Ripple: Benefits for Regulators and Payment Systems

Continuing our dialogue with regulators about efforts to build more efficient, safer payment systems, Ripple Labs recently detailed the benefits and implications of a distributed network to the UK’s new Payment System Regulator (PSR).

In most cases, payments are included under a general framework for financial regulations. Yet the UK has taken a unique approach in designating a new regulator to build a more competitive, innovative and inclusive payment system.

Since the group will be fully operational in April 2015, the PSR called for industry input on its regulatory approach and initial priorities. Ripple Labs commends the PSR’s transparency, thoughtfulness, and inclusion in its call for input, and is grateful for the opportunity to submit a letter.

• See also: BitLicense: How Ripple Labs Approaches Regulations

Our recommendations reflect ongoing discussions with regulators—such as our recent correspondence with New York Department of Financial Services (NYDFS) and the BitLicense proposal—and along those lines, represent our core perspective on regulations. That is, we believe the following four points to be essential to not only the PSR’s success, but regulatory frameworks in general:

• Ensure regulations account for the new technologies that will be necessary for creating a more competitive, innovative, and inclusive payment system. Generally, existing regulations assume the use of a centralized operator. However, new technologies such as open protocols and distributed networks may not rely on a central operator. Regulators should ensure their rules account for technology with  alternative governance models to best leverage their benefits in the payments system.

• Enable startups and smaller companies to contribute to the payment system. We encourage a flexible regulatory framework that is inclusive of startups and smaller companies—typically the drivers of innovation. We commend both the PSR for recognizing this need in their proposals, as well as the NYDFS’ decision to include a two-year transitional operating license giving  startups and small businesses an opportunity to compete with established players.

• Take a holistic view of risk and consider the cumulative impact of regulations. New technologies present new risks, yet many of these risks are known and can be mitigated. Ripple Labs urges regulators to also consider the risk of continued reliance on antiquated infrastructure. These risks grow over time, are often underappreciated, and may have systemic consequences. Further, regulators should take a coordinated approach when implementing new rules, being mindful of their cumulative impact.

• Consider how new infrastructure technology can minimize payment, operational, and systemic risks while improving anti-money laundering (AML) efforts. Novel approaches to infrastructure improvements can also go a long way in optimizing compliance capabilities and mitigating structural risks. In the case of distributed networks, the shared ledger lowers the cost of compliance by providing improved funds traceability and AML oversight.

In this case, we also included an overview of how Ripple benefits regulators, government agencies, and central banks. As an innovative approach to funds transfer, Ripple is an opportunity to improve today’s payment systems and minimize or even eliminate structural inefficiencies.

• Learn more: The Ripple Labs Executive Summary for Financial Institutions

Unlike existing systems, Ripple is an Internet protocol-based technology, which means it is both neutral and also has the capacity to maintain a record of balances without a central counterparty. The result is a competitive market for funds exchange and delivery.

A payment system powered by Ripple has numerous benefits:

1. Reduces fragmentation and concentration; increases competition.
2. Enables fund traceability and transaction visibility.
3. Reduces systemic risk: no single point of failure.
4. Reduces the possibility of conflicts of interest as a neutral infrastructure layer.
5. Improves capital efficiency and liquidity management.
6. Decreases operational and settlement risk.
7. Enables new products and improved consumer experience.
8. Improves information security and reduces cyber threats.

In all, Ripple Labs supports and shares the PSR’s objectives of fostering a competitive, innovative, and inclusive payments systems. Indeed, we believe the Ripple protocol embodies many of the PSR’s goals. We look forward to continuing our proactive engagement with the PSR and other regulators in the future.

For a more in-depth overview of how Ripple Labs approaches regulations, you can view the entirety of our response to PSR CP14/1 here (PDF): Ripple Labs response to PSR

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