ACM News Technology That Could Revolutionize Banking

A new cryptocurrency has the potential to transform the global banking system. Credit: bullbastic.com

You may have heard of bitcoin, a digital asset called a "cryptocurrency," or an electronic currency that is traded like the money issued by governments, except it is outside the control of any nation-state. Bitcoin's success has led to the creation of hundreds of other cryptocurrencies.

One of them has the potential to transform the global banking system.

Meet Ripple. Ripple was inspired by bitcoin's technology, but is very different. Where bitcoin is designed to be spent by individuals, Ripple is both a network and a currency (the currency is called XRP) that is made specifically for banks. Working together, Ripple's network and currency make it possible to transfer money anywhere in the world in seconds. Currently, banks use technology like the SWIFT network (created in 1973) to do this—and it takes days, costs too much, and requires serious counterparty risk.

Ripple says its network and the XRP currency have the potential to save banks more than 60% of the fees they pay daily to transfer currency, while making near-real-time currency transfers possible. Ripple's analysis estimates banks pay $1.6 trillion in "systemwide costs" for global cross-border transactions. In this same analysis, Ripple calculates the global average cost for a bank's international payment infrastructure is 20.9 basis points (a basis point is a hundredth of 1%); using Ripple's network and the XRP currency drops that cost to 12.2 basis points—a 42% cost savings.

It is no wonder, then, that Ripple is getting attention. The cryptocurrency is backed by the likes of Google and venture capital firm Andreessen Horowitz. XRP is the third-largest cryptocurrency by market capitalization (as of writing, it sits just above $10 billion), and 75 banks worldwide are already piloting it. Santander, a U.K. bank, is using the technology for international payments. ReiseBank, another adopter, even performed a live transfer on-stage at an industry event in eight seconds, versus the days such a transaction would normally take.

"In the future, Ripple will enable cash-to-account and account-to-cash real-time payments, not just with ReiseBank but with institutions all over the world," said Frank Boberach, head of product management at ReiseBank.

"There's no reason money should move any less efficiently than information," says Ripple Chief Technology Officer Stefan Thomas. Ripple, he says, is able to achieve that goal thanks to some groundbreaking technology.

Banking on steroids

In an age of wondrous technologies like artificial intelligence and quantum computing, the world banking system still runs on the equivalent of dial-up Internet. A currency transfer between banks in different countries can literally take days, because banks use outdated technology like the SWIFT network, an interbank protocol developed before the Internet as we know it today existed. The global foreign exchange market does $5.7 trillion per day in transactions, with banks paying fees to middlemen (usually other banks) on each transaction, which can be significant in the aggregate.

Ripple's cost modeling and research estimates this inefficient system costs banks $1 trillion per year. Payments take two or more days to settle, 4% of transactions fail, and 12% contain errors. Transfers can get lost, canceled, or otherwise be foiled if any of the parties involved become insolvent, or simply choose not to honor their obligations (something banks call counterparty risk).

Ripple's technology largely solves these huge problems through two main components. First, the company uses an Interledger Protocol (ILP), designed to connect with other protocols to settle payments in seconds. The protocol provides "cryptographically secure end-to-end payment flow across different ledgers and networks globally." This technology is used by Ripple to facilitate faster, cheaper transactions between banks using its network.

That network, says Ripple, "consists of many distributed servers, called nodes, that accept and process transactions. Client applications sign and send transactions to nodes, which relay these candidate transactions throughout the network for processing."

Together, the nodes work to validate transactions against the ledger in a process known as "consensus." This ensures that, despite the lack of a central authority verifying transactions, every transaction is legitimate, eliminating most counterparty risk.

While the Ripple network reaches consensus, Ripple Connect goes to work. This is a module that coordinates communication between banks using Ripple's network. Ripple Connect communicates with each bank in a transaction to identify the fees involved in the transfer.

Working together, the network and Ripple Connect coordinate payment validation between all parties in the transaction. Funds are cryptographically held while the payment is verified; the funds are released all at once to each party in the transaction. The process takes seconds.

Ripple's native currency, XRP, acts as a bridge currency on the Ripple network, providing a way for any bank to exchange it for any other currency on the network in just two steps, if desired.

"There's not really an asset you can move around to settle globally in real time," says Thomas. "XRP is designed for this use-case. It's a bridge asset compliant with relevant regulations. You could use bitcoin, but it isn't really suitable for enterprise use."

This is one reason why Ripple and XRP are so enticing to banks: these technologies scale in a way bitcoin currently can't. Thomas says bitcoin can only handle upwards of six or seven transactions a second, which isn't nearly enough for banks moving billions per day. Ripple, on the other hand, processes over 1,000 transactions a second— throughput which matches that of Visa .

"Banks are actually asking us to do more with XRP faster, recognizing some of these benefits," Thomas says.

Gautam Jain, global head of digitization at Standard Chartered Bank, a major bank that decided to partner with Ripple, agrees, according to Finextra: "As a leading international bank committed to facilitating trade, commerce and investments, this partnership [with Ripple] will go a long way in progressing our digitization agenda to develop innovative solutions for our clients."

Show me the money, indeed.

Disclaimer: The writer of this article holds investment in XRP.

Logan Kugler is a freelance technology writer based in Tampa, FL. He has written for over 60 major publications.

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