
https://developers.ripple.com/xrp-ledger-overview.html
Considerations on cross-border payment processing 4

3. Considerations on cross-border payment processing

3.1. Traditional cross-border payment processing

The essential transaction that has to be settled is this:

USA Germany

PUSA PGER
no direct connection

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PUSA and PGER do not have an account on the same ledger. In fact, they each have an account at different
private commercial banks:

USA Germany

BUSA BGER
PUSA PGER
PUSA PGER
no direct connection

Traditional cross-border payment orders via banks and other financial service providers are processed in
different ways, all subject to different risks and disproportionate costs:

 BUSA and BGER could process the payment by setting off obligations against each other if there would be
an opposing currency flow around the same time frame but the probability that they will balance out
completely is extremely small.
5
 BUSA and BGER could process the payment via nostro and vostro accounts that contain not only tied-up
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assets with a counterparty risk but also a foreign exchange risk .
 BUSA and BGER could process the payment via the books of other banks (private commercial banks,
central banks and the Bank of International Settlements or other intermediaries) which would cause
corresponding costs and involve risks as well as patience.

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E.g. accounts at the same private commercial bank. If they would have an account on the same ledger the transaction could be settled
directly and immediately by one single booking entry.
5
https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts
6
https://en.wikipedia.org/wiki/Credit_risk#Counterparty_risk
7
https://en.wikipedia.org/wiki/Foreign_exchange_risk
5 Considerations on cross-border payment processing

3.2. Cryptographical ledgers

By means of certain cryptographic ledgers, which are available globally, many of the problems mentioned can
be avoided.

In fact, the simplest solution of the settlement itself would be if PUSA and PGER would both have an account on
the same globally available cryptographic ledger and agree to pay with the cryptographic token that is used on
that ledger. That would look like this:

USA Germany

PUSA Cryptographic Ledger PGER


PUSA PGER
transfer tokens
with a value of 100 USD

But there are several problems that make this impracticable for both parties:

 They both have to deal with the technical and safety details.
 Although there is no counterparty risk, there is also no supporting or liable party in the event of loss
(loss of the access key of one's own account, loss of tokens due to a wrong recipient account,
unauthorized execution of criminal activities, etc.).
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 A high volatility risk which, depending on the type of cryptographic token, could be circumvented by
buying and selling the tokens immediately before and after the transaction via a crypto exchange,
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leading to a spread risk on the relevant exchange and a corresponding counterparty risk.
 Taxation issues and corresponding history as well as traceability for the tax authorities.
 Traceability of all transactions that are either directly visible to the public or through various tracking
techniques and tools.

8
https://en.wikipedia.org/wiki/Volatility_risk
9
https://definedterm.com/spread_risk
Considerations on cross-border payment processing 6

3.3. xRapid

A more practicable approach would be to leave all these difficulties to companies that handle them in the
background for others as a service. This is exactly what Ripple has done by designing xRapid as part of its
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RippleNet software. This software connects financial services providers to the cryptographic XRP ledger,
enabling faster, cheaper and more secure payment processing.

Since banks, in particular, are extremely cautious when converting their business processes, this document
describes the variant in which banks do not transfer XRP themselves for payment processing, but instead
perform this automatically using XRP liquidity providers (market makers) who have an account at their
respective private commercial bank.

Therefore, the setup for the example provided within this document is as follows:

USA Germany

PUSA MUSA MGER PGER

BUSA XRP ledger BGER

PUSA MUSA MUSA MGER MGER PGER


100 USD 400 XRP 88 EUR
(= 100 USD = 88 EUR)

10
https://ripple.com/ripplenet/
7 Initial situation

4. Initial situation

4.1. Before the purchase contract

To understand the development of the various balance sheets one has to understand the initial situation
before the purchase order and settlement process takes place. Therefore, they are shown here.

