WHY DO BANKS PREFER ? OVER ROBERT JAN VROLIJK AMSTERDAM 22 JANUARY 2015

Short introduction Robert Jan Vrolijk

(Independent) Payments Consultant since yr 2000

I have worked for

Tier-1,2 and 3 banks in the NL’s

Several PSP’s and corporates

Operated in technical, business and risk roles

Speaker about Bitcoin for a Tier-1 bank, Accenture EMEA and Enigma Payments Consulting

I became interested in cryptocurrencies when:

I realized that cryptocurrencies are by far the most interesting innovation in payments in decades!

First my interest was merely in Bitcoin

Working for Tier-1 banks, I noticed their interest in Ripple

Refreshing the memory: building blocks of Ripple

Ripple = Global payment system / network created and maintained by Ripple Labs

Built upon a distributed, open source Internet protocol (like SMTP, HTTP) for payments, and a consensus ledger

The only asset in the Ripple network: Native currency called Ripple (XRP)

The network also supports all other currencies, but only as a liability (IOU’s)

Important elements Gateways

Market makers

Consensus ledger

Overview Ripple protocol / network / currency

Refreshing the memory: building blocks of Ripple

Consensus ledger Consists of 3 different parts Contains all accounts, balances, transactions, and offers to trade assets Reaches consensus about transactions to be included in the ledger within seconds

Gateways Enable users to put money or value in and out of the Ripple network Similar to banks, yet they share one global ledger Should have AML and KYC / CDD procedures in place Accountholders have to setup trust lines (with other accountholders, MM’s and Gateways)

Market makers Offer FX services and arbitrage (with other Market makers and Gateways) The Ripple network includes a path finding algorithm offering the cheapest path between two currencies or units of value

Refreshing the memory: building blocks of Ripple

(Couple of) Similarities Bitcoin and Ripple

Both are decentralized.

Both are open-source protocols, not owned by anyone.

Both use algorithms to ensure that their networks come to the same conclusions--so if one person authorizes Transaction A, the entire network comes to agreement that Transaction A happened.

Both allow for almost free, p2p transactions across the internet

Essential differences

- Proof of work vs consensus ledger (no miners, no block reward, faster clearing 6 – 10s)

- Bitcoin protocol only holds the asset Bitcoin, Ripple network also allows other currencies (as liability, IOU’s)

- Bitcoin protocol does not include gateways, with trust lines, etc (is not based on Hawala banking), and no Market makers

- Ripple is (in it’s current state) not for the consumer market

- For Ripple, 1 company is leading the way, Bitcoin is owned by everybody (and nobody)

- Max 21 mln Bitcoin (in the future) to be mined, 100 bln Ripple already created, but not in circulation yet

- Ripple Labs still holds 69 bln XRP from total 100 bln XRP (Jed McCaleb holds 9 bln XRP)

The agenda of Ripple Labs (RL) (my personal view)

Use cases have been described for: Remittance Prepaid Banks Merchants & market places Currency exchanges Merchant acquirers

Formally the goal is: Building the internet of value

Since Jed McCaleb left Ripple Labs, Ripple has changed it’s strategic focus to the financial industry only

My personal observation:

• Initial main goal is now to act as a facilitator for remittances, and cross-currency True International Payments

• With a strongest business case for banks

• As they are currently taking care of the financial transport of TIP payments via their (often complicated) correspondent banking network

The agenda of Ripple Labs (my personal view)

So in principle

• Facilitate the financial lowest layer,

• Providing the ‘rails’ for international payments

• Not interfering banks with their clients, their channels and their initial payment routing (and revenues)

• Not pushing the use of XRP

• With the opportunity later on to do an ‘upward integration’ towards rules and messaging standards, (like the payment series of Swift MT100 – 200, SEPA etc)

• And introduce extensions of the network, smart contracts, etc

Important events on Ripple-planet in 2014

Feb 2014: Jed McCaleb leaves Ripple Labs (and starts with Stellar)

May 2014: Mc Caleb announces to sell his 9 bln Ripple, price plummets

Aug 2014: Deal between Ripple and McCaleb. He will sell only $10.000 XRP per week and 2014, 20.000 per week in 2015, etc

In the meantime:

Ripple changes strategy fully to go for a soft adoption in the financial industry, by banks and financials

May 2014: Fidor bank adopts Ripple

Sep 2014: Two small US banks announce to adopt Ripple

Nov 2014: Deal with Yantra, developer of risk solutions for payments

Nov 2014: Italian TAS Group adopts Ripple (Fintech company and biggest debit / credit card processor in Italy with subsidiaries in France, Switzerland and Spain)

Dec 2014: Deal with Earthport (White label cross border payment provider, with clients like BAML, Barclays, Standard Bank, HSBC and others) signs deal with Ripple

The price of Ripple is rising (a bit)

Last 6 months

Last 2 years

How are banks looking at this? - 1 Banks do have problems with True International cross-currency Payments

They’re slow , and are sometimes even ‘stuck’

They are costly for banks as well (heavy investment in payment infrastructure, increasing regulationary pressure, new productdevelopment in a competitive market, limited STP processing)

And even more for the payer

Lifting fees and other charges

Conversion costs

Big network banks make a business out of it (buying volumes, offering many special FI products)

But they also understand that current cost deductions are not sustainable

If somebody finds a reliable, cheaper and faster way to process , their business will be shrinking rapidly

So banks are very interested

But they are afraid to be first mover

They leave it to companies like Earthport to adopt Ripple first

If it is working and improved, then they can adopt themselves

How are banks looking at this? - 2 Do banks care that Ripple Labs owns the majority of Ripples (XRP)? NO

Banks like a stable, rising price of XRP

RL have a real huge Bazooka to countermeasure any unwanted price increase (or price drop) of XRP in the market

RL will not offend their clients (banks) by going against their requested monetary policy

Do banks care that RL and a few investors will become very rich if the price of XRP rises? NO

If Ripple really becomes the world standard, all payments for banks will be book-to-book, because they all happen in the same ledger book to book is always easy for banks (no third party involved, reconciliation, transaction details, fast)

Banks do not earn big bucks from payments Consumer payments are not profitable at all

Wholesale payments are, but only with a lot of investment, IT-effort, high TCO

Banks mainly earn their money from other products

How are banks looking at this? - 3 Banks can still make money on FX, by acting as a Market Maker (the market is

already becoming more and more competitive)

Banks are not forced to use XRP as a currency, only for conversion to exotic currencies

RL is putting a lot of effort (explaining in the media, in their product offering) to facilitate the financial industry to start working with Ripple (AML / KYC, hosted / non-hosted accounts, presenting itself on big payment conferences)

Worries for banks are still:

Is it really safe

Technical barriers, like the size and performance of the ledger

No central supervision for Gateways (some of them might go bankrupt)

First mover has limited global coverage

Integration with their payment platform (they have already heavily invested in the last years)

Local regulation on the use of a cryptocurrency

10 reasons for banks not to invest in bitcoin

Price is too volatile

Nobody is solely responsible for Bitcoin

Majority of bitcoin community is against regulation

Silk road 1 , 2 and Mt Gox

They don’t know how many Bitcoin they should buy (1000 doesn’t sound like much for a bank)

Too many people working on anonimity within Bitcoin community

No central authority to execute monetary policy

Limited conversion revenues (if Bitcoin really becomes mainstream)

Other instruments in the financial markets, like currency swaps, will be obsolete (if Bitcoin really becomes mainstream)

Banks aren’t freedom fighters

Questions

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