David Schwartz Interview - New Use Cases are Coming to the XRP Ledger

David Schwartz who is CTO at Ripple. We discuss:

• SEC Ripple XRP Ruling
• Crypto disruption of money and Governments reaction
• Ripple Metaco & HSBC
• Are Banks more open to Crypto and blockchain now?
• XRPL AMM
• CBDC and Stablecoin Pilots on XRPL
• New XRP Ledger use cases
• PolySign

Transcription

Welcome back to the “Thinking Crypto” podcast, your home for cryptocurrency news in the interviews. With me today is David Schwartz, who’s the chief technical officer at Ripple. David, welcome back.

• Thank you, Tony.
• So David, we’ve been talking for years, and there’s been a lot of new updates around the XRPL and Ripple. I got a lot of questions for you, but I would love to get your thoughts on how the year has kicked off for you, and, you know, with the ETF approvals and, you know, the market seems to be happy about that and a lot of excitement around those things.
• Yeah, it’s been a really mixed year. I think to some extent development’s been a little bit slow. There haven’t been as many of the sort of big breakthroughs technically as there have been in past years. But I think on the regulatory front there’s been a lot of progress, the ETF approvals, like you mentioned. So, I guess for me, when it’s quiet, we’re just sort of building, and then when it’s exciting, it kind of sucks some of the oxygen out from like some of the people who are just trying to like build constructively. So, I guess it’s kind of nice that there haven’t been any of the sort of crazy, arguably less useful trends. There’s a lot of consolidation. I don’t know, except for on the regulatory front it feels a little boring right now, to be brutally honest. So obviously on the regulatory front though, you know, that’s been super exciting, so…
• Yeah. Well, let’s talk about the ruling in the SEC versus Ripple lawsuit. You know, Judge Torres ruling XRP in itself, not a security. How are you and the team feeling about that? I’m sure it’s a big win. I know personally for Brad and Chris, there’s also some big up wins there.
• Yeah, I mean that ruling particularly was huge for us. I mean, and I think pretty big for the industry. I think you can see a sort of trend. I mean, truthfully, like there was a lot of Ripple hate when the lawsuit first came out, and before that historically. And so I think at first a lot of people were like, well, good, like the SEC is going after the bad guys. I mean, there really was a lot of that, you know, in the industry. And I don’t think anybody has that view anymore. I think they’ve looked at the case, they’ve looked at what the SEC has, and they’re like, “Wow, that’s what this is about?” Like, they did this investigation and that’s what they brought forth. There’ve been three big wins for Ripple. There was the ruling, like you mentioned, that XRP was not inherently a security, which is big, not just for Ripple, but the entire crypto industry. It’s been cited in a number of other cases. Then the SEC was denied an interlocutory appeal. And I think what was interesting about that, was the SEC having to essentially argue that this is complicated and it’s not straightforward, and reasonable people can disagree, which obviously is a big change from their position, that this is just a very simple run of the mill, this is just a straightforward, you know, kinda had to change the tune on that. And then the SEC voluntarily dismissing the charges against Chris Larson and Brad Garlinghouse. Personally, I think they realized, you know, that was a strategic error. I mean, from our point of view, the SEC lost on everything that was important. And hopefully that trend will continue in the remedies phase. You know, there’s still proceedings going on over the next couple of months, and we hope that, you know, I guess momentum is sort of mythical, but I certainly hope that things continue to go in our direction. And I think that our lawsuit wins, and some of the others, are showing that the SEC’s policy of regulation by enforcement just isn’t working. You know, as far as what that means for the space generally and more broadly, I think the SEC has had a lot of losses in court, and they sort of lost that presumption that they’re regulating it. You know, it’s like when a policeman testifies in court. There’s like this assumption that they’re just doing this to be good citizens and that they represent the interest of everybody. And of course, no private litigant gets that benefit in court. And I think the SEC has burned up a lot of that sort of presumption of good faith that they have. You know, I’m not super happy with the current composition of the Supreme Court, a lot of people aren’t, but one good thing about the current Supreme Court, is they are very skeptical of the sort of administrative state proceeding without clear congressional authority. So, I’m more optimistic about the regulatory front in the United States than I have been recently. I guess the one thing that I do worry about, is that if it does push Congress to act, there’s then that variable of does Congress pass a really good law, or a really bad law, or something in between? Mike, the only possible dark cloud, is it’s possible that Congress could make things worse. And that’s why I think like engagement on the part of the industry with regulators is just so important, just to make sure that they understand that, you know, there are bad, there are scams, there are bad things, but like, we don’t want the government to do absolutely nothing. But also, like, we don’t wanna choke out innovation and force it overseas, so. But I still tell people, if they’re like, “Should I start my crypto business in the United States?” I’m just like, “If there’s any way you could not.” You know, I feel bad saying that, but the reality is, if you can avoid regulatory contact with the United States, you probably should.
