Three banks, German Fidor, CBW Bank and Cross River Bank have recently began trading in crypto-currency becoming a market maker for transactions initiated by themselves or by partner banks thereby benefiting from reduced fees for a cross-border money transfer.
Africa’s flourishing network environment offers a fertile ground for cryptocurrency as a means of transaction, as growing numbers of individuals now accept to hold and pay with it, with beneficiaries accepting it as currency. Already, regulators are concerned of the untoward effect, especially the likely indelible underground economies, a worry way beyond mere laundering of drug money.
Bitcoin, Ripple, Litecoin, Bitshare, Paycoins and over 500 altcoins constitute the world of cryptocurrency providing a fast way to transfer funds globally, with minimal transaction costs, while being independent from a third party to handle the transactions. Their transactions are irreversible, this way the recipient of the funds is sure that he owns the funds for good and therefore less trust is needed to make sure the other party is reliable.
Ripple was established by Ryan Fugger in 2004. Mid 2011, computer programmer Jed McCaleb joined, and hired David Schwartz for developing the Ripple consensus algorithm in order to create a less computationally inefficient alternative to the Bitcoin “proof of work”-solution. In 2012, Chris Larsen joined who is currently CEO. July 2014, McCaleb disputed with the other co-founders over the company vision, and separated with the company to subsequently create Stellar, a direct protocol fork of Ripple. The company behind the Ripple protocol was first named OpenCoin, but changed its name in September 2013 to Ripple Labs, Inc. The source code was subsequently made open source.
Ripple Labs has gotten much attention in the news. The Massachusetts Institute of Technology (MIT) recognized Ripple Labs as one of 2014’s 50 Smartest Companies, which places Ripple Labs among other big innovators such as Google, Uber, IBM and Snapchat. Ripple Labs has also raised capital from some of the leading venture capital and technology firms, including Google Ventures, Andreessen Horowitz, LightSpeed Venture Partners, IDG Capital Partners, and Founders Fund. Although Ripple Labs is growing, it is still a startup.
As of April 2015, three banks have publicized partnerships with Ripple Labs. Fidor Bank, an innovative German bank, is the only bank using Ripple in production. The often-named benefit of reduced fees becomes immediately visible, as they ask a fee of €0,50, instead of normally €5,00 for a cross-border money transfer. The other two banks are CBW Bank and Cross River Bank, both American banks. Ripple has also partnered with Earthport, a provider of a global payment network, which might use Ripple to improve its global payment services.
Characters of crypto currencies
A first characteristic is that crypto currencies are meant to be decentralized. This means that there is no central operator who provides the servers which run the blockchain, but that each willing individual or firm can run this blockchain. If a network is ran by different individuals and firms over the world, there is no single point of failure and the network will not likely fail due to the spread out backup. This enhances faith in the network, as one not has to trust one single huge provider, but one can trust a mass of small providers which are less likely to fail simultaneously. Due to the lack of adoption some crypto currencies are yet somehow centralized, but if successful the coin will be completely decentralized.
The roles of involved parties
The Ripple network consists of two important parties: Gateways and Market Makers. The EUR gateway, USD gateway, and market maker are the only entities required to have a Ripple wallet. Users are exposed to the Ripple Network through their financial institutions gateway wallet.
Currently, in two different manners wallets can be added to the Ripple network. The first is, when a private user wants to enter the Ripple network and registers himself by the website rippletrade.com. When registering, a private/public key pair is generated which represents a wallet. This set up is done within minutes. This wallet keeps the digital money of the user, which can be in all possible currencies.
A wallet needs 20 XRP to be activated and once a wallet is activated it can never be deleted. This activation can take place by a gateway, for example SnapSwap Europe (www.snapswap.eu). This private user trusts this gateway for holding his fiat currency or deposit, while receiving virtual currency. A private user can manage his wallet by the Ripple Trade website. The second manner is, when a bank wants to enter the Ripple network. Banks can use the Ripple APIs to generate a wallet address. This address keeps the digital balances of the bank, which can be in any currency. Banks can develop applications to communicate with the Ripple servers to manage their wallets.
A gateway exchanges fiat money for virtual money, by issuing the virtual money on the Ripple network and sending this to the user’s wallet. Much like a bank, the gateway retains assets to finance its debt obligations issued on Ripple. A Gateway is a financial institution which exchanges fiat money, situated on a regular bank account for virtual money on the Ripple network, and vice versa. Ripple gateways allow individuals or companies to access the Ripple network. After a new Ripple user receives virtual money from the Gateway, he may trade it for any other virtual currencies issued by a trusted gateway or for the crypto currency XRP.
The Market Maker
A Market Maker on Ripple posts offer to buy and sell virtual currencies issued by Ripple gateways. For example, a market maker may facilitate trade between European Gateway A and USD Gateway B by first opening accounts at GatewayA and GatewayB. Market makers are important sources of liquidity for cross-currency transaction within the network and primarily consist of bank trading desks, hedge funds and quantitative trading firms.
If the sender of a payment wants to send funds from the US to the EU, he can leverage the prices that the market maker advertises. When a payment is sent, the market maker will buy USD@USDGateway from the sender, and simultaneously release EUR@EURGateway to the beneficiary. The market maker must “pre-fund” liquidity at both gateways in order to have currency (i.e. inventory) to deliver against a payment on Ripple. Therefore, the market maker is the main source of liquidity on the Ripple network.
If implemented in the production environment, a bank will become its own gateway and will have at least one Ripple wallet registered on the ledger. The bank itself or the bank’s clients can make use of this wallet and thus benefit from the Ripple network. In all likelihood, participating banks will also become a market maker in its own network for transactions initiated by themselves or by partner banks. It is possible for transactions to be split among multiple authorized Marker Makers in case a single Market Maker does not hold enough liquidity to settle the complete transaction.