Ripple Labs CEO looks to revolutionise online payments
Transferring money across borders through traditional correspondent banking networks can be time consuming and expensive for both business and consumers. Chris Larsen, CEO of Ripple Labs, believes he has the solution in Ripple, his open-source payment and currency exchange system, which can integrate with banks’ existing networks.
As a serial entrepreneur, Chris Larsen has a track record of wanting to put people out of business. At E-Loan, an online database of mortgage products, he removed the need for mortgage brokers. And at Prosper, the peer-to-peer website where borrowers could meet lenders, he removed the need for banks in the lending process. With his latest venture, a Bitcoin-style protocol, it may seem that he wants to remove the need for banks and central banks altogether.
But fighting the banks is not what he has in mind. “If you fight the banks the more likely you are to be marginalised,” says Mr Larsen, the CEO and co-founder of Ripple Labs.
The Ripple protocol is similar to Bitcoin in that it is peer-to-peer, open source and has a decentralised ledger. Instead of a bank playing the role of bookkeeper between the parties of a transaction, Ripple’s network has a shared ledger, which is run by a distributed collection of servers. Ripple also has its own maths-based cryptocurrency – similar to Bitcoin – called XRP, but it is not the currency itself that is the main feature.
“Our view is that the most interesting thing is not to create a currency without a counterparty,” says Mr Larsen in regard to Bitcoin. “The world already has plenty of currencies, the issue is moving those currencies.”
Transferring value
Bitcoin, he notes, provided a breakthrough as it is now possible to send a payment without a central operator. From that, explains Mr Larsen, it is possible to build an ‘internet of value’. The Ripple protocol has the potential to do for value what the internet did for the flow of information, and making a payment could be as easy – and as cheap – as sending an email.
The Ripple protocol is currency agnostic and most people will use it for transferring conventional currencies such as the US dollar, euro, renminbi or yen. The current system for transferring value in these currencies is a series of national closed-loop payment systems. “Nothing really links these apart from the old, antiquated correspondent banking system. Everyone pays the price for that,” says Mr Larsen.
With correspondent banking, an international payment can take days to reach its destination. From his office in San Francisco, Mr Larsen says that under the current system there is no way to send $20 to Belgium, for example. As well as the fees, the foreign exchange calculation is punitive to most consumers and small businesses. “It is antiquated – it is not in line with the internet. The internet should be equal access,” he says.
Ripple Labs has created the Ripple protocol as a public good, in the same way as the World Wide Web was kept as an open platform from its infancy. The protocol is open and free to access in the manner that anyone can access a Hyper Text Transfer Protocol (HTTP) web page.
Integrating with banks
The aim, however, is not to displace banks, but rather introduce the protocol to them and other financial institutions. Germany’s Fidor Bank was the first bank to sign up to use the Ripple network in May 2014 and offer the payment option to its customers. The following June, cross-border payments company Astropay announced that it would use the protocol in seven countries in Latin America. And in September, two US banks – New Jersey-based Cross River Bank and Kansas-based CBW Bank – joined the Ripple network.
For larger banks, there is the potential for the protocol to be used for intra-bank transfers or, in the future, for settling other financial assets. For now, it is the correspondent banking market that Mr Larsen plans to tackle.
While the protocol is open, Ripple Labs plans to earn revenue from integrating the network with banks. Also, the company holds a large share of the native Ripple currency (XRP), which Mr Larsen anticipates will be useful for market makers. The native currency can be used to enable transactions between any store of value on the network. If, for example, a market maker wants to trade frequent-flyer miles with Kenyan shillings, this can be done by finding a price for the frequent-flyer miles in XRP and then converting the XRP into a Kenyan shilling value. Mr Larsen expects that as the protocol grows, and there is more demand from market makers, the price of XRP will increase.
For now, it is not clear which regulator will oversee Ripple. Mr Larsen has already experienced the consequences of regulatory decisions that have not gone in his favour. When the Securities and Exchange Commission decided it would be the regulator for Prosper, and that peer-to-peer loans would have to be regulated as securities, the business was seriously impacted.
Regarding the regulation of Ripple, there is a lot that remains to be settled, says Mr Larsen. In making a distinction from the discussions that have been surrounding Bitcoin, he emphasises that his protocol is about creating an ‘internet of value’ and not about replacing central banks, but rather how to move currencies more efficiently.
