Why do banks prefer Ripple over Bitcoin: an explanation how banks are looking towards cryptocurrencies in general, and why Ripple currently is by far the most promising crypto-solution for adoption by financials and banks.

1. WHY DO BANKS
PREFER ?
OVER
ROBERT JAN VROLIJK
AMSTERDAM
22 JANUARY 2015

2. Short introduction Robert Jan Vrolijk
 (Independent) Payments Consultant since yr 2000
 I have worked for
 Tier-1,2 and 3 banks in the NL’s
 Several PSP’s and corporates
 Operated in technical, business and risk roles
 Speaker about Bitcoin for aTier-1 bank, Accenture EMEA and
Enigma Payments Consulting
 I became interested in cryptocurrencies when:
 I realized that cryptocurrencies are by far the most interesting
innovation in payments in decades!
 First my interest was merely in Bitcoin
 Working forTier-1 banks, I noticed their interest in Ripple

3. Refreshing the memory: building blocks of Ripple
 Ripple = Global payment system / network created and
maintained by Ripple Labs
 Built upon a distributed, open source Internet protocol (like
SMTP, HTTP) for payments, and a consensus ledger
 The only asset in the Ripple network: Native currency called
Ripple (XRP)
 The network also supports all other currencies, but only as a
liability (IOU’s)
 Important elements
 Gateways
 Market makers
 Consensus ledger

4. Overview Ripple protocol / network / currency

5. Refreshing the memory: building blocks of Ripple
Consensus ledger
Consists of 3 different parts
Contains all accounts, balances, transactions, and offers to trade assets
Reaches consensus about transactions to be included in the ledger within
seconds
Gateways
Enable users to put money or value in and out of the Ripple network
Similar to banks, yet they share one global ledger
Should have AML and KYC / CDD procedures in place
Accountholders have to setup trust lines (with other accountholders, MM’s
and Gateways)
Market makers
Offer FX services and arbitrage (with other Market makers and Gateways)
The Ripple network includes a path finding algorithm offering the
cheapest path between two currencies or units of value

6. Refreshing the memory: building blocks of Ripple

7. (Couple of) Similarities Bitcoin and Ripple
 Both are decentralized.
 Both are open-source protocols, not owned by anyone.
 Both use algorithms to ensure that their networks come to
the same conclusions--so if one person authorizes
Transaction A, the entire network comes to agreement that
Transaction A happened.
 Both allow for almost free, p2p transactions across the
internet

8. Essential differences
- Proof of work vs consensus ledger (no miners, no block
reward, faster clearing 6 – 10s)
- Bitcoin protocol only holds the asset Bitcoin, Ripple network
also allows other currencies (as liability, IOU’s)
- Bitcoin protocol does not include gateways, with trust lines,
etc (is not based on Hawala banking), and no Market makers
- Ripple is (in it’s current state) not for the consumer market
- For Ripple, 1 company is leading the way, Bitcoin is owned
by everybody (and nobody)
- Max 21 mln Bitcoin (in the future) to be mined, 100 bln
Ripple already created, but not in circulation yet
- Ripple Labs still holds 69 bln XRP from total 100 bln XRP
(Jed McCaleb holds 9 bln XRP)

9. The agenda of Ripple Labs (RL) (my personal view)
Use cases have been described for:
Remittance Prepaid
Banks Merchants & market places
Currency exchanges Merchant acquirers
Formally the goal is: Building the internet of value
Since Jed McCaleb left Ripple Labs, Ripple has changed it’s strategic focus
to the financial industry only
My personal observation:
• Initial main goal is now to act as a facilitator for remittances, and cross-
currencyTrue International Payments
• With a strongest business case for banks
• As they are currently taking care of the financial transport ofTIP
payments via their (often complicated) correspondent banking network

10. The agenda of Ripple Labs (my personal view)
So in principle
• Facilitate the financial lowest layer,
• Providing the ‘rails’ for international payments
• Not interfering banks with their clients, their channels and their initial
payment routing (and revenues)
• Not pushing the use of XRP
• With the opportunity later on to do
an ‘upward integration’ towards rules
and messaging standards, (like the
payment series of Swift MT100 – 200,
SEPA etc)
• And introduce extensions of the
network, smart contracts, etc