USA Germany
(in USD) (in EUR)

PUSA PGER
Assets Liabilities Assets Liabilities
Claim against BUSA 500 Equity 500 Product 88
Total 500 Total 500 Claim against BGER 500 Equity 588
Total 588 Total 588

BUSA BGER
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PUSA 500 Cash 5,000 Obligation to PGER 500
Obligation to MUSA 1,000 Obligation to MGER 1,000
Equity 3,500 Equity 3,500
Total 5,000 Total 5,000 Total 5,000 Total 5,000

MUSA MGER
Assets Liabilities Assets Liabilities
10.000 XRP @ 0,25 2,500 10.000 XRP @ 0,22 2,200
Claim against BUSA 1,000 Equity 3,500 Claim against BGER 1,000 Equity 3,200
Total 3,500 Total 3,500 Total 3,200 Total 3,200
Initial situation 8

4.2. After the purchase contract

When PGER is selling his product to PUSA both enter a purchase contract where an obligation from PUSA to PGER is
created and the product of PGER is delivered to PUSA:

USA Germany
(in USD) (in EUR)

PUSA PGER
Assets Liabilities Assets Liabilities
Product from PGER @ PUSA 0 Obligation to PGER 100 Product from PGER @ PUSA 88
Claim against BUSA 500 Equity 400 Claim against BGER 500
Total 500 Total 500 Claim against PUSA 88 Equity 676
Total 676 Total 676

BUSA BGER
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PUSA 500 Cash 5,000 Obligation to PGER 500
Obligation to MUSA 1,000 Obligation to MGER 1,000
Equity 3,500 Equity 3,500
Total 5,000 Total 5,000 Total 5,000 Total 5,000

MUSA MGER
Assets Liabilities Assets Liabilities
10.000 XRP @ 0,25 2,500 10.000 XRP @ 0,22 2,200
Claim against BUSA 1,000 Equity 3,500 Claim against BGER 1,000 Equity 3,200
Total 3,500 Total 3,500 Total 3,200 Total 3,200

As you can see, even when the product from PGER @ PUSA is already in the physical possession of PUSA, it is still
booked into the balance sheet of PGER, as the property right of the product legally belongs to PGER until PUSA has
fulfilled his obligation of the purchase contract.

This seems to be confusing as every sale seems to increase the equity (net worth) of the seller and to reduce
the equity (net worth) of the buyer until the payment is settled but afterwards the result will be balance-
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neutral for all involved parties.

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That is only the case because we ignore taxes and fees.
9 The settlement process

5. The settlement process

5.1. Payment order

PUSA creates a payment order to BUSA to transfer the sum of 100 USD from his account at BUSA to the account of
PGER at BGER. BUSA receives this payment order from its customer PUSA which, from a legal perspective, creates an
obligation of BUSA to BGER and reduces the existing obligation of BUSA to PUSA. But BGER does not know anything
about it at this point. Therefore, no such balance sheet transactions will be carried out until the payment
process has conclusively determined the parties involved.

5.2. Validation of the settlement path

BUSA uses xRapid as software for cross-border settlements which finds the shortest (cheapest and/or fastest)
settlement path by using the Interledger Protocol.

It finds the path from BUSA across MUSA, the XRP ledger and MGER eventually to BGER:

 100 USD from PUSA to BUSA by the use of the commercial bank account of PUSA at BUSA
 100 USD from BUSA to MUSA by the use of the commercial bank account of MUSA at BUSA
 400 XRP from MUSA to MGER by the use of the globally available XRP ledger
 88 EUR from MGER to BGER by the use of the commercial bank account of MGER at BGER
 88 EUR from BGER to PGER by the use of the commercial bank account of PGER at BGER
The settlement process 10

5.3. Simultaneous creation of the corresponding liabilities (and claims)

As soon as the path is validated there are various balance sheet operations triggered at once as the global
settlement process with xRapid is atomic. In fact, the validation process of xRapid creates a contract for all
parties involved where several additional obligations/claims are created for a fraction of a second:

