Speaking before the Economic Club of New York on Tuesday, the CEO of crypto startup Ripple, Brad Garlinghouse, reiterated his view that cryptocurrencies are unlikely to disrupt G20 currencies within the foreseeable future. “95% of global GDP has no need for cryptocurrency,” he said.
Garlinghouse’s remarks at the club came hours after EU Vice President Valdis Dombrovskis said he would propose new legislation to regulate cryptocurrencies like Facebook’s Libra in Europe. His comments follow concerns that such assets “could have systemic effects on financial stability.” Last week, early Libra backer PayPal announced that it was pulling out of Facebook’s cryptocurrency partnership.
Garlinghouse likened Facebook’s decision to pursue a cryptocurrency (which he called a “white paper,” as opposed to an actual asset) at a time when the company remains embroiled in multiple scandals to Boeing (theoretically) announcing the launch of a new double-decker airliner at the height of the 737 MAX crisis.
“Facebook has eroded its trust with customers and certainly with governments,” he said.
SWIFTer
As CEO of Ripple, Garlinghouse captains the company behind XRP, a B2B cryptocurrency and currently the world’s third-largest digital coin. The currency has a total market capitalization of $11.7 billion or roughly 8% of the total market cap of Bitcoin. Currently, Ripple owns 55% of the 100 billion units of XRP coins (valued at $27 billion) in existence; the rest is freely traded.
Ripple, the corporate entity, is disentwined from the cryptocurrency. It consists mainly of a cross-border, peer-to-peer financial payments network (RippleNet) that aims to disrupt SWIFT, the Society for Worldwide Interbank Financial Telecommunication. This is the payment protocol that currently dominates the multi-trillion dollar daily market for international money transfers.
Ripple’s customers currently number over 200 financial institutions worldwide. These include American Express, PNC, Santander, Brazil’s Itau Unibanco and MoneyGram (in which Ripple is an investor). Per Forbes, as of April 2019, the company was valued at $5 billion.
Yes, different
Rather than seeking to position its coin as a dominant digital currency, Ripple’s business model is focused on correcting inefficiencies in cross-border payments.
Garlinghouse said that international payments using SWIFT financial infrastructure take three days to transfer and incur a 6% error rate. Even in 2019, he said, the fastest, most reliable way to send money to London is still to “get on a plane and fly it there.”
Moreover, global payments (especially in emerging markets) require businesses to hold pre-funded accounts in destination currencies, adding costs and burdening resources.
He explained that given these inefficiencies, trading a low-volatility asset like a fiat currency requires a hedge against exchange rate fluctuations. Even allowing for the higher underlying volatility of a cryptocurrency, if the transfer can be completed within the 3-4 seconds that RippleNet claims, there is less need for counterparty hedging.
XRP thereby functions as a bridge to facilitate transactions between two currencies, rather than as a currency itself, or, as Garlinghouse termed it, “a tradable asset designed to solve an institutional liquidity problem.”
XRP also differs fundamentally from Bitcoin in efficiency of production. Bitcoin is a “proof of work” asset. While verifying transactions is easy, mining coins is energy-intensive and expensive.
XRP was developed by early Bitcoin engineers who recognized the difficulty of scaling coin production given such prohibitive costs. Instead, XRP coins are pre-mined and transactions are validated using a protocol consensus algorithm. This means that money transfers are affirmed by small subset of identified XRP participants, called a Unique Node List (UNL). While Ripple recommends a default list of third-party vetted validators, participants are free to select their own UNLs, an important distinction that allows XRP to remain decentralized, a core feature of cryptocurrencies.
Cryptopolitics
Early, vocal critics of cryptocurrencies maintained that these would never be a serious substitute for fiat currencies because they lack intrinsic value and are not broadly accepted as legal tender. But addressing these liabilities has arguably made them even more controversial. A new wave of stablecoins, digital currencies backed by assets, is attracting increased scrutiny for the perceived threat that commercialized currencies pose to international financial sovereignty norms.
France and Germany recently issued a joint statement in opposition to Libra after G7 finance ministers raised concerns over the risks posed by crypto and stable coin projects, stating: “We believe that no private entity can claim monetary power, which is inherent to the sovereignty of nations.
The People’s Bank of China has, meanwhile, reportedly successfully prototyped a digital version of the renminbi, similar to Libra, to protect the country’s monetary sovereignty.
Despite the skepticism of both the U.S. Federal Reserve and the current U.S. President toward cryptocurrencies as a whole, Garlinghouse said the U.S. dollar is already tokenized to a certain extent. For example, institutions seeking liquidity through the Fed Discount Window already receive a digitized form of currency, rather than hard dollars.
Asked whether the launch of “Chinacoin” would provide a new mechanism for that country’s central government to bypass U.S. sanctions and further consolidate power through its ability to track every financial transaction in the country, he said that China is probably already monitoring most of the financial activity that occurs within its borders already.
One Comment