11. Important events on Ripple-planet in 2014
Feb 2014: Jed McCaleb leaves Ripple Labs (and starts with Stellar)
May 2014: Mc Caleb announces to sell his 9 bln Ripple, price plummets
Aug 2014: Deal between Ripple and McCaleb. He will sell only $10.000 XRP
per week and 2014, 20.000 per week in 2015, etc
In the meantime:
Ripple changes strategy fully to go for a soft adoption in the financial industry, by
banks and financials
May 2014: Fidor bank adopts Ripple
Sep 2014: Two small US banks announce to adopt Ripple
Nov 2014: Deal withYantra, developer of risk solutions for payments
Nov 2014: ItalianTAS Group adopts Ripple (Fintech company and biggest
debit / credit card processor in Italy with subsidiaries in France,
Switzerland and Spain)
Dec 2014: Deal with Earthport (White label cross border payment provider,
with clients like BAML, Barclays, Standard Bank, HSBC and
others) signs deal with Ripple

12. The price of Ripple is rising (a bit)
Last 6 months
Last 2 years

13. How are banks looking at this? - 1
 Banks do have problems withTrue International cross-currency Payments
 They’re slow , and are sometimes even ‘stuck’
 They are costly for banks as well (heavy investment in payment infrastructure, increasing
regulationary pressure, new productdevelopment in a competitive market, limited STP
processing)
 And even more for the payer
 Lifting fees and other charges
 Conversion costs
 Big network banks make a business out of it (buying volumes, offering many
special FI products)
 But they also understand that current cost deductions are not sustainable
 If somebody finds a reliable, cheaper and faster way to process , their
business will be shrinking rapidly
 So banks are very interested
 But they are afraid to be first mover
 They leave it to companies like Earthport to adopt Ripple first
 If it is working and improved, then they can adopt themselves

14. How are banks looking at this? - 2
 Do banks care that Ripple Labs owns the majority of Ripples (XRP)? NO
 Banks like a stable, rising price of XRP
 RL have a real huge Bazooka to countermeasure any unwanted price increase (or price drop)
of XRP in the market
 RL will not offend their clients (banks) by going against their requested monetary policy
 Do banks care that RL and a few investors will become very rich if the price
of XRP rises? NO
 If Ripple really becomes the world standard, all payments for banks will be
book-to-book, because they all happen in the same ledger  book to book
is always easy for banks (no third party involved, reconciliation, transaction
details, fast)
 Banks do not earn big bucks from payments
 Consumer payments are not profitable at all
 Wholesale payments are, but only with a lot of investment, IT-effort, highTCO
 Banks mainly earn their money from other products

15. How are banks looking at this? - 3
 Banks can still make money on FX, by acting as a Market Maker (the market is
already becoming more and more competitive)
 Banks are not forced to use XRP as a currency, only for conversion to exotic
currencies
 RL is putting a lot of effort (explaining in the media, in their product offering) to
facilitate the financial industry to start working with Ripple (AML / KYC, hosted /
non-hosted accounts, presenting itself on big payment conferences)
Worries for banks are still:
 Is it really safe
 Technical barriers, like the size and performance of the ledger
 No central supervision for Gateways (some of them might go bankrupt)
 First mover has limited global coverage
 Integration with their payment platform (they have already heavily invested in
the last years)
 Local regulation on the use of a cryptocurrency

16. 10 reasons for banks not to invest in bitcoin
 Price is too volatile
 Nobody is solely responsible for Bitcoin
 Majority of bitcoin community is against regulation
 Silk road 1 , 2 and Mt Gox
 They don’t know how many Bitcoin they should buy (1000 doesn’t sound like
much for a bank)
 Too many people working on anonimity within Bitcoin community
 No central authority to execute monetary policy
 Limited conversion revenues (if Bitcoin really becomes mainstream)
 Other instruments in the financial markets, like currency swaps, will be
obsolete (if Bitcoin really becomes mainstream)
 Banks aren’t freedom fighters

17. Questions
?