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When Brad Garlinghouse, the CEO of Ripple, has to explain to his mother, who lives in Kansas, what his company does, he says, "Mom, it's pretty simple. We sell software to banks. But it isn't quite that simple. Most fintech startups fall into one of two camps: Ripple is the rare exception that wants to do both. The San Francisco startup, which began years ago by launching a cryptocurrency but has since turned its attention to business applications for blockchain technology, can easily prove its bona fides in the second camp.
The fact that 60 banks are now in the process of commercially deploying Ripple's enterprise software—among them Santander, Royal Bank of Canada and Mitsubishi UFJ Financial Group—reflects the company's incumbent-friendly approach. And yet the company's larger vision—to build an "internet of value," a global internetworking system for money—would be tremendously disruptive to the status quo of international banking.
In this system, monetary value could flow seamlessly from a bank ledger to a public blockchain to a mobile money system—all interoperable and working together to move money from one side of the globe to the other. In the more distant future, says Thomas, such a system could expand beyond money to any form of value whatsoever.
In other words, Ripple doesn't just want to help banks make cross-border payments. It wants to make the world's assets liquid. If Ripple has its way, it will do more than knock out Swift ; it will have found a way to make money move like information.
Overcoming an identity crisis Before it can conquer the world, though, Ripple will have to sort out its branding. It is practically the only blockchain startup selling enterprise software to major banks while funding development costs with its own cryptocurrency. That more serious attention has not been paid to Ripple even by many cryptocurrency enthusiasts—and that it hasn't garnered headlines the way bitcoin and Ethereum have—may be due in part to poor nomenclature.
Another reason, undoubtedly, is the series of pivots Ripple has undergone. Ripple's initial plan was to "build a better bitcoin," Garlinghouse said. Its leaders were prescient regarding issues with bitcoin's software that have now come to the fore, such as its ability to process only seven transactions per second.
Ripple wanted to be able to handle transaction volume on the scale of Visa. They also decided that so-called "bitcoin maximalists" were wrong about being able to replace incumbent banks, much less government currencies, with digital cash.
Rather than rail against the status quo, they decided to work with banks to improve it. Vias knows from experience. After being hired last December, he made a point of going to bitcoin meetups to spread the word about Ripple and XRP. People were surprised to hear that XRP was still around, he says.
It takes a while to sort through Ripple's offerings. There is the Ripple consensus ledger, a public blockchain network tied to XRP confusingly also called Ripple. There is an enterprise software solution that has nothing to do with digital currency but which purportedly allows banks to send cross-border payments more quickly, transparently and cheaply.
To get the full benefit, though, the banks on either side of a transaction both have to be running the software. And there is the Interledger Protocol, which works in tandem with the enterprise software and connects ledgers of different types—a private bank ledger and a public blockchain, say—for the purpose of settling payments between them.
Gradually, Ripple is incorporating this array of products and services—formerly a public-relations liability—into a singular vision.
Ripple executives talk a good game about how blockchain technology disrupts the " correspondent banking paradigm ," in which banks with no direct relationship rely on intermediaries in order to send payments to each other.
But Ripple's current software still depends on a global network of correspondent banks. Rather than total disruption, what it promises are faster settlements with more transparent fees. International banking today, said Garlinghouse, has "a speed problem, a cost problem, plus an error rate problem.
The initiating bank often doesn't know ahead of time what the total cost of a payment will be. Where Swift, the Society for Worldwide Interbank Financial Telecommunication, provides a one-way messaging service, Ripple provides a two-way protocol. This allows for greater transparency: Banks can exchange information and find out ahead of time what the fees and foreign-exchange rates will be, along with the expected date of delivery for the funds.
If any of the information is wrong or missing, both banks will find out before the payment is sent, which should keep transfers from getting stuck in the pipes. Once the sending bank has initiated a transaction, Ripple uses the Interledger Protocol to settle the funds and notify everyone of its successful conclusion. The transfers took mere seconds, BBVA said, as opposed to the four days it normally takes for such international transfers to clear. After the trial, Alicia Pertusa, the bank's head of digital transformation in investment banking, called it "a clear demonstration of how payment processes can be vastly improved through the implementation of emerging technologies.
This is perhaps a more diplomatic way of saying what Garlinghouse has said before, that Ripple's technology represents a race car compared to the horse and buggy of the current system. Naturally, Swift begs to differ. For about four decades, the nonprofit consortium has had a vise grip on international bank transfers. Swift doubts that its 11, members are yet ready to entrust big cross-border payments to a blockchain.
The collective recently launched a service called Global Payments Innovation to clear away some of the murk in the correspondent banking system. Banks are enthusiastic about GPI, and to some it may seem like a sufficient improvement over the old system. Since February, about banks have signed up for GPI, and 12 of them have already used the service to send hundreds of thousands of cross-border payments around the world, according to Swift.