 100 USD obligation from PUSA to BUSA = 100 USD claim against PUSA in favour of BUSA
o Theoretically, this decreases the equity (net worth) of PUSA even further for a fraction of a
second as the settlement process is not yet finished and therefore the product from PGER
is not yet posted into the balance sheet of PUSA.
 100 USD obligation from BUSA to MUSA = 100 USD claim against BUSA in favour of MUSA
 100 USD obligation from MUSA to MGER = 88 EUR claim against MUSA in favour of MGER
 88 EUR obligation from MGER to BGER = 88 EUR claim against MGER in favour of BGER
 88 EUR obligation from BGER to PGER = 88 EUR claim against BGER in favour of PGER
o Theoretically, this increases the equity (net worth) of PGER even further for a fraction of a
second as the settlement process is not yet finished and therefore the product from P GER
is not yet removed from the balance sheet of PGER.

USA Germany
(in USD) (in EUR)

PUSA PGER
Assets Liabilities Assets Liabilities
Product from PGER @ PUSA 0 Obligation to PGER 100 Product from PGER @ PUSA 88
Claim against BUSA 500 Obligation to BUSA 100 Claim against BGER 588
Equity 300 Claim against PUSA 88 Equity 764
Total 500 Total 500 Total 764 Total 764

BUSA BGER
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PUSA 500 Cash 5,000 Obligation to PGER 588
Claim against PUSA 100 Obligation to MUSA 1,100 Claim against MGER 88 Obligation to MGER 1,000
Equity 3,500 Equity 3,500
Total 5,100 Total 5,100 Total 5,088 Total 5,088

MUSA MGER
Assets Liabilities Assets Liabilities
10.000 XRP @ 0,25 2,500 Obligation to MGER 100 10.000 XRP @ 0,22 2,200
Claim against BUSA 1,100 Equity 3,500 Claim against BGER 1,000 Obligation to BGER 88
Total 3,600 Total 3,600 Claim against MUSA 88 Equity 3,200
Total 3,288 Total 3,288
11 The settlement process

5.4. Execution of the transactions

In order to fulfil the newly created obligations (and therefore fulfil the validation contract created by xRapid)
the corresponding transactions are executed immediately:

 The obligation from PUSA to BUSA is set off against the existing obligation from BUSA to PUSA.
 For the fulfilment of the obligation from BUSA to MUSA no further transaction is needed as by the
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obligation itself the settlement is already fulfilled from a legal perspective.
 For the fulfilment of the obligation from MUSA to MGER a transaction of XRP on the XRP ledger
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between both parties will be executed.
 The obligation from MGER to BGER is set off against the existing obligation from BGER to MGER.
 For the fulfilment of the obligation from BGER to PGER no further transaction is needed as by the
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obligation itself the settlement is already fulfilled from a legal perspective.
 Thereby, the settlement process is finished and the obligation from PUSA to PGER is eventually
fulfilled which transacts the property right of the product from PGER to PUSA.

USA Germany
(in USD) (in EUR)

PUSA PGER
Assets Liabilities Assets Liabilities
Product from PGER @ PUSA 100 Obligation to PGER 0 Product from PGER @ PUSA 0
Claim against BUSA 400 Obligation to BUSA 0 Claim against BGER 588
Equity 500 Claim against PUSA 0 Equity 588
Total 500 Total 500 Total 588 Total 588

BUSA BGER
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PUSA 400 Cash 5,000 Obligation to PGER 588
Obligation to MUSA 1,100 Claim against MGER 0 Obligation to MGER 912
Equity 3,500 Equity 3,500
Total 5,000 Total 5,000 Total 5,000 Total 5,000

MUSA MGER
Assets Liabilities Assets Liabilities
9.600 XRP @ 0,25 2,400 Obligation to MGER 0 10.400 XRP @ 0,22 2,288
Claim against BUSA 1,100 Equity 3,500 Claim against BGER 912 Obligation to BGER 0
Total 3,500 Total 3,500 Claim against MUSA 0 Equity 3,200
Total 3,200 Total 3,200