• Yeah, I’ve spoken to quite a few innovators and entrepreneurs, and same sentiment. You know, they are worried that if they come and start something here in the US, are they gonna get thrown under the bus, you know? And the SEC in itself has shown it doesn’t act in good faith. You know, they’re supposed to be the good guys, if you wanna put it that way, and respect the law, but we’ve seen things come out, and their actions just don’t align with the law. And, you know, going back to what you were saying, the industry aligning with Ripple, I was really happy to see that a lot of amicus briefs, a lot of folks started rallying behind Ripple and the XRP community. And a lot of great case law came out of the rulings that the rest of the industry can use now, so. We’re heading in the right direction, but to your point, hopefully Congress can act and do the right thing, get some balanced regulations in place. Not to get too philosophical, but I would love to get your perspective on this. Is it that the internet, this new layer that exists, what you may call maybe the metaverse, and then on top of that sits blockchain, and because of blockchain, we can move money and information, and all these things, faster without a middleman. We’re at the start of a new industrial revolution, and maybe just like the horse and buggy people and the candle makers, right, the electricity and the automobile, and the start of that industrial revolution was so disruptive, that that’s what’s happening here. These companies, these people are struggling to keep up, because it’s moving at such a rapid place.
• Yeah, and the funny thing is, it doesn’t feel all that rapid while you’re in it. What tends to happen, is like from year to year, things look pretty much the same. But if you look back 10 or 15 years, you know, you see these radical disruptive changes, AI is probably gonna bring on some of those radical, disruptive changes, blockchain. I do think there are definitely some people who would sort of like to push pause. I mean, so obviously people have jobs that are gonna be disrupted, but also anybody who’s sort of on top of industry. You know, Sony owned the music industry at one point until Apple ate it, you know. And tech has eaten a lot of retail business, tech has eaten a lot of other sectors. And I think there’s a concern that this is tech trying to eat finance, and potentially, you know, with AI, possibly eating all kinds of other, you know, taking over all kinds of other areas. I think there definitely are forces that would like to push pause. You know, one of the things I discovered at Ripple when working with banks, is that like the big banks, who everybody thinks like the system is all set up to favor the big banks, and they’ve got the whole system rigged and everything. That’s true, but there’s like five big banks. And then there’s 2,000, like your local community bank feels the same way about big banks as you do, you know what I mean? Like, ’cause they are like constrained to use, you know, a financial system that’s rigged in favor of the very, very largest. But if you’re not one of those small handful, you know, they’re not super happy with the way the system is either. They would obviously prefer to be higher up in the sort of financial pecking order. And so that’s something that you can kind of exploit. It’s surprising who your allies will be. There are some groups who are very happy with technology exactly the way it is, and they’ll pay lip service to do technology and they’ll try to… You know, the United States, for example, has a very good position with the dollar, where we enjoy a pretty significant boost to our economy from the fact that other countries are using the dollar. We can produce dollars very, very cheaply, you know, and if they value them at a dollar, that’s a huge point, you know, post World War II, that’s been a massive boost to the US economy. We would love for that to stay as long as it could possibly be. And so that’s a force against anything that threatens dollarization. But also to some extent, there’s a recognition that that’s not gonna last forever. And then it’s like, well, we would prefer the next thing not to be some other country’s currency sort of taking the role. So there’s sort of room in there to say like, yeah, you would, even for the very biggest, who would prefer that the world not change, you would, if the world is gonna change, and it’s going to, you’d prefer it not to change in ways that sort of benefit your biggest competitors. So there’s leverage there.