Its express purpose is to establish a clear framework of rights and obligations for banks using Ripple's technology. One member of the group, MUFG, says the expansion of the network is among Ripple's biggest challenges. Ripple's 75 customers are nothing compared to Swift's 11, And it is harder for some banks to join up than others. CBW Bank, a small Kansas institution that has managed to become a fintech hub , wants to use Ripple's technology but is still working through the compliance requirements.
There are tens of thousands of banks. There is no easy way that we can connect to every one of them," said Suresh Ramamurthi, the bank's chairman and CTO. But there are signs of progress. In March, Ripple announced that a consortium of 47 Japanese banks had successfully completed a pilot with its enterprise software.
Twelve more banks have since joined the consortium, and they are planning to deploy a commercial version of the blockchain solution at scale in October Although Ripple is signing up as many banks as it can for its messaging software—its customers include the largest bank in Turkey and the national bank of Abu Dhabi—it is emphatically not trying to persuade them to entrust all of their payments to Ripple's own ledger. To do so would lead to a "Mexican standoff," said Thomas, because nobody wants to give up their preferred ledger.
That's where the Interledger Protocol comes in. In May, Ripple completed a test in which the company sent ether—the native coin of the Ethereum network—to the Ripple consensus ledger; the ether was received as XRP in a Ripple wallet. It was therefore "both a cross-ledger and a cross-currency transfer," Thomas said. At the Blockchain Expo in Berlin recently, Ripple went even further, presenting a demo of a payment that had crossed seven different ledgers, and held a hackathon in which representatives from Ethereum, the privacy-focused cryptocurrency Zcash and other projects worked to enable Interledger Protocol payments on their ledgers.
A return to cryptocurrency One of those ledgers, of course, is XRP's. Even as Ripple has signed up dozens of banks for its enterprise software, it has been working to bring XRP back into the conversation. You could say it is pivoting back to cryptocurrency just as it once pivoted away from it. XRP is today the world's third-largest digital currency by market capitalization, and it has delighted speculators in recent weeks.
For a long time, two of the biggest concerns about XRP have been the network's centralization —with Ripple itself being the primary validator of transactions—and the startup's huge hoard of XRP, basically a mountain of digital gold on which Ripple has crouched, Smaug-like, and which it has sold off piecemeal to finance development.
In addition to paying its developers, Ripple doles out XRP as incentives to market makers and sells it to institutional investors.
For the past year and a half, Ripple has sold an average of million XRP each month. But concerns lingered that the company could dump much more, making it a bad bet for investors. In mid-May, Garlinghouse announced a solution. Ripple, he wrote, was going to place 55 billion of the nearly 62 billion XRP it owns into escrow by the end of the year. Technically, there will be 55 lockup agreements of 1 billion XRP each; a contract will expire on the first day of every month, providing Ripple with operating funds.
Whatever hasn't been spent at the end of the month will be put into a new escrow account at the back of the queue. By cryptographically freezing so many of the company's assets, Ripple will place a hard limit on the number of XRP that can enter the market at any given time.
The price of XRP had already been climbing before the announcement. The price spike has prompted new exchanges to support XRP trading. As Ripple brings them on board, the exchanges tend to become validators on the XRP network, decentralizing a job that Ripple once performed alone. Vias acknowledges that some of XRP's recent price increase is due to larger forces. An intense bull market has seen the total value of all cryptocurrencies rise to a level about six times what it was in January Teleporting gold So why should banks care?
Because Ripple plans to use XRP to solve their liquidity problems. As it stands, banks around the world must hold billions of dollars in reserve, waiting to use them for payments. When one bank needs to send money across borders, it uses the dead cash it is holding at the foreign institution to which it is sending funds—either the final recipient or the intermediary correspondent bank.
The whole process involves counterparty risk and the expensive vetting procedures that go along with it. This dormant cash is all the more wasteful because, in a world of Basel III, it counts as yet another balance-sheet asset against which a bank has to hold cash to cover its liabilities. Ripple's big idea is to use XRP—once its market cap gets high enough and it is being traded heavily enough—to provide banks with liquidity on demand.
During a transaction, a fiat currency like the U. The Ripple ledger can process more than 1, transactions per second. There is even a feature that would allow two parties to set up a direct conduit and send money back and forth at much greater speeds—increasing the network's processing limit to 50, transactions per second, Vias said.
When preparing to send money, the bank would get a single quote for the foreign-exchange cost. Everything else, the actual sausage-making, would be abstracted away. This, according to Thomas, is the new frontier, "trying to get banks to use digital assets for settlement.
While Vias admits he can't even begin to have this conversation with banks until XRP itself is more liquid, Thomas is already thinking about the end result in magical terms. Banks, he said, will have "gold that you can teleport into any vault in the world instantly.