November 24th, 2014 by

FinTech visionary Chris Larsen takes on Bitcoin, highlights latest in Fintech, and challenges entrepreneurs.


FinTech visionary Chris Larsen of Ripple Labs takes on Bitcoin, highlights latest in Fintech, and challenges entrepreneurs. Below, Camp One Ventures’ Tom Brown and Larsen sit down for a cup of coffee. Chris Larsen is the CEO of Ripple Labs, the founder of E-Loan, and the founder of Prosper.

Tom–  Chris, some people may not be familiar with Ripple or the distinction between Ripple Labs the company and Ripple the technology. I was hoping you would give a little intro on the two.

Chris– Sure. The Ripple protocol is a real-time settlement protocol or what we sometimes refer to as an internet-for-value exchange.  Ripple is like http for money or value. Ripple is open source. It is a public good that anyone can use without a fee or license as they see fit. Ripple Labs is the software company that built the Ripple protocol. Our job is to continue to contribute code to the Ripple protocol to make sure that Ripple is leading on compliance and also to introduce Ripple to banks and other financial institutions.

MONEY2020 Conference

Tom– I saw both you and Ripple Labs’ Chief Risk Officer and payments impresario Greg Kidd speak at Money2020 last week. What was your overall impression?

Chris– We have attended all three Money2020 conferences. It doubled in size last year and it doubled again this year. Money2020 was absolutely jammed with just about everybody in the FinTech space. Anil, the founder, did a phenomenal job in building it. There were full tracks dedicated to the virtual currency space, the bitcoin phenomenon, and distributed ledgers in general. Obviously, there was a lot of talk about Apple Pay’s innovation and what that means for the industry. One particular launch that we thought was interesting was the former head of Google Wallet Osama Bedier’s Poynt, which was tremendously received. People have been anticipating Osama’s next move. We were impressed with it as well.

The Direction of Ripple

Tom– Chip Kahn of Boomtown! participated in the demo, and I know both Chip and Osama were a little anxious the night before. The demo came off great. On another note, it seemed that there were not as many announcements as last year. It was as if people were sort of  holding back a little bit. I am curious on where Ripple is headed as you look out over the next six months to a year.

Chris– With the Ripple protocol and Bitcoin technologies, we are seeing a major shift in the financial technology space. The world has figured out how to confirm financial transactions without a central operator. Bitcoin was the first technology to do that, which we think is super interesting. Ripple is building on that fundamental technology, confirming financial transactions without a central operator, which means you can build and distribute a peer-to-peer server-to-server value exchange system or internet-for-value. Why we think that is important is not for introducing a new currency. The world has plenty of currencies already. The problem that we see is that it is difficult to move those existing currencies. For example, moving US Dollars to become Euros is a multi-day process. It is expensive and there is not enough competition for the exchange of Dollars to Euros. The competition is lacking because those exchange systems rely on what is called correspondent banking. Essentially, there is no ‘global wire’ or ‘global switch’ that can move value from US to Europe, like we move information from US to Europe easily and in milliseconds. We have to rely on this correspondent banking system. It is not broken but it is antiquated. It is based on pre-internet technology. Where Ripple Labs sees the virtual currency technology being useful is in becoming an alternative to our correspondent banking system. If you use the internet-for-value rails that the Ripple protocol has built, you can use these rails with your existing currency. It is not necessarily a new currency, which Ripple has been able to stay currency agnostic, you then are able to send value like we have been able to send information for the last twenty years. Instantly, in seconds instead of multiple days, essentially free payment rails. These are the things that are the foundation of our value exchange system and they now allow for any financial institution to compete for that correspondent stringing of value, which right now, is pretty well dictated by about six global money center banks. We are making a fundamental structural shift in the way that value exchange works globally. So that is what Ripple is trying to introduce. Of course, as you can probably tell, that is not a consumer or merchant play but it is focused on financial institutions, who would be ecstatic to be able to cut their transfer costs.

New currencies and ‘Mining’

Tom– I think you described Bitcoin as a precursor to Ripple in terms of mechanisms that came to light that enabled a peer-to-peer exchange of value. Could you help us understand how Ripple has improved on or avoided some of the aspects of Bitcoin that seem cumbersome or inefficient, in particular the activity devoted to ‘mining’?

Chris– It is important to know that in this technology, there are two different aspects that make this whole area really confusing.

First is this notion of a new currency. Bitcoin gets a lot of press for its ability to access a currency with no counterparty. That makes Bitcoin a digital asset. It has been very successful at this. The other part of the technology, which is completely separate, is this notion of being a real-time settlement protocol. In our view, this means it becomes that ‘global switch’ or ‘global wire’…For it to really be useful as a protocol, it will then have to be able to move anything of value. Just like the internet-of-information is able to move any language or any form of information. The internet-of-information it is not limited to just one type of information. The problem with Bitcoin, while it might be successful as a new currency or a new digital asset, is that it is only able to move value expressed in Bitcoin. That is a huge limitation. It means that it would be difficult to use Bitcoin for correspondent banking, for example, because either every single bank and person in the world would have to throw away their existing currencies and switch over to Bitcoin, which is incredibly unlikely, or in the moving Dollars to Europe example, transfer Dollars to Bitcoin then move Bitcoin to Euros. Doing that is essentially no different than our current correspondent banking system. In fact, it is probably worse because you are relying on very new counterparties that probably do not have enough of a track record, even if they are well capitalized, to be trusted. So that is Bitcoin’s first weakness, that Bitcoin as a protocol can only move things of value expressed in Bitcoin.