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This is the result of 1) the contract between MUSA and BUSA where MUSA keeps a bank account at BUSA.
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In this example, it is assumed that the MUSA already has a sufficient amount of XRP which otherwise would be rather strange for an XRP
market maker. But even if MUSA would lack of XRP, the validation of the settlement path would have detected that MUSA has a sufficient
account on a corresponding XRP exchange where he is able to buy the required XRP amount which is just another intermediate step that
would be settled within seconds.
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This is the result of 1) the contract between PGER and BGER where PGER keeps a bank account at BGER and 2) the contract between PGER and
PUSA where PUSA has to pay per bank transfer to the bank account of PGER at BGER.
Final comparison 12

6. Final comparison

Conclusively, the initial and final balance sheets with the highlighted changes are shown below.

 For the private persons the purchase contract and settlement resulted in a swap of asset classes.
 For the private commercial banks the settlement resulted in a swap of liabilities.
 For the market makers the settlement resulted in a swap of asset classes.

Initial situation in the USA (in USD) Final situation in the USA (in USD)

PUSA PUSA
Assets Liabilities Assets Liabilities
Claim against BUSA 500 Equity 500 Product from PGER @ PUSA 100
Total 500 Total 500 Claim against BUSA 400 Equity 500
Total 500 Total 500

BUSA BUSA
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PUSA 500 Cash 5,000 Obligation to PUSA 400
Obligation to MUSA 1,000 Obligation to MUSA 1,100
Equity 3,500 Equity 3,500
Total 5,000 Total 5,000 Total 5,000 Total 5,000

MUSA MUSA
Assets Liabilities Assets Liabilities
10.000 XRP @ 0,25 2,500 9.600 XRP @ 0,25 2,400
Claim against BUSA 1,000 Equity 3,500 Claim against BUSA 1,100 Equity 3,500
Total 3,500 Total 3,500 Total 3,500 Total 3,500

Initial situation in Germany (in EUR) Final situation in Germany (in EUR)

PGER PGER
Assets Liabilities Assets Liabilities
Product 88 Product from PGER @ PUSA 0
Claim against BGER 500 Equity 588 Claim against BGER 588 Equity 588
Total 588 Total 588 Total 588 Total 588

BGER BGER
Assets Liabilities Assets Liabilities
Cash 5,000 Obligation to PGER 500 Cash 5,000 Obligation to PGER 588
Obligation to MGER 1,000 Obligation to MGER 912
Equity 3,500 Equity 3,500
Total 5,000 Total 5,000 Total 5,000 Total 5,000

MGER MGER
Assets Liabilities Assets Liabilities
10.000 XRP @ 0,22 2,200 10.400 XRP @ 0,22 2,288
Claim against BGER 1,000 Equity 3,200 Claim against BGER 912 Equity 3,200
Total 3,200 Total 3,200 Total 3,200 Total 3,200
13 Update history

7. Update history

6.1. Version 1.1

 chapter 4
o explained in more detail the purchasing contract between the private parties
 chapter 5.3
o explained that the xRapid validation process generates a contract for all involved parties
which creates corresponding obligations
o corrected missing terms
 chapter 5.4
o explained that transactions fulfil obligations
o explained in more detail why the obligation between the private parties is fulfilled

6.2. Version 1.2

 added chapter 3
 improved formatting
 corrected the display order of the balance sheets and some minor grammar mistakes

6.3. Version 1.3

 used better terms


 highlighted formatting

6.4. Version 1.4

 adjusted chapters 4 to 6 to explain the purchase contract issues and settlement in more detail

Thanks for reading.


Share it with others if it had helped or pleased you.

Mario Schieschnek
Burgstädt, Germany
th
9 of January, 2019