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The Fed’s Faster Payments Task Force is responsible for improving the U.S. payment system. Photo: Tim Evanson

In the latest report from the Federal Reserve Board on “distributed ledger technology in payments, clearing, and settlement,” the future use of distributed financial technology looks more certain than ever. The exhaustive document details potential and known use cases, the path to adoption for new solutions and legal issues and governance among a whole host of subjects.

Three key takeaways from this report:

• Distributed ledger technology (DLT) represents an opportunity to deal with existing frictions in payments, clearing, and settlement.

• As DLT matures, compliance and governance requirements must evolve along with the technology to extend the existing framework.

• An open interoperability standard like the Interledger Protocol (ILP) could spur further innovation and adoption of DLT-based systems for cross-border payments.

First, the report acknowledges that the system currently in place for cross-border payments is less than ideal. Taking the historical perspective, the Fed points out that the methods for executing, clearing, and settling financial transactions have evolved over many years, through iterations of different technologies and gaining complexity. The complexity contributes to friction between siloed systems, and adds additional costs. As a nascent technology, DLT shows promise to improve this system by addressing the inefficiencies and interoperating separate networks.

Next, the document brings a scrupulous attention to the complicated legalities involved in and governance arrangements that are critical for risk management in payments, clearing, and settlement systems. As Ripple’s Deputy General Counsel Jess Cheng noted in her article in the American Bar Association’s Business Law Today, where she explored the application of U.S. payments law to Ripple technology: “the benefits to having a consistent, unitary law governing all transfers made on traditional funds transfer system apply just as well in the context of distributed financial technology” as they do to traditional financial rails. As Vice Chair of the American Bar Association’s UCC Payments Subcommittee, Cheng has partnered with other experts to lead the discussion around cutting-edge legal issues for payments and emerging payment products.

While the question of how the legal framework currently underpinning our global financial system will govern this game-changing technology is a new and challenging topic for many companies in fintech, Ripple has been leading the charge in establishing governance and rules for how our infrastructure solution can integrate and possibly even improve compliance. Ripple has had a seat at the table in the most influential policy discussions, and are very proud to have our Head of Regulatory Relations Ryan Zagone elected to the Federal Reserve’s Faster Payments Task Force Steering Committee.

Additionally, in 2016, Ripple created the Global Payments Steering Group (GPSG), the world’s only blockchain bankers’ network with defined rules and governance. We predict that 2017 will be a crucial year in policy and regulatory decisions that will determine how distributed ledger tech is integrated into the world’s financial infrastructure. That work has already begun.

Finally, the report makes a specific point regarding the need for an industry standard to unify and interoperate parts of the existing structure with the next step in our fintech evolution: DLT. ILP was created with that exact goal in mind, and Ripple is very proud to see its potential  acknowledged by this report.

The section on cross-border payments specifically singles out ILP, explaining exactly how the protocol works and what it is intended to do:

“In addition, a particular industry development of note is the Interledger Protocol (ILP) which allows transactions to flow across different ledgers and creates connection points between two or more digital ledgers. In effect, the protocol defines a set of procedures for proposing a payments path and cryptographically escrowing funds across a series of interoperable ledgers and then subsequently executing the escrowed transactions once the recipient of the payment validates or acknowledges receipt of payment. The ILP is being developed as an open standard and is intended to improve interoperability and streamline the process for transferring digital assets by enabling entities in different countries with different payment systems to more easily transact with one another. Adoption of this or a similar protocol could spur further innovation and adoption of DLT-based systems for the cross-border payments use case.”

Read the full report here.

Ripple is proud to announce another addition to our team: Miguel Vias, head of XRP markets. In his new role, Vias will utilize his considerable expertise building liquidity for new financial products by working with market makers, traders, investors and exchanges to strengthen the XRP markets and set the stage for large-scale institutional adoption.

Global financial institutions are increasingly looking for solutions to consolidate the liquidity tied up with the nostro accounts required to fund their overseas payments. Digital assets allow for banks to fund their payments in real-time, and in the process, cut down their dependency on nostro accounts. A strong XRP reinforces these economics.

Vias joins us from CME Group, where he was global head of precious metals and metal options at the largest precious metals desk in the world. Prior to the CME, Miguel honed his craft at the commodities desks of Morgan Stanley, Bank of America, and Mitsui. He brings nearly two decades of trading experience to our team.

We talked with Vias about what brought him to Ripple, and what he’s most excited to do in his new position.

What made you decide to get into fintech, or come to Ripple specifically? This is a little bit of a career change for you, so can we talk about what interests you about this position?

My interest in fintech goes back to early 2012. While I was working in London, I’d begun to hear about bitcoin. A borderless currency without a central counterparty was theoretically appealing, but I had my doubts, especially given the complex systems bitcoin on its own was attempting to replace.

