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Ripple Bridging the Gap Between Bitcoin and the Banks

Bitcoin and other cryptocurrencies have a strange and tumultuous relationship with banking, and with the rest of the traditional finance industry.

To many of the more idealistic Bitcoiners, bankers are the big enemy. For these people the appeal of decentralized digital currencies like Bitcoin lies precisely in their potential to replace the over-weaning power of the banks with a peer to peer alternative. They glory in the way that Bitcoin allows you to hold your own money on your own computer and still be able to use it for internet payments and international money transfers, without needing to trust a third party. Perhaps most of all, they love the fact that digital currency is not created by central banks out of thin air and backed only by a public debt that we must all repay – a system which many blame for our recent financial crisis and continued economic woes.

This antipathy can also be found amongst many bankers and economists, who view Bitcoin with distrust and disdain. They point to the origins of Bitcoin's anonymity and its early growth within the criminal economies of the darknet as evidence of its fundamentally 'shady' nature. They wax lyrical about the irrational bubble created around the currency by enthusiasts, comparing it to the infamous Dutch 'Tulip Mania'1) of the 17th century. And perhaps most of all, they call for its regulation and control in order to prevent it from being used for money laundering, sales of illegal items and tax evasion.

But at the same time, there is another side to this story. I often stumble across social media posts from people who have invested in Bitcoin in the hope of making a profit – or people who see declining prices as the major barrier to greater public adoption of Bitcoin right now and would like to see them go back up for the sake of Bitcoin's success itself – opining on the possibility of Wall Street buying into Bitcoin. There is constantly speculation over the involvement of traditional investors and institutions in the digital currency economy, and indeed it does seem that there is a growing interest; for example, Bloomberg recently announced that it would add Bitcoin pricing and news to subscribers of its professional service2).

A new breed of digital currency entrepreneur is also hoping for a more friendly attitude to Bitcoin from the traditional finance industry. In the past, Bitcoin related business have struggled to get bank accounts3) or to raise capital through the usual methods – and that does nothing to help the growth of an ecosystem of services around Bitcoin, of the kind that many believe to be essential for the currency's future success.

It is also true to say that there have been voices coming from the very top of the banking system which recognize the potential offered by this revolutionary new technology. For example, Vice President of the U.S. Federal Reserve David Andolfatto has said that:

“There is (in my view) room for beneficial coexistence” (between digital currency technologies and traditional banking).

So although on the surface it may seem that there exists an unbridgeable chasm between Bitcoin and the banks, it may well be that this will change as both the technology itself and attitudes towards it mature.

In the quote given above Mr Andolfatto goes on to give an example of the 'beneficial coexistence' which he thinks may be possible:

“A politically independent Fed operating an “elastic” currency supply with congressionally assigned mandates (e.g., price-level stability). Together with Ripple, a currency-agnostic P2P payment system to facilitate low-cost payments.”

Recent events have begun to add credence to his assertion that a currency-agnostic protocol such as Ripple may be able to bridge the gap between these two very different economic systems – this week saw the news that German bank Fidor has become the first bank in the world to integrate Ripple into its public offering. This surprising news seems to have first leaked out to the general public at the Finextra Future Money conference in London, where an investor named Udayan Goyal predicted that Swift – the traditional inter-bank clearing and exchange system, would be dead in the water within three years, and cited Fidor bank's use of Ripple to move money between three different countries as evidence for this4).

The CEO of Fidor Bank Matthias Kröner has since elaborated on this, and is quoted by Coindesk as saying:

“Ripple enables us to securely and instantly send money anywhere in the world at no additional cost and through the same customer facing products and relationships we offer today.”5)

Ripple As Common Ground

For those readers who are unfamiliar with Ripple, it is an open source and decentralized protocol for payments and currency exchange (with other features such as 'smart contracts' planned for the future).

A Ripple wallet can be used to hold either fiat currency or digital currency such as Bitcoin. Although it does have its own digital currency – Ripples (XRP) – this is intended primarily for paying transaction fees and for use by market makers to provide liquidity, rather than as traditional currency for making payments or storing value.

Both digital currency and fiat money is treated pretty much the same within Ripple. Either one can be held within in your Ripple wallet in the form of an 'IOU'. To do this you need to deposit the money with a 'gateway' who holds the asset and issues an IOU into your Ripple wallet. You can then trade these IOUs within an internal peer to peer market, and even use them to make payments – with the gateways debt then transferring to the person you have paid. A Bitcoin bridge protocol even allows you to send BTC to any Bitcoin wallet from your Ripple wallet (without paying the BTC transaction fees), and other bridges are planned for fiat currency services such as Paypal.

This puts Ripple in a unique position to effectively bridge the gap between Bitcoin and the banks, as it provides a common ground on which both sides may be willing to operate. On the one hand it is decentralized, peer to peer and open source. But on the other hand the gateway system provides additional AML and KYC measures, while the provision of digital currency advantages for the movement of fiat currency provides incentive for banking institutions to follow Fidor's lead and jump on-board – and may even provide a way for banks to integrate Bitcoin related services into their public offering in a way which does not break the strict legal compliance requirements placed on traditional banks.

How this story will play out is anybody's guess, but it is certainly an interesting one to watch.

Categories: E-Currency | Ripple | Bitcoin | Business | Finance | Banking


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