The Finanser interviews: Chris Larsen is CEO and Co-founder of Ripple Labs, creators of Ripple, an open-source, distributed payment protocol. Mr. Larsen also cofounded and served as CEO of Prosper, a peer-to-peer lending marketplace, and E-LOAN, a publicly traded online lender. During his tenure at E-LOAN, he pioneered the open access to credit scores movement by making E-LOAN the first company to show consumers their FICO scores.
A lot of people have not heard of Ripple. Can you give us some background?
Sure. We’ve all experienced the inefficiencies of payments – I can physically travel to Europe faster than my payment settles from the U.S. to Europe using a wire service. The delays and costs inherent to today’s infrastructure restrict the expansion of businesses, international trade, economic growth and ultimately financial inclusion.
Think of the Internet’s revolution. By providing common, neutral, global infrastructure for free and instant information exchange, the Internet opened access to and dramatically increased participation in global knowledge and information sharing. It spawned entire new, previously unimaginable industries. Services like eBay, Twitter, and Uber have changed the world, but wouldn’t have been possible without the Internet.
The same concept applies to payments. Payment systems were created before the Internet existed, built country-by-country as closed loops. Payments needs common, neutral, global infrastructure for free and instant value exchange. It’s the dawn of the Internet of Value. Ripple is decentralized payments technology that enables free and instant payments in any currency anywhere in the world. It’s infrastructure that sews together and modernizes today’s payment systems so money can move on the web just like information does today.
But then some people might struggle with this, as in why do I need Ripple when we’ve got Bitcoin?
Ripple was borne out of Bitcoin’s incredible revolution. Bitcoin solved the double spend problem, creating, for the first time in history, a digital asset and decentralized ledger with no central operator. This breakthrough means people can send this new currency (bitcoins) to anyone else in the world in minutes and at no cost, instead of days and at the high expense in today’s traditional systems. But Bitcoin is only efficient as a payment system if everyone in the world adopts bitcoin as the one and only currency, and in that scenario, Bitcoin replaces today’s systems – from ACH to SWIFT to Visa, banks, PayPal, etc.
By design, Ripple is optimized to serve as improved, IP-based infrastructure for today’s payment systems. Amongst distributed payments technologies, Ripple uniquely works with any currency (dollars, euros, yen, etc.), and it settles transactions, including cross-currency transactions, in five seconds.
So, whereas Bitcoin depends on consumers and merchants adopting the currency and exclusively using the blockchain for payments, Ripple is meant for financial institutions to integrate into their core systems to dramatically increase the speed and lower the cost of payments. Financial institutions and networks using Ripple never have to touch digital currency; they continue to deal in the fiat currencies they deal in today.
So if I summarise: there is the Bitcoin blockchain technology. This technology is fantastic, but it also allows a bit of a Wild West to exist, as it’s out there and open sourced. The community use it as money without government, which is not what the government wants, so you have made the technology appropriate more for corporations and banks to use in a structured way.
Bitcoin was designed with a different objective than Ripple. For Bitcoin, the goal was to create a decentralized currency and ledger, independent from any government or central operator. For Ripple, the goal was to create a decentralized ledger that could work with and improve the foundation of today’s payment systems.
Government regulators, central banks, financial institutions, and corporates aren’t interested in experimenting with digital currency or upending the banking and payments industry. They are interested in improving and modernizing the industry. They’re open to the benefits of lowering costs and risks in the system, end-to-end transaction transparency, and the possibility of exponential growth in volume – all of which Ripple enables.
Ripple is settlement technology that plugs into banks’ existing core systems, including compliance, messaging, and other systems. For example, Earthport is fusing Ripple with its robust compliance framework that it’s known for to offer their bank clients a trusted, secure, real-time payments option.
Lastly, because payments on Ripple settle instantly and point to point, banks, regulators and law enforcement have complete visibility into transactions as needed, which reduces costs for everyone involved.