Still, the blockchain and distributed financial technology could clearly solve some interesting problems. Two years after joining CME, I came across Ripple and XRP, and immediately knew I’d found something. Ripple and XRP removed most of the initial reservations I had around bitcoin, namely that there was an actual group of people focused solely on integrating into the financial system, instead of displacing it.

Since I bought my first XRP two years ago, I’ve kept a close eye on everything Ripple- and XRP-related and have been impressed with the progress the company has made. From building the team, to the product, to the market infrastructure, it’s obviously the best blockchain-focused fintech startup in the world. So when I had the opportunity to become part of the team, there was no way I was going to pass it up.

How does your experience in commodities translate to working with XRP?

XRP is uniquely qualified as a liquidity solution, to help banks and corporates currently holding balances in nostro accounts all over the world to facilitate payments without trapping their cash. As a digital asset, it can reduce the amount of capital in float. As a bridge currency, it can enable liquidity concentration around fewer currency pairs, making cross-border payments more efficient.

Looking at it through the lens of my experience, XRP’s commodity and foreign exchange characteristics (specifically its limited supply) makes it very similar to precious metals. The considerations around inventory and delivery that make trading a digital asset like XRP unique are also at the core of the commodities markets. As a result, my understanding of precious metals, especially when it comes to market structure, will be ever more helpful as we increase the access to, and liquidity of, XRP.

Additionally, my experience in OTC markets and at an exchange will aid in charting a path toward wholesale XRP adoption. Similar to other digital assets, XRP exists in an interesting hybrid of OTC and exchange-traded markets. If we want to transform XRP into an institutionally viable currency, it’s crucial to understand how both those markets function individually, how they complement each other, and how we can leverage a deep understanding of both to further develop XRP.

What about your new role is most exciting to you? What do you think the future of digital currency will look like?

As I mentioned, I think the natural ethos of digital currencies actually limits their utility and thus general adoption. In order for any currency, digital or not, to achieve critical institutional adoption requires a team of people to manage its progress. As a thought experiment it might be comforting to think that open source adoption is possible, but the reality is much more complicated.

That’s a lengthy prelude to what I find most exciting about the role, which is being primarily responsible for ensuring XRP achieves institutional adoption. The idea that I will be part of the team which will help grow the first institutionally useful digital currency is amazing. As for the future of digital currencies or distributed ledgers generally, I think we will continue to see usage increase in more institutional areas.

The role XRP plays in reducing the capital needed to fund cross-border payment businesses is equally applicable to any cross-system or cross-asset transaction. Beyond the foundational use case of payments, digital assets will lower collateral requirements across the whole of the capital markets, for example, with securities settlement, derivatives markets, and repo lending.

A digital asset may well be included in baskets of world reserve currencies in the years to come. It will take some time, and a ton of effort, but I have no doubt in the very near future we will live in a world where much of our existence will revolve around digital currencies and distributed ledger technologies.

With regards to XRP, what can we look forward to in the future?

We’re planning to launch a quarterly XRP update that will focus on the state of the market, XRP deal structures and sales targets. Most importantly, our intent is to make XRP more broadly accessible by listing it on additional exchanges. So, stay tuned! I can’t wait to get started.

Image courtesy of Santander

Ripple often references our banking clients as “leading” in the world of financial services, and “innovative” for their commitment to providing better services to their corporate and individual clients through the use of distributed financial technology like ours.

However, this is more than a matter of opinion. The banking world has its own methods of rewarding and singling out the financial institutions that are pioneers in their field; the ones that investigate, test, and adopt the technologies that are poised to remake the industry. Innovation is not always on a bank’s radar, and history rarely rewards those that wait and see from a vantage point of comfort and security.

With that in mind, we are pleased to share news that two of Ripple’s clients have been recognized for their bold and innovative work in bringing banking in line with customer expectations in an era of on-demand services.

• Santander received the Payments and Wallets award in the category of Distribution and Marketing in Retail Financial Services from the nonprofit financial marketing association Efma, specifically for its Ripple-powered International Payments app, which uses blockchain technology to enable customers to make faster and cheaper international payments.

• Reisebank won the Banking Innovation Award for their implementation of a fast and inexpensive form of international transfers, for all currencies around the world by means of open and decentralized blockchain technology. Ripple’s solution provided this technology, allowing for cross-border payments that settle in real time.

Ripple is very pleased to have contributed to these wins, as well as to the ongoing creation of the Internet of Value. Huge congratulations to Santander and Reisebank!

To read more about Ripple’s work with these award-winning banks, read our case studies on both  Santander and Reisebank.

In payments, the future looks bright. Image: Shutterstock

Professional services giant KPMG and venture capitalist database CB Insights published a report called “The Pulse of Fintech,” looking back over the biggest moments in Q3 of 2016. Most of the report focuses on trends and highlights in fintech funding during this action-packed quarter. However, the report also makes some forward-thinking points on the fintech use case in cross-border payments, pointing out that Ripple is poised to “revolutionize” this space that is clearly so ripe for reinvention.