Ripple, a seven-year-old company that uses blockchain technology for payments, has grand ambitions to revolutionize the way banks send money to each other internationally. Whether it gets anywhere close to reaching such a lofty aspiration remains to be seen, but it has at least succeeded at pumping competition (and attention!) into a sleepy corner of banking.
The San Francisco company’s chief rival is Swift, a pre-internet bank cooperative that dates to the 1970s. Belgium-based Swift’s payment-messaging network is used by more than 11,000 financial firms to send funds. Industry executives say privately that Ripple was a catalyst for a much-needed Swift upgrade, as parties previously didn’t know how long transfers would take, how much they would cost, or have information on when a payment was made.
Even Swift’s CEO recognizes the upstart’s influence. “I don’t think we could have done this without competition making it clear to the banks that they need to shape up their act,” Gottfried Leibbrandt said while sitting next to Ripple boss Brad Garlinghouse, last week at the Paris Fintech Forum.
Ripple, meanwhile, says it has doubled its customer count in the past year to more than 200 financial institutions. Garlinghouse describes his company as a new breed of enterprises that will unleash the power of blockchain, and says its technology moves value cheaply and instantly, likening it to email for money. The company’s RippleNet product uses blockchain—a network of computers that store and verify copies of a database, making it particularly difficult to forge or corrupt—to transmit fiat money. Its xRapid service goes a step further and uses XRP, a cryptocurrency, to move funds.
Swift and Ripple became tangled in an unexpected way
Ripple is the creator and largest holder of XRP, which it touts as a kind of reserve currency for interbank payments. Some punters are betting on Garlinghouse’s vision, and buying up XRP in a wager that banks will eventually use XRP instead of the US dollar as a bridge for money transfers, creating utility and a source of demand that would make the token more valuable.
While Ripple hopes to challenge Swift’s dominance, last week the two got tangled in an unexpected way that showed how the unsexy world of correspondent banking has become fodder for the super-heated world of cryptocurrency speculation.
Swift, founded as the Society for Worldwide Interbank Financial Telecommunication, is owned by its thousands of member banks. Its recent upgrade, called global payments innovation (GPI), relies not on blockchain, but other 21st century advances like monitoring via cloud computing, application programming interfaces (APIs), and new service agreements among banks to speed up and track payments around the world. Cloud and API tech haven’t inspired armies of Twitter fans, but they’ve been foundational for the new economy.
$300 billion a day travels on the new network
More than a hundred banks have gone live with GPI, and more than 50% of Swift’s commercial payment traffic—around $300 billion a day—travels on the new system, according to Harry Newman, Swift’s head of banking. Most payments now take a few minutes to reach the beneficiary and all Swift members should be switched over to GPI in the next year and a half, he says.
When it comes to speeding up payments, “you don’t need blockchain technology to solve that problem,” Newman says. “We don’t actually see it being that suitable for payments in their current setup. It might be in the future, but right now we don’t see that.”
Still with us? Good, because this is where it gets more interesting, though admittedly convoluted. Though Newman isn’t optimistic about blockchain for payments, Swift is continuing to investigate the technology, and this news inspired a sharp, ill-informed rally in the XRP crypto token.
Here’s what happened: Last week Swift said it’s partnering with R3, a blockchain technology firm, to develop an application for trade finance—the slow-moving import-export transactions that generate large quantities of time-consuming and error-prone paperwork. While industry execs have their doubts about blockchain for payments, many see much more promise in trade finance because it could, among other things, help make sure trade records are authentic. The proof-of-concept application will test out R3’s blockchain technology, called Corda, and pair it with Swift’s GPI system for payments.
This part gets a little confusing: Crypto speculators, fanned by dodgy internet articles, seemingly seized on the news because of an agreement that allows R3’s Corda to integrate the XRP token. In short, traders were likely betting that XRP was finally going to be used for interbank payments, facilitated by Swift’s network. The rally soon fizzled as reality set in: Neither XRP nor Ripple are involved in the plans between Swift and R3 in any way. The proof-of-concept will use blockchain, but only for trade finance, and still using good ol’ fiat currency.
The episode sums up the crypto phenomena of recent years. Behind the hype, internet-rumor-driven price spikes, and naked speculation, there are genuine attempts to harness the technology for use in mainstream finance. It’s far from proven that blockchain will be as transformational as, say, email or cloud computing, but the results so far suggest it will indeed find some cool uses (at least, if you think trade-finance settlement can be cool).
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What you need to know and why
Facebook expands its blockchain team. The social media giant confirmed Feb. 4 that it hired at least four members of Chainspace, a company that has been working to create “a planetary-scale smart contracts platform.” The new members of Facebook’s blockchain team include four of Chainspace’s cofounders, who each possess a technical background.
Takeaway: There’s been lots of speculation about whether Facebook is working on its own cryptocurrency. Given the interest areas listed by the former Chainspace researchers online, there’s a chance the company is pursuing something related to voting technology. A paper the Chainspace team presented at the 2018 Network and Distributed System Security Symposium hints at the possible use of smart contracts for polling, smart metering, and banking. Mustafa Al-Bassam (alias “Tflow”) a south London programmer previously associated with LulzSec, a hacking collective, was also a co-author on the paper, but apparently won’t be joining Facebook.
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Hacks, Scams, and Capers
Zcash quietly fixed a major counterfeiting bug. The Zcash Company, which launched and now supports the development of the privacy-oriented cryptocurrency of the same name, revealed Feb. 5 that it patched a significant vulnerability in its October network upgrade, Sapling.
The company said that if exploited, the inflation bug would have allowed a person to create an unlimited amount of Zcash, without the rest of the network knowing it. Zcash currently has a market cap of $270 million. The vulnerability was discovered by Ariel Gabizon, one of Zcash’s own engineers, and it had no bearing on the coin’s privacy protections, which utilize a form of cryptography called “zk-SNARKS.” While the Zcash team believes nobody abused the loophole, they can’t be certain of it.
“Knowing a vulnerability exists means you’re in a position where you can pretty easily and anonymously exploit it,” noted Neha Narula, director of MIT’s Digital Currency Initiative. Although the Zcash Company addressed the issue in a responsible manner—notifying other projects that use the same cryptographic method and preventing a public panic—the experience shows that even popular, older cryptocurrencies can contain major flaws and users are ultimately placing their trust (and financial safety) in a very small group of subject matter experts.
This story has corrected the name of Ripple’s service that uses XRP to xRapid.