Hello, I'm David Schwartz, CTO of Ripple ... definitely not an economist.
I just had arthroscopic surgery and tomorrow will officially be my first day back at work. So no slide deck from me. I'm coming to you from my kitchen because my office is on the other side of my house -- it might as well be on the moon.
I want to thank Rich and Tobias, and also Barry and John, for giving me the opportunity to speak today.
Ripple improves international payments for enterprise customers by building a modern, interoperable, international payment and settlement system, RippleNet, based on blockchain technologies. Our ultimate goal we call the "Internet of Value", payments as easy as email for enterprises of all sizes and for consumers around the world.
Obviously, we're not going to build that all by ourselves. It's an audacious goal, and in 8 years, we've learned a lot about where the challenges are. Also, where the opportunities are.
The good news: CBDCs can make domestic settlement faster, more reliable, and less costly. And that is very important -- you can't have good international payments without good domestic settlement. International payments are more important than you might think because they're so inefficient today, they often simply don't take place. Most emails wouldn't have been sent by postal mail if we didn't have email. The communications simply wouldn't have happened. An enormous amount of valuable commerce simply doesn't happen because international payments are so slow, unreliable, costly, and complex.
There's typically a domestic transfer on each end of any international payment. If those don't work well, the international payment doesn't work well.
And equally importantly, if you imagine an international settlement system with good characteristics like speed, certainty, and low failure rates, those benefits won't be seen by the endpoints of the payment unless the domestic components on both ends have them too. Countries that don't modernize their domestic systems will not see the benefits of the revolution in payments taking place today pushed to endpoints in that country.
CBDC distribution will almost certainly have to happen through intermediaries (banks, wallets, fintechs). Central Banks don't have the scale today to provide direct to consumer services, and it would make no sense for them to try to scale up to replace consumer financial infrastructure.
In working to build modern international payments, we've discovered that the biggest obstacle is often the very last hop -- getting the funds to the payment recipient through the domestic payments system. But lacking connectivity to consumers, CBDCs won't solve the "last mile" problem that has made modernizing international payments so difficult.
Fortunately, domestic systems are modernizing -- SEPA, Singapore, and others all have very strong domestic systems. The US is implementing FedNow, though that won’t be live for another few years.
It’s important that these payment systems are also built on newer technologies that are compatible with each other. At a minimum, they won't be able to confer the benefits of improved international settlement to the payment's originator and recipient if they aren't modernized. At worst, those payments won't work at all.
Even if you imagine some future with "one world asset", we won't get there unless the new "one world asset" is compatible with where the value is today. So either way, compatibility is key.
The world's value is spread out today among systems that don't interoperate with a massive number of bespoke and quirky interconnections -- band aids. Companies that handle large numbers of payment endpoints need hundreds of people to maintain their payments infrastructure and handle the complex treasury operations needed to handle funds in dozens of payment systems. If someone want to compete with companies that have this kind of payments infrastructure, the answer can't be that they hire a hundred payment engineers and dozen treasury operations people. That's a non-starter.
So there is definitely an opportunity here to bridge domestic real time payment systems (such as FedNow, the Clearinghouse for USD) with powerful benefits for SMEs and ultimately consumers around the world.
4) THE TASK:
We need to build systems with common principles, just as the Internet was built. Today, many computer networks are effectively just part of the Internet. But it wasn't always this way.
As many of you may know, Cisco rose to dominance against competitors because they could make existing legacy systems connect to the Internet while competitors required you to build new Internet-like networks. Today, most networks look like the Internet, but we needed interoperability to get there.
And payments and settlement are definitely in that pre-Internet state. There’s still that huge mismatch today -- it’s walled garden after walled garden, with very limited interoperability through a massive number of different specific, limited interconnections. Liquidity is spread out and enterprises need to keep money spread across these systems. The result is high cost due to trapped funds and the need to prefund transactions, often days in advance.
So two problems we need to be mindful of:
A) Stablecoins are always going to be tied to a single fiat currency. There probably is not going to be one winner at the end of the day, and there defintiely won't be a single stablecoin (or a single fiat currency, for that matter) that everyone uses any time soon.
B) The US dollar has been the world’s reserve currency since the Bretton Woods Agreement in 1944 -- but as we’ve seen (particularly this year) that status is weakening.
