Ripple, whose business is built on providing financial institutions with an infrastructure to facilitate international payments and currency trades, has always been a more likely ally to governments and regulators than most other major blockchain projects and cryptocurrencies. Seeking to enhance rather than disrupt the operations of the legacy financial industry, the company has been long stressing the importance of a clear-cut policy framework for the banks to fully reap the fruits of blockchain-powered innovation.
The regulatory pushback against Libra, Facebook’s recently announced cryptocurrency, has apparently spurred Ripple’s determination to publicly take an even more pro-market-regulation stance. Late July saw the company’s leadership publish an open letter to the United States Congress (which also appeared as a full-page ad in the Wall Street Journal), urging lawmakers to differentiate between the industry players and “not paint us with a broad brush,” but to promote regulation that recognizes fundamental differences between various actors in the space. In taking this potentially controversial step, what message did the creators of Ripple, Brad Garlinghouse and Chris Larsen, want to convey?
The image of “The Other”
As noted in the letter, Ripple deploys blockchain-based innovations “in partnership with regulated financial institutions to enable the world to move money across borders” — a mission that is vastly different from the principles that informed Bitcoin’s original, subversive ideology. Some crypto purists even deny XRP the right to be called a true cryptocurrency on the grounds of the degree of the system’s centralization, as well as the fact that Ripple, the company, maintains control over a large share of XRP tokens.
While this debate is impossible to be definitively resolved absent a universal delineation of what a “true” cryptocurrency is, it is hard to argue that the way XRP is structured sets it apart from most other top coins, such as BTC or Ether (ETH), which operate on permissionless ledgers. This is perhaps the major fundamental difference that the letter emphasizes, the distinction between XRP and other high-cap digital assets.
However, there is more to it, since it is worth keeping in mind that the company Ripple, which issued the letter, is not synonymous with the XRP cryptocurrency. Ripple offers banks and other financial organizations products, whose main function is to decrease the costs of cross-border transfers; some of these solutions make use of XRP token, while others do not.
Clearly, the authors of the letter urge Congress not to lump them together with some other corporate entities that operate in — or are seeking to move into — the domain of payments traditionally served by institutional actors. Both the timing of the message and the passage about how “digital currencies have the opportunity to complement existing currencies like the U.S. dollar — not replace them” make it apparent that the jab is aimed at Libra, which President Donald Trump considers a threat to the dollar.
Compliance across the board
As Ripple stands to benefit from a coherent and uniform set of rules governing international transactions, the fintech firm has long been vocal about its support of regulatory certainty across jurisdictions of its operation. The statement on Ripple’s website proclaims that the company is committed to building “a regulatory framework for global payments that is predictable, clear, consistent, and pro-competition.” The company touts having obtained a digital asset-specific charter, called a BitLicense, from New York’s Department of Financial Services — the first instance of getting such an approval for an institutional use case.
Ripple also has a record of declarations supportive of heightened regulation of the blockchain industry akin to the recent letter. In 2018, Ryan Zagone, director of regulatory relations at the firm, addressed the United Kingdom’s government with a call to put an end to the Wild West of cryptocurrencies by instituting rules of the game that would mitigate risks without hindering innovation. Similarly to the letter penned by Garlinghouse and Larsen, Zagone’s appeal drew a comparison between the current state of the blockchain sector and the early years of the internet.
These statements were not merely lip service to appease the regulators. Shortly after the international Financial Action Task Force issued guidelines that introduced more stringent Know Your Customer requirements for cryptocurrency-related businesses, Ripple entered partnership with the startup Coinfirm, which specializes in compliance and is reportedly set to furnish the new client with a range of Anti-Money Laundering (AML) information.
Other reports allude that Ripple could be privy to potentially far-reaching discussions with international regulators, including the International Monetary Fund, in which the guardians of the global financial order discuss ways to integrate blockchain technology into the workings of traditional institutions.
Such positioning looks logical for a company with a global focus, whose role is better defined as facilitator rather than disruptor. Apparently, Ripple’s ideal regulatory scenario looks very different from that of the majority of other companies that make use of cryptocurrencies. The company’s preferred arrangement would likely entail a uniform set of global cross-border payments regulations, complemented by stringent AML policies to limit the public networks’ capacity to facilitate such exchanges pseudonymously.
