The global banking system is in search of faster, more secure Real Time Gross Settlement (RTGS) networks to increase efficiency and save money, and boy do they need it. Ripple’s software provides a RTGS use case for cross-border payments as well as remittance and corporate disbursements. They are currently on advisory boards with the International Monetary Fund (IMF) and the U.S. Federal Reserve (Fed), and are trialing their Interledger Protocol (ILP) with the Bank of England (BoE), which has been developed with input from the World Wide Web Consortium and Internet Engineering Task Force.1

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U.S. Federal Reserve

As of May 17, 2017, Ripple is the only Distributed Ledger Technology (DLT) company on the U.S. Federal Reserve’s Faster Payment Task Force (FPTF) Steering Committee. Of course DLT will not be the only solution, and being on the steering committee does not in itself guarantee adoption. The Federal Reserve has been very clear that their goal is to let the market naturally decide what solutions deserve market share. However, Ripple is obviously doing everything it can to position itself as a leading solution. Other members of this task force that are not on the steering committee include representatives from Goldman Sachs, IBM, JP Morgan, Citi, Barclays, BNY Mellon, BBVA Compass, Morgan Stanley, Visa, Mastercard, Verizon, NASA, BAFT, the IRS, and the FDIC to name a few of the 300+ organizations participating. Their January 2017 progress report states that 22 proposals have been submitted by task force participants, with 19 progressing through participant review. It has also been stated that with the U.S. financial system being the largest and most complex of any country, they will not be relying on a single solution. “The Federal Reserve System plans to release proposals for real-time payment systems around mid-year…”. Anytime now we should be seeing their second report. 2

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The group has identified six “effectiveness criteria” for the next generation RTGS networks: Ubiquity, Efficiency, Safety and Security, Speed, Legal, and Governance.

Ubiquity: They want accessibility, usability, and cross border functionality. As a software implementation designed to comply with ISO 20022 (the messaging standard to be used in the United States, as decided by the Fed), Ripple has been strategically developing their solution to satisfy the requirements of the next generation of RTGS. They even offer the service of making any bank’s current messaging system compliant with ISO 20022 so that it can run Ripple’s solution. As mentioned, Ripple is heavily focused on the cross-border payments use case.

Efficiency: Among the sub-criteria are payment format standards, scalability and adaptability, and implementation timeline. The first, ISO 20022, we already covered. Ripple’s long-term goal is to create the “Internet of Value” (IoV), where value can move as fast as information. Critical tools in accomplishing this are the XRP Ledger and ILP. ILP is capable of handling throughput on par with Visa, setting it far apart from Bitcoin and Ethereum which both are currently dealing with scaling issues. Using the Payment Channels function, scaling to 50,000 transactions per second can be achieved. ILP defines adaptability in the new age of cryptocurrencies; it is a protocol enabling every distributed ledger to become connected to every other one. As far as an implementation timeline, Ripple already has banks operating on the live Ripple network, and are onboarding many more this year. Details on that are discussed further down.

Safety and Security: Risk management, payment finality, and handling disputed payments are among the Fed’s concerns in this category. In a study published in June, 2017 by Purdue University entitled “Mind Your Credit: Assessing the Health of the Ripple Credit Network“, the researchers stated that the core of the network (~10,000 wallets) is highly resilient. They did point out that around 50,000 wallets are at risk of losing connection with the main Ripple network if as few as 10 highly connected wallets were to be disrupted. They did, however, point out that this can be viewed as a good thing; to identify any issues now so that Ripple can hopefully address them sooner than later. In the mean time, if the findings of this study worry you, you can “offline” your holdings to a hardware wallet to ensure full ownership. I personally use Ledger (please research the best option for yourself and know what you are doing before you transmit any value to an offline storage solution). Regarding payment finality, if the validators of the network do not include a transaction in a consensus round, it can simply be picked up in the next. Validators currently listed on Ripple’s website include Microsoft, MIT, CGI, Telindus, BitGo (the exclusive provider of multisig wallets for the Ethereum IRA), @Tokyo, Gatehub, and Worldlink. For a great explanation of the Ripple Consensus Ledger, watch this video. The speaker is David Schwartz, the chief cryptographer for Ripple, who previously worked for the National Security Agency (where the Secure Hash Algorithms used for cryptocurrency were developed).