5) RESERVE CURRENCIES AND JURSIDICTIONS:
I don’t think the USD being fully replaced as the world’s reserve currency is likely in the near term, or even over the next few decades. But its position is becoming more precarious because of several reasons: pandemic uncertainty forcing consumers and institutions to look at other safe haven asset classes (like crypto) and the rise of other countries (particularly China) that are trying to dethrone USD.
Being tied to USD also brings jursidictional ties as well that are, let's be realistic, increasingly unwanted in many parts of the world. Today, many sovereign countries around the world want indepedence from a system that gives jurisdictions like the US and the EU extraterritorial control over systems in those sovereign counries and their regions. Saudi Arabia, for example, wants a payment system in the middle east that respects their sovereignty.
If each country issues their own CBDC or starts using stablecoins denominated in different regional currencies, we risk repeating this mistake yet again. We drastically need interoperability between these virtual currencies and between virtual currencies and traditional assets and systems.
A CBDC by definition will carry the same capital controls, trade agreements, politics, etc just as its corresponding fiat currency did. Again, countries are not going to want to deal with another country’s capital controls.
A world currency issued by a world jurisdiction that everybody uses for everything is a pipe dream. Our choices seem to be an interoperable future with a few jurisdictionless settlement assets or balkanization.
6) THE NEED FOR A NEUTRAL ASSET
If you’re looking at cross-border, the key factor is interoperability. You're working across jurisdictions and across assets. You need a neutral asset in between different CBDCs or your liquidity will be divided among the N^2 pairs of CBDCs.
Similarly, if other assets (such as securities around the world) get tokenized, there's even more need for a neutral asset between multiple CBDCs and possibly a large number of new assets in new asset classes.
A central bank is not going to issue a digital asset that behaves like BTC, XRP, ETH -- these are neutral assets that should remain free from single jurisdiction control.
CBDC are not going to usurp the role of universal settlement assets. You need a neutral asset going in-between CBDCs serving as a settlement asset across jurisdictions -- accepted by all because everyone accepts that they can't get the whole world to use an asset they control, and so an asset nobody can control is better than one controlled by one of their geopolitical competitors.
Bitcoin is sometimes pitched as the interoperability solution, and in the early days that almost seemed believable. But as we now have some 1,500 cryptocurrencies that don't interoperate, and almost nothing non-crypto interoperates with bitcoin, we have re-created a newer version of the same walled garden problem. Instead of building an internet based on compatibility, we built one network and required everyone to join that network, requiring too many sacrifices too quickly.
7) XRP and the XRP Ledger
It can't just be one network. And if there's one network at the hub, that network has to be built for that role with interoperability taking priority over "everyone do things our way". It has to be based on bridges, not on walls.
XRP and the XRP Ledger were built specifically for this kind of role.
XRPL was purpose built for transacting both in a native, neutral asset, XRP and also in "issued assets" to bridge to CBDCs, stablecoins, other payment networks, and other kinds of assets.
XRPL has asset issuance built into the protocol - issuance, authorization, payments, settlement, and exchange are all native operations with simple APIs. Issued assets can represent fiat currency, securities, or anything else of fungible value that works like a currency.
The XRP Ledger can't handle all the world's payments, and I'm not proposing a "one network" solution. That's totally unrealistic. People want different things and have different problems. But XRP can be the hub or backbone that provides the fast international settlement piece. It won't solve the last mile problem, but will help with interoperability and concentrating liquidity so enterprises don't have to be keep funds in every payment system.
Just to repeat what I said at the very beginning: "CBDCs can make domestic settlement more efficient. And that is very important -- you can't have good international payments without good domestic settlement." But they are not enough by themselves and expecting them to bring benefits to SMEs and end users is unrealistic unless we do a number of things.
One of the things we discovered at Ripple is that you can give an enterprise a fantastic payment rail and they will still be hesitant to push that benefit to their customers because it makes the less modern parts of their system seem worse or unacceptable. It may be better to only provide payments that settle in 2 to 3 business days than to sometimes provide instant payments -- people will now be more dissatisfied with the slower payments than they would be if you didn't seduce them with the better experience they only sometimes get.
To some extent, you have to do everything to do anything. But CBDCs can have a role to play. It just still leaves getting to and from the end user and interoperability across jurisdictions and different fiats.