• Tough question for you, because we’re talking on the US dollar and being the world reserve currency, and we benefited significantly from that. Do you feel as some would say, look, every great empire has its great run and then it ends, right? And part of that is related to the currency and how that affects the economy, and wars and all those things. But does the United States have the opportunity here to continue its dominance by moving to either a stablecoin, a US-backed stablecoin that is moved, pushed, penetrated to other markets, or a CBDC? I don’t know. What are your thoughts on that, that it can continue this run, and look, there’s competition, China building their digital yuan, I think there’s a digital ruble. What are your thoughts on that? Hi everyone, pardon the interruption. I’m Tony Edward, the founder and host of the “Thinking Crypto” podcast. I have a huge favorite to ask you. If you haven’t subscribed as yet on YouTube or the podcast platforms, hit that subscribe button, hit the thumbs up button, hit the notification bell on the YouTube platform and on Spotify or Apple, or wherever you get your podcast, please leave a five-star rating and review. It supports the podcast. It allows me to bring great quality content to you. Thank you for your support and I’ll let you get back to the content.
• I think that’s a good argument to make to regulators, that like, if you want to stay on top, you’re gonna have to be agile. You know, the analogy that I used of Apple leading the music business, Sony could have made the iPod, they just didn’t, right? They didn’t have the vision, they didn’t have the foresight. Whatever it took, whatever Apple had, you know, Sony didn’t have. And you could imagine someone making a pitch to Sony, basically saying, “Hey, if you want to stay in the top of the music industry, you’re going to have to evolve, you’re going to have to support these digital downloads.” And of course, they didn’t do that. But you know, you mentioned that, like, great empires have their run and then they fall, but of course they don’t fall until they fall. And there’s could be any number of points where you could think, well, that could have been the end of the empire, and it wasn’t. The Empire continues, or has a resurgence. And there’s definitely opportunity. And that’s the pitch, that’s kind of like that, you know, you have a seat at the table. If you get up, there’s no guarantee that seat will be there. It’s kind of that same pitch. You just have to make those, you have to make that pitch to the right people. So if you have somebody who’s like an enforcement person and they’re just trying to stop bad guys from doing bad things, that kind of argument is just not gonna… That’s same thing with like today at FinCEN, where like there was one group who was trying to criminally punish Ripple for what they thought was a violation of law. And another group was like, “Hey, can you help us, like, continue to fight money laundering in this tech world?” And it’s like, you know, that’s an dichotomy in mindset. And you gotta find the people whose mindset is, “How can we continue to grow and how can we continue to fight the legitimate crime?” You know, there are bad people doing bad things out there. You need to fight them. How can we continue to do that? And that’s a balance. You have to find the people who that will resonate with. And I’m not sure who the people that are… I mean, who in the US government would that argument resonate with? Who are the right people to take that to? You know, it’s a difficult argument to me. Also, there’s sort of like your personal credibility in doing it, is a challenge, no matter who you are. And that’s one of the reasons industry groups are helpful. So like that’s an argument that’s more credibly made by an industry group, than really any individual company.
• Now, you and I have been talking for years and we’ve talked about, look, it’s difficult to get these big banks, which are deep rooted in the SWIFT system, and the way things have been going for years and decades, right? However, with the growing adoption of blockchain in crypto, and ETFs getting approved and CBDCs are coming, and stablecoins are being issued, have you seen a change in interests or demand? Are they now more open to listening to the folks at Ripple and seeing how we can do pilots, and working together and things like that?
