Ripple is seeping into the core of the global financial system

Over the past few years we’ve seen Ripple expanding. In particular, Ripple’s relations with the most powerful global financial institutions are strengthening.

By compiling a timeline of significant events (and these are just the public ones) we get an idea of how deeply Ripple is penetrating finance. This also gives as an idea of what we can expect to see in the distant and not-so-distant future.

Here we will look at Ripple’s collaboration with central banks, the IMF and the Federal Reserve.

In case you haven’t already, meet Ripple:

Ripple provides distributed financial technology and services to banks, payment providers, digital asset exchanges and corporations. Its products include RippleNet, xVia, xCurrent, xRapid and Interledger Protocol, all functioning with the native currency XRP. This creates a network for banks and enterprises, especially designed to deliver fast, cheap and almost seamless international transfers.

In traditional international transfers, liquidity costs are high since payments require pre-funded local currency accounts around the world. Using Ripple’s network, money would be converted into XRP, and then converted into whatever currency is used at the receiving end. This means fast and cheap international transactions, with a low impact of volatility.

Ripple’s vice president Asheesh Birla says: “Here’s something where we’re finding a ton of value and providing a ton of value to our customers using digital assets to move money more efficiently,” adding that the commercial application of XRP in the international financial services is

“a critical milestone in Ripple’s bid to make cryptocurrencies and the underlying blockchain technology a part of the financial mainstream.”

Ripple’s technology in itself is not particularly revolutionary. However, its application in the banking world is. Ripple is acting as a highway between traditional financial system and the new digital economy. Ripple’s blossoming relationship with the International Monetary Fund (IMF) is even more momentous. Let me explain why:

The transnational role of the IMF

The IMF was conceived at the Bretton Woods Conference in 1944, which brought together the allied powers. Here, significantly, the exchange-rate system established that all currencies be pegged to the dollar, and the dollar to gold (this was suspended by the early 1970). The conference aimed to establish a third-party order that would facilitated international financial cooperation and prevent disasters such as another Great Depression or World War. And so the twin institutions of the World Bank and the IMF were born. The IMF was designed as “a watchdog of the monetary and exchange rate policies vital to global markets.”

Today, the IMF consists of “189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.” Its main role is surveillance of the global economy and providing nations with conditional loans.

The condition of these loans is that a country structurally adjusts its economy to first and foremost benefit the global economy. Nations who receive the loan must allow free trade and open markets by removing tariffs and subsidies, lifting import and export restrictions, privatization, cutting expenditure, increasing foreign investment — anything to satisfy the neo-liberal gods. The same formula for development is applied to every country.

Despite its criticisms, the IMF remains a mighty player and shaper of global finance.

Ripple accumulate clients and banks

On the 1st of October 2018, it was announced that Ripple’s technology has gone live with three companies: Mercury FX and Cuallix, which are both payment providers, and Catalyst Corporate Federal Credit Union, a financial institution serving cooperative financial institutions in the US. This was an important milestone for Ripple, which is signing up an average of two production customers per week.

Ripple is continuing to work diligently with central banks. During the Bangkok Fintech Fair in April earlier this year, Ripple’s head of Asian Government & Regulatory Relations, Sagar Sarbhai, said that Ripple is already working with 40–50 banks. It’s worth noting that Sarbai was previously employed by Deutsche Bank and J.P Morgan.

In November 2017, Ripple hosted tens of the world’s central banks at the Central Bank Summit to explore the future of international payments. Ripple CEO Brad Garlinghouse said at the event:

“The Summit provided an opportunity to explore the full payments landscape: central banks’ domestic trials, Ripple’s growing cross-border network and interoperability across systems. Together, these form the beginning of an Internet of Value, where payments move as easily as the data across the internet.”

Garlinghouse publicly announced that he is certain that by the end of 2019 “dozens” of banks will use XRP as a liquidity tool, and soon enough every major bank will be using it.

The romance between the IMF and digital currencies

The relationship between the IMF and Ripple has been simmering on low heat for a while. The IMF has been investigating and endorsing digital currencies more and more, and Ripple seems to have caught its eye.

In March 2017, the IMF established its High Level Advisory Group on FinTech. Chris Larsen, Executive Chairman of Ripple, is a member. The group will “work closely with the IMF’s Interdepartmental Working Group on Finance and Technology to study the economic and regulatory implications of developments in the area of finance and technology.”

The IMF completed its first high-level meeting on blockchain technology in April 2017, with Head of Regulatory Relations, Ryan Zagone, present representing Ripple. CoinDesk reported:

“Unlike the Bretton Woods agreements that pegged the price of global currencies to gold, Tapscott noted today’s meeting wasn’t held exclusively in ‘smoky, wood-paneled chambers between global elites’.”
“Tapscott [author of Blockchain Revolution] told CoinDesk ‘There’s a convening power that the IMF has, and I think they should bring together central bank governors. But also, the process should be transparent and it should be inclusive and that people from outside of central banking should be able to provide their input on what needs to be done.’”

