While Bitcoin grabs headlines, a little-noted rival promises to supercharge all currencies old and new, fiat and cyber. An open-source programming system called the Ripple protocol could transform commerce and banking by making dollars, yen, euros, bitcoins, and even loyalty points virtually interchangeable.
The Ripple protocol, based in part on the system behind Bitcoin, is a payment and currency exchange system that erases the barriers between fiat currencies while also embracing digital currencies and other representations of value, ranging from gold to frequent flyer miles. It goes beyond Bitcoin by providing a code system that leaves no currency—including bitcoins—out.
Right now anyone can make limited use of the Ripple system by signing up with financial gateways such as SnapSwap and Bitstamp for quick cross-currency exchanges between dollars, euros, bitcoin, and more. The greatest value for most people will come if banks and other institutions implement the protocol to streamline their operations. Then all sorts of transactions would become simpler, quicker, and more secure. Many people would not even know Ripple was involved; they’d simply notice that their banks got better.
The system is being developed as open-source code by Ripple Labs, a Silicon Valley startup backed by Google Ventures, Andreessen Horowitz, and other leading funders. Like TCP/IP, the protocol that powers the World Wide Web, the Ripple protocol enables developers to create cheaper, speedier and more secure ways to perform transactions that are more laboriously executed by existing technology based on fiat currencies and pre-internet methods.
The key to Ripple is its distributed, decentralized nature. “It offers a way to confirm financial transactions without requiring a central operator,” says Chris Larsen, Ripple’s CEO. That saves both money and up to days’ worth of time. While the Bitcoin system also bypasses a central operator, its transactions take minutes rather than seconds to process, according to Larsen.
Financial organizations have already begun adopting the Ripple protocol. In May 2014, Germany’s Fidor Bank became the first bank to use the Ripple protocol. Its customers can now send money in any currency instantly and at a cost lower than typical bank rates through Fidor’s money transfer products.
Some larger financial institutions have also taken baby steps to help their customers learn about or participate in Ripple. For example, Bank of America (BAC) and Wells Fargo (WFC) offer easy ways for customers to send money to SnapSwap, the Ripple gateway that lets people buy digital currencies and performs exchanges in more than a dozen fiat currencies including the dollar, euro and pound. Such initiatives, now in their infancy, may pave the way for more active participation by major institutions.
Meanwhile, eleven financial gateways are now implementing the Ripple technology to facilitate transactions within the network. They are SnapSwap, Bitstamp, rippleCN, The Rock Trading, RippleChina, Justcoin, rippleSingapore, btc2ripple, Coinex, Bitso, and Ripple LatAm.
The latest gateway, Ripple LatAm, was launched on June 12 by AstroPay. The United Kingdom-based regional service, which covers Brazil, Chile, Colombia, Mexico, Argentina and Uruguay, will connect Latin American businesses with their counterparts in Asia, Europe and North America for faster and more affordable remittances, merchant payments and other transactions.
The longer-term prospects for leveraging Ripple are enormous. Perhaps the biggest first step any large financial organization could take would be to use it to offer faster, cheaper currency exchange services. According to the Bank for International Settlements, the global foreign exchange volume reached $5.3 trillion a day in 2013. This growing market is ripe for the taking.
The window of opportunity is open wide, but it could start to narrow. Already a London start-up, TransferWise, has raised $25 million to implement a peer-to-peer technology enabling people around the world to swap currencies at much lower rates than current bank transfer fees.
Beyond currency exchange, banks might also use Ripple to develop next-generation payment vehicles to replace obsolescent credit cards or to expand into cloud storage by offering virtual safety deposit boxes. Banks could also use Ripple to create innovative new smartphone apps and forge alliances with tech-savvy organizations that live by transactions, such as Walmart and IBM. Such developments could facilitate a renaissance in community growth by greasing the wheels of services such as microloans, helping to create jobs. And if Ripple becomes widely adopted, the result could be a whole new medium of exchange—“money 2.0” or “supermoney.”