Briefcase of Cash

In an age when data can move around the world in nano-seconds, it’s staggering just how inefficient the global money transfer infrastructure still is. When consumers and institutions alike attempt to move money around the world, it typically requires a number intermediary stops along the way, not to mention manual human intervention and far too many pieces of paper for the year 2014.

The problem is that, maddeningly, each country and each financial institution creates its own rules and its own system for executing such transfers. As a result, transferring money can often take days, costing non-trivial sums of money in the process, and introducing significant risk of fraudulent or failed transfers. The second order effect of this system is that it’s impractical to make small transfers, such as sending $20 from the US to India, for example, because such a transaction will cost more than its value.

Ripple was invented to address this very problem, offering a decentralized order book relying on open-source peer-to-peer payment protocols that allow financial information to move as quickly and easily as other data. The platform serves three key functions: confirming transactions free of charge and without a centralized authority; identifying the shortest possible path between two assets (ex: US dollars to Rupees) and their respective endpoints; and holding all global orders within a single blockchain-like, decentralized order book.

“The current payments system is built on pre-Internet technology,” Ripple co-founder and CEO Chris Larsen says. “Ripple is a giant pathfinding algorithm, looking for most efficient way of trading one thing for another. We can improve the speed of these transfers from days to seconds and remove the bulk of the risk in the system that exists today.”

Ripple has shown enough promise to attract the attention of a growing number of developers and the capital of top Valley investors – it’s raised $6.5 million from the likes of Andreessen Horowitz*, Lightspeed Venture Partners, Bitcoin Opportunity Fund, Google Ventures, Venture 51, and others. But the company has yet to accomplish the most crucial sale of all: convincing mainstream financial institutions to adopt its platform. That is, until now.

Today, the company announced that Germany’s Fidor Bank AG has become the first major bank to adopt Ripple, using the technology both to transfer client funds between countries and to make inter- and intra-bank payments between its own bank branches and other financial institutions – all this without ever using the existing SWIFT money transfer protocol. This is the second such forward-thinking decision by Fidor in the last year, following the bank’s decision to partner with San Francisco-based bitcoin exchange, Kraken, on an EU-focused exchange.

The announcement marks a major validation for Ripple, but is also a promising sign for other decentralized payment and currency protocols looking to establish credibility within traditional financial circles. Hopefully it’s just the first of many such announcements in the months and years to come.

Ripple is unique for allowing more than just government-backed currencies to be transferred. The platform allows “anything of value” to be moved, meaning that nearly all currencies (both fiat and virtual), commodities, and other assets can be transferred. All that’s required is someone around the world willing to accept payment in that form (i.e., a willing counterparty, or chain of counterparties).

Prior to Ripple, Larsen founded peer-to-peer lending platform Prosper. His coconspirator in reinventing the global money transfer system is Jed McCaleb, who previously founded the now infamous bitcoin exchange Mt. Gox, which at the time was a Magic the Gathering marketplace (his involvement with the exchange ended years prior to the recent insolvency). The idea that got the two to drop their existing projects and work on Ripple was that of creating the “Internet of value,” Larsen says. Ripple has been cash-flow positive for an extended period of time and is unlikely to raise additional outside capital, he says.

The next phase for Ripple will involve equal parts focus on attracting additional financial institutions to the platform and growing its developer community, with the goal of building necessary applications like escrow services and custodianship. The company has partnered with a Ripple-focused accelerator, CrossCoin Ventures.

Peeling back the layers of the Ripple onion is a bit like looking into the future of financial services. It’s exciting and yet at the same time frustrating, given the stark contrast to the current state of the industry. Smart money, however, is on the fact that today’s Fidor announcement will be the first domino in a long chain of such adoptions.

Just like data wants to be free, money wants to move like data. Ripple is looking more and more like the rails on which that money will move.

[Disclosure: Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are investors in Pando.]