https://www.linkedin.com/pulse/international-banking-flocks-ripple-chandan-maddanna
Article by a JP Morgan Chase V.P. About Ripple
Prelude
Recently, as some of you might have noticed {/or not}, many International Banks and Central Banks have partnered with
Ripple.
Bank of America,
Merrill Lynch,
Santander,
Unicredit,
Standard Chartered,
Westpac Banking Cooperation and
Royal Bank of Canada Joined Ripple to oversee creation and maintenance of
Ripple Payment transaction rules launching
global payments steering group (GPSG) on 26/09/2016. This year, the worlds 3rd largest bank
The bank of Tokyo-Mitsubishi UFG (BTMU) announced their
Joining. Ripple is also on the
Federal Reserve's Faster Payments Task Force steering committee and has an ongoing
pocwith
Bank of England.
Further, Ripple recently also had significant presence in BAFT conferences, including the recent Middle East one (
MENA), with onstage participation by Central bank of UAE. A Very respected conference in the banking world. If you thought that was extensive, the story does not end there.
SBI Holdings-Japan and Ripple have Strategically Established a Joint organization called
SBI Ripple Asia Co. Ltd with a commercial capital of 500 Million Yen. Over
50 Japanese Banks have joined the consortium headed by SBI group, which are now past a very
successful POC and have announced to go into production this year – for both Domestic and International Payments.
For us
Banking Technicians, the question is obvious. What innovation is
driving such massive partnership and adaption en-masse? lets keep up with a few more updates & then, we will jump right into the
techncials. You have my word!
Continuing on their progress,
AXIS bank of India &
NBAD of Dubai have both partnered with Ripple, and are in the queue for remittance/cross border payments system implementation. And If you thought large international banks are the only ones Ripple operates with, you could not be more wrong. In a recent
NACHA conference Ripple showed of implementing their international payments mechanism for a Credit Union. Previously, international payment service provider
Earthport and a new online only bank
Fidor of Germany both have successfully partnered and both use Ripple in Production.
Why are they being flocked by so many global Financial Institutions, including Central Banks?
Ripple is a public/private, block-chain based, settlement platform that utilizes advanced consensus for confirming transactions on a distributed ledger network. If things sound unfamiliar, you can do a quick read and brush your basics
here on Ripple's website (pretty extensively actually).
In this article, I will merely focus on the key features that have made them ahead of the rest (especially given the Over-Hyped status of the block-chain space).
➩Support for the established standards
A common solution on ripple involves The
Ripple Connect - which acts as a
Messaging Layer & the
ILP compatible Ledger that establishes the
Settlement Layer. This solution is able to inject traditional message formats like
SWIFT or
ISO20022 through a translation layer such as Volante Technologies
VolPay which makes the solution
tranformative instead of disruptive so to speak.There by opening a more elegant route to reap the benefits of latest in fintech without needing a break-&-build-from-scratch approach.
Additionally prevalidation, cryptographic '
hold of funds' across all the involved ledgers & simultaneous release makes the transactions
immutable with a clear binary outcome.
This is the process that removes "Settlement Risk" - The payment is either successful or unsuccessful, with no place for indeterminate states or mid~tier/broker service related failures.
➩Near Real-Time 'Settlement Finality'
The above described process while essentially establishing a '
Deterministic turing machine' in its behavior, what makes it even more practically attractive is, the
duration of settlement finality. I really recommend you to watch this in action, in this ~8 Seconds -
Live Settlement Demo between Canada and Germany, by Tim Wan, Director of Innovation, ATB Financial, Canada.
The platform amazingly achieves a
near real-time "Settlement Finality" (contrast this to the multiple confirmations of others like Bitcoin/Ethereum et alia).
➩Public/private inter-operable ledgers makes the ecosystem naturally regulation friendly
One of the areas where Ripple has been different since inception is interoperability. They spearheaded the efforts in this direction resulting in ILP (Inter Ledger Protocol). As the name suggests this allows operations between ledgers. Unlike bitcoin and other platforms, any ledger that is ILP compliant is able to operate in the ripple Eco-system and work with other ledgers.
For those who are unfamiliar, there is the
RCL (Ripple Consensus Ledger ) which is a public good. This parallel's bitcoin, in the sense
no one can stop you from having a wallet on RCL and having money in it.
it is not subject to any regulation, nor under any governments control. the cryptocurrency native to ripple protocol - the XRP provides for a house asset meeting the needs of universal acceptance ( and more as we see later).
On the other hand, there are operators providing services on the public ledger, who request users to fulfill KYC and other compliance/regulatory needs like anti-money laundering checks, before letting access to their services.
This helps maintain a healthy ecosystem on the public ledger.
Lastly, the system can have private ledgers, ( Ex: banks having their own private ledgers ) -
to which entry is allowed only to authorized users who duly fulfill the banks compliance and regulatory needs. In-fact i suggest you to explore more on how blockchain based platforms make audit and record-keeping much extensive and easier. This way Banks don't have to make any compromise on their existing regulation and compliance standards.