Yes, I have seen a few references to some of the folks that you are working with, such as new companies like Fidor Bank and Earthport. Equally you are working with some of the big guys (the banks you know and love to hate). How is that progressing?
We’ve had a great response from the market – from community or regional banks to the top global banks and payment networks. The value proposition is clear to them: enable real-time payments; lower the costs of liquidity and compliance. Sibos last year was a turning point for Ripple where the common question we heard was, “how do we get started?”
We’ve announced integrations with Fidor Bank (in Germany), CBW Bank (in Kansas), Cross River Bank (in New Jersey), and Earthport. We’re working on dozens more integrations behind the scenes in private pilots.
It’s a pivotal time for our company. We have exciting opportunities in the pipeline and we’re focused on executing them. We just brought on Brad Garlinghouse as our COO (previously of Yahoo!, AOL, Hightail) to dig our heels in and focus on delivering to the market.
I guess that the core motivation for banks to use Ripple is that it takes out a lot of the handovers between the likes of CHAPS, SWIFT and Fedwire out and does it for free. Is that right?
Ripple doesn’t replace local rails and standards (like SWIFT). Rather, it connects them. Today, every bank in the world relies on correspondent banking for cross-border payments. Every link in the correspondent banking chain creates costs in the form of fees, risk and time delays. There are only five or six global money center banks that provide liquidity for cross-border payments so foreign exchange rates aren’t competitive.
On Ripple, banks can transact directly with each other, instantly and for free. By way of example, Ripple enables a bank like Fidor in Germany to provide Europe to U.S. real-time payments to its customers at a fraction of the cost by working directly with a bank like Cross River Bank. In that scenario, Ripple connects SEPA to ACH and works with SWIFT’s messaging layer, so another bank in the U.S. or a bank in Europe could actually use Cross River Bank or Fidor Bank as its “correspondent” to get more competitive rates and delivery speed, which is a new business opportunity for banks who aren’t the top five.
It always amuses me when banks talk about cryptocurrencies, such as Ripple, as their first question is always: is this approved by the regulators? Does the Fed support this approach?
Yes, and for good reason! Banks using Ripple aren’t touching cryptocurrency. They continue to deal in fiat currencies. And, Ripple works in synchronization with their existing compliance systems.
Regulators in the U.S., Europe, the U.K., and abroad have been proactive about learning about these technologies. They’re interested in the potential for improving compliance practices, lowering costs, increasing the speed of payments, and enabling interoperability for global systems. Real-time payments isn’t just a consumer feature. The speed of payments has huge implications for the cost of liquidity, and as a result, economic expansion. History has shown us (take FPS in the U.K. for example) that if you increase speed and lower costs, volume explodes.
Do you see Ripple currency will be a big game player 5-10 years from now, or is that not the focus?
Our focus is really on creating utility for Ripple as a payments technology. I think in 5-10 years people will use Ripple for domestic and international payments without knowing it, just like how I use ACH daily but I don’t need to think about it.
As more and more banks adopt Ripple and they push more and more cross-border volume through Ripple, market makers will need efficient ways to trade less liquid currencies. XRP is a useful tool for market making when a currency trade will take multiple “hops” (for example: Nepalese Rupee to Indian Rupee to Euros to Kenyan Shilling). Because it has no counterparty, XRP is always a one “hop” trade (Nepalese Rupee to XRP to Kenyan Shilling). So then, XRP as a utility for trading creates its demand.
One of the biggest issues is in capital markets right now around collateral management, and the efficient use of capital and liquidity. I guess what you are saying is that Ripple plays directly to that challenge of the problem of the efficient use of capital?
Yes, that’s exactly right. Liquidity management is a big cost to banks today that’s intrinsic to the correspondent banking system. Capital outlays for cross-border payments restricts working capital. Imagine if banks don’t have to make those outlays and they can instantly and directly transact with the institutions they chose to work with. That’s the reality of Ripple today.