Speed: Ripple transactions have two wait times of two seconds each, and the actual code execution takes about a second to complete. We are entering an age where you will be able to transmit value across the globe, have it turned into another form of value, and post to the recipient’s account in 5 seconds. As Ripple’s CEO Brad Garlinghouse has put it, “I don’t think you can make a horse and buggy keep up with a race car…”.3

Legal: Considering the aforementioned associations Ripple has, this section should require no explanation. It is interesting to note, though, that several years ago Ripple Labs was fined by the Financial Crimes Enforcement Network (FinCEN) for not registering with them as well as not having an adequate anti-money laundering program in place. Fast forward two years – it is apparent they have since heeded the call and then some; actively seeking out dialogue with regulators, and receiving “New York’s first BitLicense for an institutional use case of digital assets”.

Governance: Effective and inclusive governance. A December 2016 report from the Fed singled out ILP, summarizing that “an open interoperability standard like the Interledger Protocol (ILP) could spur further innovation and adoption of DLT-based systems for cross-border payments.” The Global Payments Steering Group is comprised of the following institutions: Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac Banking Corporation, CIBC, and Royal Bank of Canada. “The group will oversee the creation and maintenance of Ripple payment transaction rules, formalized standards for activity using Ripple, and other actions to promote implementation of Ripple payment capabilities as our network continues to grow.” This is Ripple’s governance advisory board.

IMF & BoE

The International Monetary Fund has engaged Ripple in discussion by including them as a member of their High Level Advisory Group. “The Group will provide advice to help IMF staff deepen its understanding of FinTech issues. It will work closely with the IMF’s Interdepartmental Working Group on Finance and Technology, which was established in 2016, to study the economic and regulatory implications of developments in the area of finance and technology.”

“Such a system [Ripple] would stand a good chance of disrupting entrenched players [e.g. SWIFT], according to the IMF”.

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“The BoE wants to allow a variety of financial firms to compete with the major high street banks that currently have access to the high-speed payments system, which handles 500 billion pounds ($647 billion) of transactions a day.” The BoE plans to have most of its RTGS upgrades completed by 2020, and stated that they would “set out” such plans by mid-2017, designed to integrate DLT.4 This timeline is very similar to the one given by Ryan Zagone, Ripple’s Director of Regulatory Relations, and representative on the Fed’s FPTF Steering Committee. In a webinar, Zagone says they plan to be “at scale” by 2021 or earlier, with a full-scale commercial deployment taking 3-6 months to integrate Ripple Connect into a bank’s infrastructure, according to Patrick Griffin, Ripple’s SVP of Business Development.

Multiple Service Providers

Could competition leave Ripple without a seat at the table? There is about $27 trillion in banks’ float accounts across the globe to fight over. About four percent of this represents more than 100 times Ripple’s current market cap, so there seems to be room for several players. Ripple also seems to be a bit quicker out of the gate with 75 contracts with banks already, and more coming to Ripple. Additionally, it is worth noting that Crypto Fund AG is launching the Cryptocurrency Fund that will include Bitcoin, Ethereum, and Ripple as well as some other large cap altcoins. Following the Bitcoin/Ethereum IRAs, this may be one of the first steps in moving cryptocurrencies towards other mainstream investment vehicles such as ETFs, hedge funds, etc. The fund is planned to launch in Q4 2017, available to “qualified investors”.

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Why would banks use XRP?

Some have referred to XRP as a “scamcoin” since Ripple hasn’t yet distributed the majority of the total 100 billion XRP. To alleviate fears that Ripple would irrationally or selfishly flood the market and drive the current price down, they will be placing 55 billion XRP in escrow, cryptographically locking it away under terms described on their website (Ripple couldn’t reverse this even if they wanted to). The minimum funds required for banks to maintain their nostro accounts represent an opportunity cost; these funds are tied up and cannot be used to generate income. If banks exchanged currency via XRP these funds would be entirely freed. If they were to use one pool of XRP instead of multiple nostro accounts, it would allow them to allocate less liquidity for the same volume: intermediaries are reduced, only one account to XRP would be needed, and they would only need to hold enough XRP to cover their largest expected payment obligation. The network transaction fee has been consistently less than 1/1000th of a dollar. Ripple itself can save banks $18 billion annually. Adding XRP in the mix saves $23 billion (6.8bps and 8.8bps “on $26.5 trillion in annual cross-border payments volume”, respectively). Once at scale, projected savings rise to $33 billion. XRP is optional, but if it saved your business money, wouldn’t you use it? Ripple has currently deployed its solution in 9 countries, and is expanding into 16 more this year.

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Proximity does not ensure success, but I like these odds.

DISCLOSURE: I own XRP. I am not employed by Ripple. Do not interpret this article as investment advice; do your own research! I tried to make this source-heavy; if I misinterpreted anything, be gentle, I have a separate day job.

Donations greatly appreciated: r3gxVKveP5cJe2m4n47XLvUqzX1KhG1K7G