• Yeah, way more, way more. So in the early days, we almost had to pretend we weren’t a crypto company. I mean, you know, like we basically said, “Hey, we have this payment system that’s like something better than, it’s an alternative to Swift.” Like, I wouldn’t necessarily have said that it was better in the very early days, but like, it’s built on modern technologies and has the potential to, you know, to provide a speedy experience for your customers, lower cost, all of these other advantages. If nothing else, it’s an alternative, and so Swift does, ’cause nobody wants to rely their business on there being only one game in town. And they’re like, “Well, don’t you have this crypto thing?” We’re like, “Ah, don’t worry about that.” Like, pay no attention to me behind it, because I mean, it was toxic at that time. And then I think one of the key pivotal moments that changed that, believe it or not, was Coinbase’s ICO. Believe it or not, that was a… I think people underestimate the importance of that inside the industry. But one of the things that quickly changed for a lot of banks, was first of all, they looked at Coinbase’s market cap, and they’re like, “Wait a minute.” Like there were some small banks that were like, “Hey, well, we’ve been a household name for 30 years and these guys are worth more than we are overnight. We need to have some kind of, we need at…” And they were hearing from their boards of directors, like, how did this like creep up on us? Why are we not, is there a opportunity? And they couldn’t say, no, there’s nothing here. Like, pay no attention. Like, ignore this, this is just a… Like, that made it much more real for them. And they needed some sort of a, they needed at least to be able to tell their, at a minimum, even if they thought nothing of it, they at minimum needed to be able to go to their board of directors and say, “Don’t worry, we have a crypto strategy.” Like, they at least needed that. And then they would come back to us and they would say, “So what is our crypto strategy?” Like, what should it be? And so they came to us, and they were much more receptive to at least thinking, at least like thinking about how that would play out. And now, I mean, they’re much more receptive to exploring it, than they were. One of the nice things about the way RippleNet works, you know, the payment side of Ripple, that’s, you know, not the XRP Ledger side, but for that payment, that RippleNet payment system, although it will use cryptocurrency to settle, the customers who are making the payments are not exposed to the crypto in any way. Like, they just make a fiat to fiat payment. And so it’s nice for regulators and it’s nice for the banks that, you know, sometimes we’ll have regulators that’ll say, “Hey, you can’t, you know, Joe’s paying Mary, you can’t like use the cryptocurrency.” Like, well, Joe never owns the cryptocurrency, Mary never receives the cryptocurrency. Then the volatility is, only the institutions are exposed to the volatility. And effectively from the point of view of the regulators, the crypto was sort of like an internal treasury management function of the payment company. And so that made regulators much more comfortable, which of course makes banks much more comfortable. But of course there’s the separate problem of like, okay, that’s great that they’re using cryptocurrency for their payments and internally, and it’s making things faster and cheaper, but that isn’t really pushing too many of the benefits that cryptocurrencies can provide to the customers. And so figuring out how to do that, is going to take them continuing to get more comfortable. I think the Bitcoin ETFs will probably help with them getting more comfortable. And then there are some countries where the regulatory environment is much better, and so there’s that level of comfort, and you will start to see financial institutions sort of pushing cryptocurrency services to customers, particularly small to medium sized ones that are looking for some edge. Like the larger ones don’t, you know, don’t feel like they have to do that. And I think you’ll see the same thing with the Bitcoin ETFs. I think we already saw one of the largest brokers saying like, “We’re not gonna touch these things.”
• [Tony] Yeah, it’s funny how that works.
• They don’t have to. But imagine if all the big guys said that, well then all the small guys are gonna be like, “Come to us.” You know, it’s a competitive world. They’re not gonna be able to keep their customers from getting the financial products and services they want if they competitors are offering them. So it’s gonna be interesting to see how that plays out.
• Now I know the community’s gonna want me to ask, and you probably can’t give names or whatever, but if you can give numbers maybe, as far as how many banks you’re working with. I don’t know if you know this number at the top of your head, ’cause you guys are constantly growing and so forth, but you know, maybe how many banks are you’re working with and are there new banks that have been brought on board recently?