In my personal opinion this unique and balanced positioning, and respect for regulation and compliance in the ecosystem is perhaps the single most corner-stone reason why they have attracted so many world class institutions. XRP being the class protocol asset provides for universal acceptance throughout the ecosystem, and also can act as bridge between diverse currency-pair conversions.
➩On platform 'escrow' for safe & conditional release of funds
Conditional release of payments is not a new thing. its part of the very core of payments and used all the time (Ex: imagine an initiating bank releasing payments 'after' confirming its intermediary has successfully dispatched the promised payment to the right party) .
A large caveat with this is the need for a neutral central party/account, and the need of both the parties to have to trust them. ( Ex: when you buy from paypal, and payments to the seller are dispatched upon delivery - You as buyer and The seller both are trusting paypal to be fair. Its not guaranteed by the platform).
This is a very critical thing to understand. where there are conditional payments, the sender and recipient will both perhaps need a 'trusted' middleman who will hold the funds on behalf of the receiver and dispatch the funds on behalf of the sender. Off-course such a middleman wont be working for free ( ergo- further increasing costs ).
Now you can say goodbye to all of this - once and for all. Ripple comes with
a cryptographically secure, Escrow function, making it possible to realize safe value exchange on a one-on-one basis without the risk of escape or loss. As this is a standard function of the platform, there is no additional cost associated with it, neither does it need any sort of middleman services. Additionally, the Escrow function also provides for simple time based payment release if needed.
Thereby, e
liminating the need to trust any middlemen (or service), their associated costs and more importantly, 'risks' associated with such a middleman (or service). Savings on costs of transaction 'risk' coverage alone is enough justification for this feature (aka:
enterprise transactions coverage insurances are not needed anymore).
*note : as of rippled 0.60.0 Escrow is only available on the
native crypto-currency (XRP) only. Future releases are
supposed to support Escrow on IOUs, however when you are
suspending payment for conditional dispatch, do you want
to hold suspended funds in a liability (AKA: IOU)?. Hence,
I personally believe, XRP is the best asset for Escrow as
it is free from country party-risk and accepted throughout
the ecosystem.
➩Payment Channels for high speed off-ledger transactions
The problem with transaction speed on a blockchain with every transaction recorded on the ledger through consensus is that it is slow. It is perfectly good for normal needs, but becomes a bottleneck deterring transaction speed, in examples like an overnight settlement of mutual trade transactions, between two trusted institutions ( or other use cases, between well known parties , having routine high volume transactions etc.. ).
PaymentChannel (
PayChan) is a functionality provided by ripple for exactly these kind of circumstances, where a very high transaction speed is needed.
As soon as we hear off-ledger transactions, the first question that comes to mind is, its '
Legality' ? fair enough, and the answer is Yes, Off-ledger transactions are not illegal 'IF' continuity of authenticity, accountability and trust enforcement are not impacted.
PaymentChannels does exactly that, The wallet for high speed Off-Ledger transactions are multi-sign wallets requiring signature of all the involved parties avoiding '
clandestine transactions'. and impressively it achieves over 10000 off-ledger cryptographically secure transactions per second which are '
Multi-Signed' by all involved parties, for transactions to complete. As the wallets are co-owned, each party can recover their respective funds, in case of failure.
*note : Similar to Escrow, as of rippled 0.60.0, PayChan
is supported exclusively with the ripple native
cryptocurrency XRP.
➩Dynamic administrator List for Trusted Validators (UNL)
The public Ripple Consensus Ledger, now derives trust from existing trust (which means mathematically the initial trust will be preserved for validation) and have added support for Dynamic validator list Instead of specifying a static list of trusted validators in the config or validators file.
The trusted validator list and quorum are now reset each consensus round using the fetched validator lists and the list of recent validations seen. The validation quorum is no longer configurable.
What this basically means is there is no configuration where a single party can propagate an authoritative validators list, instead the ecosystem guarantees propagation of a trusted validator for transactions, from existing trusted validator and conditions.
Making it a more truer distributed and de-centralized platform, that self-regulates transaction validation.
Salient features of ripples native cryptocurrency XRP
Liquidity providers can bridge any currencies directly through XRP, saving them from having to maintain accounts with each counter party for each currency ( Ex: A '
Bank' or '
Remittance Operator', having to maintain an account in every regional currency they operate in, often with 'trusted' custodian and/or partner institutions acting as intermediaries:
aka: nostro/vostro accounts).
Apart from guaranteeing acceptance ecosystem wide, XRP Enables usage of advanced functions like escrow and paychan.
Conversion between exotic currency pairs, might involve multiple internal currency conversions ( Ex: INR to MXN might actually go through INR->USD & USD->MXN ), bridging XRP directly, can avoid and save such convoluted costs and settlement delays associated.
Also, XRP does not require bank accounts, service fees, counter party risk, or additional operational costs, and hence XRP is the true protocol enabler on the RCL, which is a public good, open for one and all.
Lastly, in a more complex setup, involving trust and/or swap lines between multiple parties, your
'compound transactions' can
avoid having to depend on others 'IOU liability' and entirely eliminate risk of IOU failures, by making sure all the interconnected transactions clear in XRP, a liability free native currency, through and through.
