robert jan-vrolijk--why-do-banks-prefer-ripple-over-bitcoin
TRANSCRIPT
WHY DO BANKS PREFER ? OVER ROBERT JAN VROLIJK AMSTERDAM 22 JANUARY 2015
Short introduction Robert Jan Vrolijk
(Independent) Payments Consultant since yr 2000
I have worked for
Tier-1,2 and 3 banks in the NL’s
Several PSP’s and corporates
Operated in technical, business and risk roles
Speaker about Bitcoin for a Tier-1 bank, Accenture EMEA and Enigma Payments Consulting
I became interested in cryptocurrencies when:
I realized that cryptocurrencies are by far the most interesting innovation in payments in decades!
First my interest was merely in Bitcoin
Working for Tier-1 banks, I noticed their interest in Ripple
Refreshing the memory: building blocks of Ripple
Ripple = Global payment system / network created and maintained by Ripple Labs
Built upon a distributed, open source Internet protocol (like SMTP, HTTP) for payments, and a consensus ledger
The only asset in the Ripple network: Native currency called Ripple (XRP)
The network also supports all other currencies, but only as a liability (IOU’s)
Important elements Gateways
Market makers
Consensus ledger
Overview Ripple protocol / network / currency
Refreshing the memory: building blocks of Ripple
Consensus ledger Consists of 3 different parts Contains all accounts, balances, transactions, and offers to trade assets Reaches consensus about transactions to be included in the ledger within seconds
Gateways Enable users to put money or value in and out of the Ripple network Similar to banks, yet they share one global ledger Should have AML and KYC / CDD procedures in place Accountholders have to setup trust lines (with other accountholders, MM’s and Gateways)
Market makers Offer FX services and arbitrage (with other Market makers and Gateways) The Ripple network includes a path finding algorithm offering the cheapest path between two currencies or units of value
Refreshing the memory: building blocks of Ripple
(Couple of) Similarities Bitcoin and Ripple
Both are decentralized.
Both are open-source protocols, not owned by anyone.
Both use algorithms to ensure that their networks come to the same conclusions--so if one person authorizes Transaction A, the entire network comes to agreement that Transaction A happened.
Both allow for almost free, p2p transactions across the internet
Essential differences
- Proof of work vs consensus ledger (no miners, no block reward, faster clearing 6 – 10s)
- Bitcoin protocol only holds the asset Bitcoin, Ripple network also allows other currencies (as liability, IOU’s)
- Bitcoin protocol does not include gateways, with trust lines, etc (is not based on Hawala banking), and no Market makers
- Ripple is (in it’s current state) not for the consumer market
- For Ripple, 1 company is leading the way, Bitcoin is owned by everybody (and nobody)
- Max 21 mln Bitcoin (in the future) to be mined, 100 bln Ripple already created, but not in circulation yet
- Ripple Labs still holds 69 bln XRP from total 100 bln XRP (Jed McCaleb holds 9 bln XRP)
The agenda of Ripple Labs (RL) (my personal view)
Use cases have been described for: Remittance Prepaid Banks Merchants & market places Currency exchanges Merchant acquirers
Formally the goal is: Building the internet of value
Since Jed McCaleb left Ripple Labs, Ripple has changed it’s strategic focus to the financial industry only
My personal observation:
• Initial main goal is now to act as a facilitator for remittances, and cross-currency True International Payments
• With a strongest business case for banks
• As they are currently taking care of the financial transport of TIP payments via their (often complicated) correspondent banking network
The agenda of Ripple Labs (my personal view)
So in principle
• Facilitate the financial lowest layer,
• Providing the ‘rails’ for international payments
• Not interfering banks with their clients, their channels and their initial payment routing (and revenues)
• Not pushing the use of XRP
• With the opportunity later on to do an ‘upward integration’ towards rules and messaging standards, (like the payment series of Swift MT100 – 200, SEPA etc)
• And introduce extensions of the network, smart contracts, etc
Important events on Ripple-planet in 2014
Feb 2014: Jed McCaleb leaves Ripple Labs (and starts with Stellar)
May 2014: Mc Caleb announces to sell his 9 bln Ripple, price plummets
Aug 2014: Deal between Ripple and McCaleb. He will sell only $10.000 XRP per week and 2014, 20.000 per week in 2015, etc
In the meantime:
Ripple changes strategy fully to go for a soft adoption in the financial industry, by banks and financials
May 2014: Fidor bank adopts Ripple
Sep 2014: Two small US banks announce to adopt Ripple
Nov 2014: Deal with Yantra, developer of risk solutions for payments
Nov 2014: Italian TAS Group adopts Ripple (Fintech company and biggest debit / credit card processor in Italy with subsidiaries in France, Switzerland and Spain)
Dec 2014: Deal with Earthport (White label cross border payment provider, with clients like BAML, Barclays, Standard Bank, HSBC and others) signs deal with Ripple
The price of Ripple is rising (a bit)
Last 6 months
Last 2 years
How are banks looking at this? - 1 Banks do have problems with True International cross-currency Payments
They’re slow , and are sometimes even ‘stuck’
They are costly for banks as well (heavy investment in payment infrastructure, increasing regulationary pressure, new productdevelopment in a competitive market, limited STP processing)
And even more for the payer
Lifting fees and other charges
Conversion costs
Big network banks make a business out of it (buying volumes, offering many special FI products)
But they also understand that current cost deductions are not sustainable
If somebody finds a reliable, cheaper and faster way to process , their business will be shrinking rapidly
So banks are very interested
But they are afraid to be first mover
They leave it to companies like Earthport to adopt Ripple first
If it is working and improved, then they can adopt themselves
How are banks looking at this? - 2 Do banks care that Ripple Labs owns the majority of Ripples (XRP)? NO
Banks like a stable, rising price of XRP
RL have a real huge Bazooka to countermeasure any unwanted price increase (or price drop) of XRP in the market
RL will not offend their clients (banks) by going against their requested monetary policy
Do banks care that RL and a few investors will become very rich if the price of XRP rises? NO
If Ripple really becomes the world standard, all payments for banks will be book-to-book, because they all happen in the same ledger book to book is always easy for banks (no third party involved, reconciliation, transaction details, fast)
Banks do not earn big bucks from payments Consumer payments are not profitable at all
Wholesale payments are, but only with a lot of investment, IT-effort, high TCO
Banks mainly earn their money from other products
How are banks looking at this? - 3 Banks can still make money on FX, by acting as a Market Maker (the market is
already becoming more and more competitive)
Banks are not forced to use XRP as a currency, only for conversion to exotic currencies
RL is putting a lot of effort (explaining in the media, in their product offering) to facilitate the financial industry to start working with Ripple (AML / KYC, hosted / non-hosted accounts, presenting itself on big payment conferences)
Worries for banks are still:
Is it really safe
Technical barriers, like the size and performance of the ledger
No central supervision for Gateways (some of them might go bankrupt)
First mover has limited global coverage
Integration with their payment platform (they have already heavily invested in the last years)
Local regulation on the use of a cryptocurrency
10 reasons for banks not to invest in bitcoin
Price is too volatile
Nobody is solely responsible for Bitcoin
Majority of bitcoin community is against regulation
Silk road 1 , 2 and Mt Gox
They don’t know how many Bitcoin they should buy (1000 doesn’t sound like much for a bank)
Too many people working on anonimity within Bitcoin community
No central authority to execute monetary policy
Limited conversion revenues (if Bitcoin really becomes mainstream)
Other instruments in the financial markets, like currency swaps, will be obsolete (if Bitcoin really becomes mainstream)
Banks aren’t freedom fighters
Questions
?