A hearing on cryptocurrency and blockchain at the UK Parliament offers some fresh insight on Ripple’s recent accomplishments and overall philosophy.
Among the highlights, director of regulatory relations Ryan Zagone confirmed that 120 financial institutions are now using Ripple’s software – and two of those clients have sent around a billion dollars so far, mostly in corporate payments.
Here’s a look at what Zagone had to say as he faced a tense round of questioning on Ripple’s payment technology RippleNet, Ripple’s coin XRP and the future of banking on the blockchain.
What’s the advantage of using Ripple’s technology?
“We focused on cross-border payments where previously it was a quite painful process. Cross-border payment would take two to four days, you wouldn’t be able to track that payment and you didn’t know the fees up front.
So it wasn’t until days later when your funds were delivered that you could find out how much was taken out as a fee. And you essentially went into a black box – you could literally mail a box of cash and have better tracking and certainty…
So we recognized that it was a key pain point in cross-border payments that was limiting consumers’ use. If they’re sending money back home, it also became a key limit to economic growth for small corporates that were looking to start to growing internationally, importing raw materials or exporting goods. They couldn’t manage this very complex four-day payment cycle, so most of them backed away from international growth and would just focus domestically.
So we took the technology. We built two products with it. First is a technology that allows banks to do real-time cross-border payments in four seconds instead of four days. We guarantee the fee up front, so the sender knows exactly how much the fee will be and has real-time tracking so they can track it all the way through. So that allows banks to connect to currencies they’re using today.
There’s two parts to a payment. You have to be able to connect, and you have to have that foreign currency. So, our first product just allows banks to connect when the bank already has that foreign currency. There’s a key problem in payments that no one’s solved, and it’s how to connect to currencies that are foreign or exotic or don’t have a very high volume, so say your tier 2 or tier 3 currency. So, an example would be Mexican peso to Korean won. There’s payment demand, but it’s very hard to find a market between those two currencies.
So what we’ve taken is a second product that uses the digital asset, and we’ve used that as a bridge to connect these hard to reach currencies – that’s XRP – it becomes this bridge. It’s using the same technology that underpins Bitcoin the currency, but we’re not using it as a currency. Here the Bitcoin model would, say, replace the euro or the pound or the US dollar and use Bitcoin to buy your coffee. In our model we take that same tech, and we connect existing currencies together more efficiently. XRP is not controlled by us – that’s an open-source platform. We’re just making use of open source technology, and we’ve built that into our product. There is a tight correlation between us and the currency as the market has begun to understand it. The reality is, it’s open source. We as a company could go away and that technology could continue to exist.”
How are banks using Ripple today?
“We’ve signed over 120 financial institutions to the network for them to enable real-time payments. The focus is on remittances, which are now live. We have several banks that have launched remittance services and corporate payments – particularly for payments that need to be made immediately or down to the cent to control exactly what’s delivered. This fills a product gap that most banks had.
We have 120 financial institutions using it. We’ve had a couple clients send around $1 billion dollars thus far, mostly corporate payments, and we have some smaller value numbers around remittances. Those products are just now launching.”
If the value of XRP was to change dramatically, what are the consequences?
“So the payment would go into XRP as a bridge and out of it immediately so it’s not exposed to the XRP price before or after the payment. It’s just in those two or three seconds that it gets converted through, so the price volatility only really matters in the exact few seconds you’re making the payment.
An important point to make is there’s two different products – one product banks are using today is live and does not use XRP – so banks are connecting with their own existing accounts. We have a second product we’re testing now that’s in pilot with Western Union, MoneyGram and some others that uses XRP that’s not a live product. So the banks we see on our network are not using XRP right now. We’re looking down the road at how they can expand their reach through XRP.
We’re seeing an ability to leverage it to better meet customer needs, so on the remittance and corporate side for the ability to synchronize data. We’re doing this much more efficiently and at much less cost. Our early models have found banks are saving about 60% on the cost of a payment by using our tech, so it’s a material reduction that starts to open the market to new types of payments, like very small payments at lower cost and more efficiency.”
Aside from banking, what other areas can blockchain technology improve?
“We see use cases around securities trading – making that more efficient – trade finance and digital identity as some of the other key solutions in the market. We’re not working on those directly – or at all – but there are other companies. That does seem very promising.
With the ability to have more transparency in systems, you can have more certainty about who owns what type of invoice or where that payment or transaction is in the flow trade finance processes. Usually it takes several days, so it goes in a black box kind of like payments…
This gives you much more visibility to those use cases.”
How will you stop criminals from abusing Ripple’s technoogy?
“We’ve taken this tech and specialized it for enterprise use, so we’re a vendor to that financial institution. That financial institution is regulated – they have requirements for the type of vendors they use – so they audit our systems. They audit our solutions. We do third-party audits as well, to ensure that it’s enterprise grade technology that we’re delivering.”
How do you stop anonymity in blockchain?