Is XRP a bitcoin replacement?
a personal NO, as
Bitcoin is all about a decentralized store of value. Every bitcoin involves a certain mining effort solving a complex challenge (although consumes large amounts of electricity to '
prove' its '
worth' by solving a challenge that serves no real life purpose).
It is also
striking to note how much of
Bitcoin's life cycle resembles dynamics of mined Gold,
dragging similar mobility & performance constrains, to the digital world. This makes it unsuitable for everyday liquid use, especially in a globally inter-connected economy.
XPR on the other hand, is a protocol enabling asset,
built for transaction and made to scale.
Hence,
XRP Carries negligible transaction costs making global micro payments possible & provides great vehicle for as a transaction currency instead. I believe it is world class at that. In short it unlocks the full potential of the ripple ecosystem that we have mentioned above,
enabling true realization of IOV (Internet of Value).
What about Ethereum?
In some ways I look at
Ethereum as a natural human evolution from Bitcoin, the tremendous use of resources to solve a mathematical challenge that serves no real life purpose, is bound to evolve and here is such an use case and a brilliant one at that.
In Ethereum, the money
derives its 'worth' by guaranteeing execution space and execution of promised code. In a way it makes a collective large computer as a mimic of an economic ecosystem, you can define the code it can execute. often referred to as contract code.
This leads to the much famed 'smart contracts'. No doubt, Ethereum is the next phase in evolution where we are no more burning lots of electricity in the process of "mining", just for the sake of proving its worth. Instead in this case, the code and its 'execution guarantee' proves 'worth'.
So where do they stand in my mind?
➾
Bitcoin : A decentralized
digital "store" of value ( it is worth something ),
that no government or central body has direct control on. ➾
Use cases: { digital store of wealth }
➾
Ethereum: A contract based cryptocurrency,
where execution of contract code is guaranteed (Code is law). ➾
Use cases: { Casino, coupons, shopping vouchers, game and prize exchanges, lotto and lotteries, hotel reservations, service vouchers, loyalty card & points, short term insurance contracts, enterprise contracts base settlement etc..}
➾
Ripple XRP: A transaction based cryptocurrency designed to
unlock IOV (Internet of value). It
enables congestion free global value movement &
extends ultra-low transaction cost to payments of all sizes (micro & macro) - in near real time. ➾
Use cases: { Payments, Remittances, Forex, Trades Settlements, Banking Platforms (some have dubbed this
Fintech 2.0), exchanges, Next-gen Trading platforms, Ultra-low cost real-time money/IOU movement, Domestic and International transfer services, Complex trust and intermediary channels, Real time global pay outs etc. }
Some other thoughts about Ethereum
Ethereum is turing complete, and outcome is not guaranteed to be deterministic. Meaning the contract code can have 'known AND unknown' outcomes. this exposes a huge attack area ( which has been exploited in previously
famous attacks ).
Further, something that moves money & IOU, and hence acts as a currency, should not alter the properties of the underlying asset it moves. This is a key quality often referred to as
preservation of asset properties. Hence, a true currency should be uniform in structure of its content, and also retain its properties indefinitely.
With a currency based on contracts, questions like: '
Will the code remain valid indefinitely?", "
can the future outcome of the code always be the same in changing circumstances?" , "
Will the contract mean different after a few year?', '
Will the context of the code remain unaltered in varying environments, known and unknown ?' etc... - Such questions make it unsuitable for Core Banking, Platform and Currency use. However, it is indeed a brilliant option for something short term and requires complex logical conclusion upon contract execution, including the use cases described above.
Although the possibility of indeterminate states are a stand out issue and probably needs to be addressed at some point. This has also already given rise to its successors with Projects like
Boscoin.
Any particular winning organizations in Ripple ecosystem ?
I especially find
Japanese Financial institutions far ahead of the rest. In particular I have been following the adoption of SBI Holdings, below is a quote from President and CEO of SBI holdings, Mr. Yoshitaka Kitao (
@yoshitaka_kitao) at the end of
SBI fintech Consortium last year in Japan:
'We, SBI Group, through partnership with FinTech companies, target to supply our customers with revolutionary financial services by basing our core technology on block chain technology. In addition, through close cooperation with the investors in the FinTech fund managed by SBI Investment, we plan to root the FinTech industry to be one of the main industries of Japan, and not have the recent rise of FinTech to end as a temporary boom.'
And true to his word, SBI Japan seems to be designing an entire ecosystem with blockchain and distributed technologies at its fundamentals, with many projects and services ( especially in domestic and international payments market) said to
go live this year and in the years ahead. Ripple is certainly a major strength of this early adopter, and on that note, I think they are strategically way ahead of others.
A detailed look at their recent
presentation to stakeholders provides us a glimpse into the extensive markup planned ahead.
In Conclusion
The above described features & their competitive advantages, should make it very clear - why institutions are increasingly adopting Ripple platform for settlements. Given the salient features and maturity of their
time-tested & production-ready code, I believe this is just a beginning. I am certain that the platform will continue to see increased adoption in both private and public space, implementing myriad of use cases.
Future for Fintech is bright, and in particular for Ripple, we should congratulate them on their well deserved success.