Second is the method(s) of confirming financial transactions without a central operator. Again, that is what the virtual currency technologies introduced to the world. That is the real breakout here. That you can now confirm that value is sent or received, correctly or not, without the need for a central operator. This is why these technologies have a shot at being universally used as an internet-for-value. The whole problem in todays world is that you are never going to get everyone in the world to trust any one central operator. For example, AliPay is not going to trust Amazon, Deutche bank is not going to trust Bank of America- even though those are all trustworthy organizations. They will never sign up for one central operator. The cool thing about distributed ledger technology is that it does away with that central operator. However, there is no ‘certain way’ it must be done. This is where we had a problem with Bitcoin. In our view, it was awesome in what it did but its method of confirmation, called mining, was wasteful and presented a lot of problems. Mining as a method of confirmation burns through enormous amounts of electricity and computing power. There is nothing that says a distributed ledger needs to have mining. Mining is just one method of many different types of methods. Ripple introduced a new method of confirmation called consensus, which works differently than mining in that it is a sharing system. For example, lets say I am holding up a number. It is like getting a bunch of servers around the table and all agreeing with that number without having to chew through tons of computing power to solve some mathematical problem. We think that is a big advantage because at the end of the day, if you are chewing up a lot of electricity to confirm a transaction, well, there is a cost to that. Someone has to bear that cost at some point in the system. It is unclear who is going to bear that cost in the Bitcoin protocol. The other problem with mining is length of time. With Bitcoin, it takes about 8 to 45 minuntes to confirm that a transaction is valid, depending on the number of confirmations needed in a certain transaction. That can be problematic in many circumstances and obviously works against the notion of a real-time settlement protocol, which is clearly where the world is moving to. The world likes real-time. We think a system that can settle transactions in seconds is more in line with the real-time trend.

Financial Regulation

Tom– The regulators in the US and abroad have had a lot to say about virtual currency. There were a number of regulators who spoke at Money2020. Not a day goes by where there is not some release with someone commenting on the subject. I am curious how you view the regulatory climate coming together.

Chris– I think, in terms of regulation, clearly these things have to be part of the mainstream financial system. There is no way that anyone can expect that this technology can just sort of exist in the periphery or that someone can build an alternative finance system that will be out of the reach of regulators. It is typical of new technologies introduced by pure technologists to not be given a lot of thought to regulation. Clearly that has shifted, as more well funded ventures and more mainstream professionals have joined in building not only the technology but also on the compliance side. Also, regulators have gotten up to speed on what virtual currencies are, why they are important, what their role is, and how they can make sure that they are handling the many needs there are such as catching criminals, preventing terrorism, and all the things that everybody should always be concerned with when approaching new technology. The good news is that the most of the key regulatory leaders are recognizing that there is tremendous value here, that it can be regulated, and that the technology is not trying to skirt the rules but be a part of the mainstream system. It is early and I think we are getting close to the point where there will be a lot more clarity. I am optimistic about the long term in the merging of the regulatory needs and the power of the technology.

Opportunities for Entrepreneurs

Tom– Chris, you have created created E-Loan in the mid nineties when people did not think the internet was safe for commerce, or at least for large lending purposes. You then went on to found Prosper, which created a new way for personal loans to be obtained and funded. Now, you are at it again at the cutting edge with Ripple. It is safe to say you are one of the extraordinary visionaries in the financial technology space. I am curious when you cast your gaze across financial technologies as a whole what are the other places that you think are interesting and opportunistic.

Chris– Thanks Tom for the kind words. I do think we are at a bit of a magic moment here. At E-Loan and Prosper, we were doing cool things but we were still operating in a pre internet-for-value world. I cannot underscore enough how the distributed ledger technology is a game changer . What I would say to entrepreneurs is that there are a ton of things happening. We are at the beginning of the era of internet-for-value. This is a global phenomenon. Most fintech in the past has been country by country. You can see this now unfolding like the internet-for-information did if you look back the last 20 years. We are kind at the ISP phase, but the ISP phase of the financial world. We are getting the infrastructure and liquidity into place. Once you get liquidity into these systems, it presents that liquidity globally, and now suddenly to all these new companies, maybe non-financial companies, maybe more technology companies, maybe healthcare companies, retail companies, who knows where that goes. It is a blank canvas after the infrastructure is set up. What is going to be the Uber of payments? Or the AirBnB of payments? In the internet-for-information, after 10 or 15 years of setting up all the infrastructure, you had a dramatic run of incredible companies. What are we going to see in the payments and financial world after all the infrastructure is built out? I believe someone could watch what happened in the information world and replicate that in the financial world. It is all very exciting.

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