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Ripple is one of the most valuable private companies in Silicon Valley. But depending on who you ask, it is also potentially the most divisive.
CEO Brad Garlinghouse knows this better than anyone. While Ripple looks to chip away at a multi-trillion-dollar cross-border-payments industry, he and other company executives are constantly clarifying the company's relationship with the cryptocurrency "XRP" and its pack of zealous followers.
Confusion around Ripple is warranted — the start-up payments company owns 60 percent of the XRP in existence. The cryptocurrency was for many years even called "Ripple" instead of XRP and listed on some online exchanges that way.
The sizable cryptocurrency stake puts Ripple in an almost unheard of position in Silicon Valley of not needing to rely on much venture capital to fund its operations. Instead, it sells XRP on a regular basis. And based on the amount it owns, the company's value is at least $20 billion. The valuation of ride-hailing start-up Lyft, by comparison, is around $15 billion.
The price of XRP, and therefore Ripple's value, skyrocketed last year in a buying frenzy led by retail investors. But after the bubble popped, the Ripple-XRP relationship has come under a microscope from skeptics and investors who lost out.
"People got really excited about the potential of a new platform and the hype got ahead of the reality. That unequivocally has happened in this space," Garlinghouse said in an interview at CNBC's midtown offices. "There's religious fervor around all of them — some people seem to think these are the crusades and this is a holy war being fought."
Ripple's biggest goal is to allow customers to make cross-border payments. Even while XRP's price slid 90 percent from its peak a year ago, Ripple says it was signing up an average two customers per week last year as it attempted to break into a legacy software and network business that hasn't changed much in 45 years.
On Tuesday, Ripple announced it hit the 200-customer milestone, a 350 percent increase in customers sending live payments. It is now operating in more than 40 countries. Still, it has a long way to go before making a dent in global payments, which is dominated by the world's biggest banks.
SWIFT, an acronym for the Belgium-based Society of Worldwide InterBank Financial Telecommunications, was established by banks in 1973 as a new way to communicate about cross-border payments, and the messaging system remains the go-to network for more than 10,000 member institutions.
Money transmittal between countries can take several days, especially if intermediaries called correspondent banks get involved. Ripple wants to shorten the process to a matter of seconds using something similar to blockchain — the distributed ledger technology that underpins bitcoin and is being tested by companies from Amazon to J.P. Morgan.
Much like public blockchains, Ripple's network uses advanced cryptography to make sure transactions are secure. But all parties on the system do not have access to a shared ledger. Unlike cryptocurrency transactions, it can only be seen by those with permission to the network and transactions are not completely anonymous.
Even getting a crumb of Swift's business could be a significant win. Global payments ballooned to $1.9 trillion in 2017 and are forecast to grow to $2 trillion by 2020, according to an October report by McKinsey. Philip Bruno, a partner at McKinsey and co-lead of its global payments practice, said mobile telecommunications have raised expectations for how quickly money is transferred from one place to another.
"We've been able to make much faster same day payments domestically with mobile banking," Bruno said. "There's now this expectation that if I can pay my brother or my cousin immediately, when I get to work why can't I do the same thing to pay my global supplier?"
Banks aren't going to let go of their dominance in cross-border payments that easily. Swift has a global payment initiative to speed the flow of information, and HSBC is among the partner banks testing Swift's version and blockchain for payments. But as far as is known, not Ripple's. The bank's head of innovation Jeremy Balkin told CNBC that global banks "have a huge competitive advantage" when it comes to cross-border payments since they have branches and banking relationships across the world.
Global banks like Citi make "an automatic $8 billion on cross-border payments," Ripple's Garlinghouse acknowledged. "I think Citi will be the last customer we ever sign up because it has the highest vested interest in not changing the status quo."
Ripple's most widely used product is xCurrent, which is software that lets Ripple work with a bank's existing infrastructure to settle payments quickly. In this case, they still need to use a correspondent bank. But instead of just using Swift, Ripple's software sends the message.
It calculates the correspondent bank fees, the beneficiary bank fees, and the total cost to the customer before the transaction goes through. It also passes on important compliance details to help financial institutions comply with "know your customer" and "anti-money laundering" laws, which allows them to pre-validate payments in real time. For customers that only want to send payments, not receive them, there's a product called xVia.
Much of the growth opportunity in payments is seen coming from the Asia-Pacific region, according to McKinsey, where nearly half of Ripple's customers are.
Colin Dinn, the chief technology officer at Siam Commercial Bank, one of Thailand's biggest banks, says a lack of old infrastructure makes newer banks the ideal guinea pigs for technology like Ripples'. Dinn said he was looking to get rid of some of the complexity and middlemen needed for international settlements in places like Vietnam, Cambodia and Singapore. So, they began testing xCurrent in 2017.
"We have less embedded infrastructure in the payment systems and are in a position to exploit the growth at a faster pace," Dinn said. "Certainty and speed are way more important in this modern world."
Many of the transfers done by Siam are small, remittance payments, or funds that someone might send home to his or her family in another country. That's not a huge business for most U.S. banks that instead focus on payments for global suppliers. But in the case of Siam, these small, often $100 payments are now being sent in a couple of minutes and at a lower cost, Dinn said.
Ripple's crypto product is called xRapid and officially went live this fall. XRP enthusiasts had long-awaited this announcement, speculating that it might help prices recover. It uses cryptocurrency as a "bridge" between foreign currencies, Garlinghouse said.
For example, a bank might want to process a transaction from U.S. dollars to Mexican pesos. In most cases this process requires pre-funded local currency accounts. But by converting U.S. dollars into XRP tokens on an exchange, then converting them back into pesos at the other end, Ripple says the process can happen within fractions of a second.