“It’s not anonymous. While you may not know the identity of the person, you can see their account, and you can see all the history of all the transactions from that account. So that gives you much more visibility than, say, compared to cash, where you can’t track it at all. So there’s already, with this open source technology, much more of this ability to see the history of records. Law enforcement has become quite smart at tracking that and putting together patterns to identify accounts, so there’s already new layers of visibility that you don’t have with cash, and you didn’t have with traditional systems.
Ripple made a recommendation to the G20 to provide a framework that requires KYC anti-money laundering and consumer protection requirements to exchanges in the virtual currency space, to bring that activity into the regulatory fold and make sure those risks are contained.”
Can countries really trust blockchain technology?
“Last year we ran a proof-of-concept with the bank of England, where they tested the software to enable new capabilities within their own systems. It was a very successful proof-of-concept and they’ve added some of those capabilities into their blueprint for future systems. So we’re seeing that this has been battle-tested on the technology, and in that maturity, enterprise grade – so good for a bank or corporate.
To use some of the technologies in that maturity phase is a very similar cycle we see with other technology breakthroughs. I’ll use the automobile as the example. The Ford Model T was the first widely accessible automobile, and there was a lot of hype around that, much like there’s a lot of hype around blockchain. The hype being it can solve all of our problems and it will give us world peace in the process.
There’s a lot of hype right now similar to the Model T when it first came out. That one design didn’t allow us to meet all of the use cases that would solve. The automobile went through a long period of specializations, so there’s a wide variety of models specialized for use cases. Your 18-wheeler to move goods, your minivan to move your family, your sports car to move fast. Each of them have different risks, parameters and mitigants to make sure they’re safe. They’re all specialized. We’re in that specialization process now for blockchain. So taking it and modifying it, specializing it for these different use cases.”
Why isn’t XRP a security or an equity?
“XRP is open source, meaning there’s many participants that make use of that technology. There are virtual currency exchanges that do sell it to retail consumers. They do so as either an investment or payment tool. Those are exchanges not related to Ripple. We, as a company, we make use of that same open source technology. We don’t sell it to retail consumers, so we only sell it to institutional market-makers and financial institutions. We have a license out of the state of New York to cover that activity – a BitLicense. It does not allow us to sell to retail consumers – to you or me. So we sell to institutional parties, and we have a partnership for open market selling as well, but that is not to – we don’t directly sell to you or me, only to financial institutions.
There are exchanges that make use of that open source tech. That’s tech not controlled by our company that existed before our company, outside of our control. We’re just leveraging it as a tool, so they are selling it on the market – other exchanges are.
You would buy [XRP] on a virtual currency exchange from other parties that have XRP. Half the XRP is open in the market at exchanges. You would buy it on that exchange from a party that’s looking to sell it. Given this dynamic, we as a company make use of this tech in the enterprise space. There’s also exchanges selling it in the consumer space. We’ve called for a global recommendation for licensing of those exchanges to ensure that there’s consumer protection, AML and safety and soundness measures to make sure those exchanges are also safe.”
If XRP became more commonly used, how would governments and regulators react to a private company centrally controlling a crypto bridging currency?
“We’ve been very involved with regulators to get feedback on how the technology should be developed – to identify risk and mitigate those risks so that the money that’s moving today, let me be clear, are not using XRP.
We have two different solutions. The solution that’s live does not use XRP, so the money being moved today is just fiat currency to fiat currency.
Now we’re looking at leveraging XRP as a bridge into hard-to-reach currencies, where there’s not an easy connectivity today. That’s been in pilot for about three years now. We’ve been very slow in that process to make sure that we’re checking all the boxes, we’re considering all the risks and we’re mitigating those. So we have six pilots going on right now that have been successful at giving payment companies a reach into new markets. Those are still in pilot. They’re still testing those and learning how to make sure we’re doing that safely.
The currency – to repeat – it’s not controlled by Ripple. We have a concentration of ownership, but we do not control that platform. That platform is open-source, and existed before our company. We came about and said, “Hey, we think that’s really interesting technology. Let’s build a company that leverages it.” But we didn’t create it, and we don’t control it. So there is a separation there. We could go away. We could fail and go away tomorrow, and XRP and that ledger would still exist.”
How should governments classify technologies like XRP?
“There’s many different categories that we see coming to the market depending on how that technology is used. In the US, the IRS – our tax authority – has deemed them assets, just like property. The CFTC says some uses and some designs of these look like commodities. The Securities and Exchange Commission says some look like securities, okay, the ICOs. So we’re seeing, depending on how they’re constructed and used, different categories. We expect that conversation to continue as the technology evolves.”
Did the US government find Ripple to be non-compliant?
“In 2014, the US government did a review of all of our operations and found that in the very early day of our company, one of our subsidiaries was not properly registered and we did not have a sufficient compliance program in place for some of the activity we were doing. We agreed with that assessment. It was a retroactive assessment. We had a settlement agreement on that. We did pay a fine and agreed to put in place a full compliance program. That’s a three or four-year agreement. We have done so. We’ve met all of the requirements of that agreement to date, and we had no such findings since.”
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