The IMF’s sparked interest in blockchain and digital currencies has intensified ever since. Over these two years, the IMF have published a number of reports on the issue:

  • Central Banking and Fintech — A Brave New World? — considering virtual currencies,new models of financial intermediation, and artificial intelligence. [September 2017]
  • Going Cashless — The governor of the world’s oldest central bank discusses his country’s shift toward digital money. [June 2018]
  • The Long and Short of The Digital Revolution — Smart policies can alleviate the short-term pain of technological disruption and pave the way for long-term gain. [June 2018]
  • Casting Light on Central Bank Digital Currencies — Digitalization is reshaping economic activity… Central banks have been pondering whether and how to adapt. One possibility is central bank digital currency— a widely accessible digital form of fiat money that could be legal tender. [November 2018]

In June 2018, IMF Deputy Director Dong He argued that “for regular fiat to stay relevant, central banks needed to tokenize their currencies to be in tune with the times.” On the same line of thought, the IMF should fully embrace digital currencies to stay relevant.

The IMF endorses digital currencies

At the Fintech Festival in Singapore in November 2018, the IMF held what may become a historical event in the development of global finance. The IMF’s managing director and chairwoman Christine Lagarde urged central banks follow “the winds of change” and to start considering issuing their own digital currencies.

“Should central banks issue a new digital form of money?”
“A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy,”

Central bank digital currencies would answer to the public policy goals of financial inclusion, security and consumer protection, and provide privacy in payments. The IMF idealizes a cashless world, discussing Scandinavia as a “poster child” and considers “payment providers that offer e-money — from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya.”

Lagarde goes as far as saying that “even cryptocurrencies such as Bitcoin, Ethereum, and Ripple are vying for a spot in the cashless world.”

Nonethless, the IMF emphasizes the importance of “being open to change, embracing change, shaping change. Technology will change, and so must we.” This is the central point of Lagarde’s speech.

According to speculations, Lagarde is subtly referring to Ripple in the speech. For example she sayys that the IMF expects money to become more convenient payments “readily available for online and person-to-person use, including micro-payments.”

Ripple does have a micropayment application, Coil. Lagarde continues to say that currency is expected to be “cheap and safe, protected against criminals and prying eyes.” With Ripple having significantly low transaction fees, it could be said that the qualities Lagarde refers to as the future of digital currencies are those of Ripple.

Ripple and the Federal Reserve

Not only is Ripple gaining a spot in the IMF’s heart, but it has also been collaborating with the Federal Reserve. Ripple played a “leading role” in 2015–2017 Federal Reserve’s Faster Payment Task Force. Ripple’s Ryan Zagone was elected to the Steering Committee of the Task Force.

This is an action plan to enabling faster payments in the US, which resulted in highlighting “Ripple’s ability to underpin the next generation of cross-border payments.” Ripple was the only blockchain technology group selected to join JP Morgan, Goldman sachs, IBM, NASA, BAFT, Visa, Mastercard and over 300 others.

In addition, in 2016, the Federal Reserve expressed its interest in blockchain technology with its paper: “Distributed ledger technology in payments, clearing, and settlement” (although the fine print clarifies that “the views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, or anyone else in the Federal Reserve System.”)

The report discusses how firms are “increasingly exploring ways to develop and deploy DLT arrangements for use in payments, clearing, and settlement.” Seeing that Ripple played a major role in the Fed’s Faster Payment project, the following quote seems to hint at a possibility of a mass adoption:

“Technologies that are successful in the pilot phase may then move toward the production stage. Technologies at this stage have the full set of features necessary to facilitate the storage, recordkeeping, and transfer of the asset being considered. The final stage of the development process is broad adoption of the technology by participants in the payments, clearing, and settlement system.”

Facilitating the evolution of global finance

Not so long ago cryptocurrencies were a laughable matter to central financial institutions (e.g. JP Morgan’s CEO calling Bitcoin a fraud). Since then, a consensus seems to have been reached that digital currencies are very powerful. What we see playing out in central banks, the IMF and the Fed is a typical “if you can’t beat them, join them” move.

Ripple wants to be a facilitator and transition enabler for these institution, which would otherwise face the danger of becoming obsolete. This probably would have happened anyway, but Ripple is speeding up the process. These are unprecedented moves in cryptospace.

Ripple is enabling institutions such as the Federal Reserve, the IMF and central banks to hold on to their power, and move into a new phase.

At this point, banks and leading financial institutions will not become obsolete. But, thanks to cryptocurrencies, it is becoming optional to participate in the traditional financial system. And that is still a historically-significant ability worth celebrating.

Photo from Unsplash