XRP vs. Libra: Is a collision inevitable?
Ripple’s position as a pro-regulation mediator between global regulators and the crypto industry has been unchallenged for a while, as other major blockchain systems simply lacked both centralized agency and the need to closely interact with legacy financial institutions by design. The game changed when Facebook upended the space with the announcement of Libra — a global payments system with a potential billion-user reach and enough clout to tailor global regulatory frameworks to its own needs by directly appealing to national governments.
It is not just the status of the regulators’ darling, though, that was threatened by the prospect of Facebook’s megaproject materializing. While it may look like Ripple and Libra specialize in separate segments of the remittance market — the former concentrating on interbank payments and the latter primarily concerned with transfers between individuals — some recent developments point to the tendency toward convergence of the two. Perhaps the most indicative of all is the recently announced partnership between Ripple and the global payments network MoneyGram, illustrating the company’s interest in the retail remittances domain.
As Libra’s initial momentum got bogged down in lawmakers’ suspicious hostility, Ripple’s leadership evidently seized upon an opportunity to counterattack. Speaking on Bloomberg TV on the same day that the open letter to Congress was published, Ripple’s CEO, Garlinghouse, offered ample criticism of Facebook’s “arrogant” approach to cryptocurrencies, again siding with the traditional financial system and supporting President Trump’s assertions of the dollar’s superiority over any other would-be global currency.
Along with his remarks on Libra, Garlinghouse also took time to denigrate public blockchain systems such as Bitcoin and Ethereum, which are allegedly beholden to the disproportionate influence of Chinese miners — the kind of fearmongering that is ostensibly designed to impress a certain strain of U.S. policymakers.
Between the lines
Ultimately, is Ripple’s pro-regulation crusade just another manifestation of the company’s longstanding public view or was it an outburst triggered by the imminent threat from the Libra side? It is likely both: a response to tectonic shifts in the crypto landscape evoked by Facebook’s ascendance to the scene and a vocal reminder to the authorities that the company’s behavior has always been different from that of the so called “irresponsible actors.” Lindsay Danas Cohen, chief operating officer and general counsel at digital assets platform Velocity Markets, sees Ripple’s recent actions as a manifestation of regulatory goodwill. She told Cointelegraph:
“Similar to other industries, such as financial services, regulatory compliance in the blockchain and digital asset space requires commitment. Crucial to this commitment is ensuring that ‘regulatory compliance’ is a pillar of any company in the space and that such compliance is built into a company’s DNA. […] We believe it is crucial to work with lawmakers and regulators in the U.S. to ensure that we bring world-class emerging technology to the forefront while also developing a proper regulatory framework to address related risks.”
Michael Poutre, managing partner of blockchain platform Terraform Capital, told Cointelegaph that the calculus behind the open letter has much more to do with the emergent competition rather than with Ripple’s penchant for regulation:
“Libra is a direct competitor, and a superior one. If Libra gains traction, Ripple will fall to the ranks of an 'also ran'. The letter they authored goes against virtually everything Ripple was started for. They are attempting to kill Libra in the crib, so it can't grow up to kill them. The letter has the appearance of being disingenuous, and it lauds the institutions Ripple was created to subvert.”
Poutre also believes that Ripple has been caught up in a difficult situation whereby it is having to side with a lesser evil:
“Libra is a better solution — but has a lot of work to be done for it to work and go live. Ripple is speaking from both sides of its mouth by stating that governments have historically handled this well as are needed going forward. They don't believe that for a minute, but the enemy of my enemy is my friend. Ripple hates regulation, but needs the regulators this last time to try and kill a superior product. And you know what, it may work. Congress loves to be told how smart they are.”
Whether it is one or the other, at the very least, the letter to Congress contributes to our ability to map the crypto space and Ripple’s place in it. In an industry in which ideology plays a considerable role, the company that owns more than half of all XRP ever to be issued has confidently put its stakes on the incumbent financial system. Even if the regulators won’t notice the move, the crypto community certainly will.