The potential catch is the volatility of crypto, which is known to rise and fall by 15 percent in a single day. Foreign currencies can also be volatile, however, Garlinghouse said, especially if transactions take a couple of days. "The average Swift transaction takes three days — but really what we're seeing is three business days. You're taking fiat volatility risk while markets are closed over the weekend," Garlinghouse said.
London-based foreign exchange service MercuryFX was one of the first to sign up for xRapid to move payments for charitable donations between the U.K. and Mexico. "It makes a difference to be able to trace these transactions and know where they are," Alastair Constance, founder and director of Mercury FX told CNBC.
Still, for this to work, Constance acknowledged that the more activity on the network, the better. "Your network is as only as good as your participants," he said. "The trick now is to get more on the network."
The newest members to the network last year aren't household names: Euro Exim Bank, SendFriend, JNFX, FTCS, Ahli Bank of Kuwait, Transpaygo and BFC Bahrain. Five of those are using the XRP product. Based on tests with companies using XRP, Ripple said the cryptocurrency technology is also proving to be cheaper. For payments between the U.S. and Mexico, Ripple claims financial institutions using xRapid saw a savings of 40 percent to 70 percent compared to what they normally pay foreign exchange brokers.
In 2017, cryptocurrencies like bitcoin and XRP went from a niche, online hobby to a retail obsession. XRP attracted speculators, rising to a high of $3.84 in January of last year. It's now the third largest cryptocurrency in existence but has come crashing down to roughly 35 cents since the peak.
While a spike in people wanting to trade XRP may have helped Ripple, it also put a target on their back. Multiple lawsuits have sprung up, including a class-action suit arguing that XRP should have registered as a security. The plaintiff is suing on behalf of all California citizens who bought XRP, seeking $5 million in damages. Brad Garlinghouse is listed among the defendants.
At least in the eyes of regulators, bitcoin is "decentralized" enough to exempt it from securities laws. Ether, the world's second largest cryptocurrency, has also been publicly defined as "not a security." XRP is still waiting for that distinction from regulators. "It's really clear that XRP is not security," Garlinghouse said. "If Ripple the company shut down, XRP would keep trading."
Another suit by Israeli resident Avner Greenwald, states that there are "thousands" of individuals who lost money after buying XRP, and is asking Ripple to pay $167.7 million in damages.
In one of those cases, Ripple is being represented by former Securities and Exchange Commission Chairwoman Mary Jo White, who is one of its many well-known backers. Ripple's board members include American economist Gene Sperling, and Ben Lawsky, the former New York Superintendent of Financial Services who created of the state's bitlicense.
If XRP ever shut down, Ripple would surely struggle. While revenue comes from selling software to banks and a small amount of venture capital money, the overwhelming majority of its money comes from XRP sales.
The founders of Ripple made this possible by gifting the lion's share of the cryptocurrency XRP to Ripple soon after they created it. Unlike some other virtual currencies that have to be "mined" by users, XRP was fully generated before its distribution.
Founders Jed McCaleb, David Schwartz and Arthur Britto decided this when they set out to develop a better version of bitcoin.
"The founders were huge fans of bitcoin and believed in its transformative potential but they saw some inefficiencies in its design that would lead to scalability issues and speed problems," said Monica Long, one of Ripple's early employees and its senior vice president of marketing.
The company put the majority of its stake —55 billion XRP — in a cryptographically-secured escrow account, and sells a little bit of that every month. It has the flexibility to sell as much as 1 billion XRP tokens in a quarter and issues reports on how much it sold. In the third quarter of 2018, it unloaded the equivalent of $163 million.
While Ripple calls XRP the best digital asset for payments, others aren't as enthusiastic.
CEO of Messari Ryan Selkis, who is an early crypto investor and vocal Ripple critic, said the company as a stand-alone software business is "actually good," and their disclosures are about as transparent as it gets in cryptocurrency.
But Ripple-XRP relationship makes it the "Jekyll and Hyde" of crypto, Selkis said. From his vantage point, Selkis still thinks XRP and Ripple are still one and the same, "the industry's worst kept secret."
"This was an asset that was sold and centrally managed by Ripple Inc. the company," Selkis said, adding that he does not own, or short XRP. " They've made numerous efforts to disassociate themselves with that language because now it's more risky to be perceived as a sole overseer of XRP."
He and others wrote off XRP as a legacy byproduct of a system that pivoted from cryptocurrency to enterprise distributed ledger technology.
"The question is, if that cryptocurrency is necessary in the Ripple ecosystem," Selkis said. "The odds of XRP being used by enterprises are very low."
Tushar Jain, managing partner of Multicoin Capital, is short XRP, meaning he is betting against it. He said if it weren't for Ripple's interest in XRP, there wouldn't be a need for it at all, instead advocating for dollar-backed cryptocurrencies called stable coins.
"If you can look past the class-action lawsuits and other serious regulatory concerns, there's still a slew of reasons to be bearish," Jain said. "XRP's future as a liquidity bridge for banks looks bleak at best."
Garlinghouse said he and others at the company are used to the criticism and questions of commercial adoption when it comes to xRapid. But Tuesday's announcement, adding five customers to that product in particular, is a "punctuation" that Ripple is making progress, Garlinghouse said.
Like the earlier dot-com era, cryptocurrency companies are now going through an inevitable wash-out. Consensys, another well-known and well-funded cryptocurrency start-up. is reportedly firing as much about 60 percent of its 1,200 person staff this year, and many other digital coin offerings are crumbling as regulators take notice.
Garlinghouse is hoping that Ripple ends up like the Amazon or Google of that earlier era.
"Ripple took a contrarian view on a bunch of things pretty early and that made us unpopular among the die-hard crypto community," Garlinghouse said. "In the face of those kind of arrows, though, I still have conviction that we're on the right path."