• You know, I don’t have that information offhand. I know that we do continue to, you know, we’re constantly continuing to grow the network. And there have been a number of them that we’ve disclosed, and I can also say that, like, new growth from RippleNet it’s all gonna be people who are using cryptocurrencies to settle, or stablecoins, or some of these sort of blockchain technologies that we’re not particularly looking to grow the sort of pure… So in the early days of RippleNet, you could use RippleNet to settle and you could provide, you know, you could provide a forex rate. Let’s say, if you just wanna use it for messaging, let’s say you said, “Look, we don’t wanna use SWIFT for messaging, we wanna use RippleNet for messaging, but we still want our internal forex desk to provide all the rates.” Or it’s not even a foreign exchange application, it’s all, you know, US dollars, or it’s all Mexican pesos or something. We brought on those kinds of customers for a variety of reasons. One being when it’s hard to find customers, you don’t necessarily wanna be too picky, but also it’s like the value of a network is the number of things that you can reach on it. Like even if there’s a website that doesn’t add much value to the internet as a whole, it isn’t like of strategic value to the internet, the fact that there’s a long tail of stuff that you can do on the internet, is part of what makes it attractive. Like whatever you wanna do, you could probably do it on the internet. For not, you’re like, well why not? And so it’s this idea that like anything that the network could do, would increase network effects and increase the value of being on the network. It would increase the number, even if they weren’t strategically valuable to Ripple. You know, it didn’t matter. It still make sense to grow. Just like Google wants as many websites to be on the internet as possible, even if they don’t produce any app, even if they don’t fit any of Google’s strategic direction, because somebody will use them, and that person is another target customer that, you know, Google can offer their services to. The same kind of logic applied, but new growth is all going to… We’re very focused right now on blockchain settlement.
• Now there was news of Ripple’s acquisition of Metaco last year, and then partnering with HSBC. What can you tell us there? And is HSBC gonna be using RippleNet or the XRP Ledger in any way?
• That has been, I mean that was so exciting. You know, we knew we needed some sort of a custody solution. You know, Ripple trying to be like the sort of one-stop shop for institutional adoption of crypto and trying to provide a platform that would provide access to the XRP Ledger, to tokenization, to payments, particularly. Like there had to be a secure custody solution in there somewhere. And so we were looking for, we looked at many different companies, and then in May we acquired Metaco. It was a huge acquisition, a quarter of a billion dollars, Ripple’s largest acquisition ever. And you know, obviously it was kind of funny, because when you first do an acquisition, you’re not exactly sitting on the same side of the table as the company that you’re acquiring. And everybody’s afraid to say something, that will blow up the deal. Like if somebody has a crazy, like, “I have this crazy idea of something to do,” they’re like, “That’s a terrible idea, let’s not acquire.” You know, everybody’s on pins and needles that they’re not gonna blow up the deal. And I remember our first meetings after the deal was closed, when we were all sitting on the same side of the table. And I really have to say we found a bunch of kindred spirits. I mean, they’ve just been an amazing group of people to work with. The technology they’ve built is incredible. You know, custody is a massive market. You know, something like $10 trillion by 2030. And you know, the increases in tokenization, you know, mean that that’s just gonna grow. And institutions are gonna be like the main drivers. So you need, you know, someplace to store it. If there’s CBDCs, if there’s stablecoins, you know, if those things become big as we think they will, people are gonna need places to store them. They’re gonna need connections to on-ramps and off-ramps, payments, liquidity services. It’s kind of all gonna tie in. It’s kind of like the same thing that banks learn. You know, in the early days of Ripple, another thing I learned talking to banks, is that a lot of banks don’t care about payments. Seriously. Like, you might think, well what do banks do? What they say is, we want you to like deposit your money with us and sort of leave it here. And payments are expensive and they’re slow, and customers complain when we can’t do them, so we just won’t be very good at payments. We’ll be a great bank, but not very good at payments. And what they learned very quickly is that like, you’re not, nobody, why would I keep my money at a bank that isn’t good at payments? And what they discovered is that if I don’t keep my money at a bank, I’m not gonna go to the bank for a loan. You know, it used to be if you needed a loan, you would go to your local bank that you had a personal relationship with. Virtually nobody does that anymore. Right, like the world has changed. And I think the same thing happens with custody. Like if you want to get all these associated businesses, like you’re gonna go to the place that has your cryptocurrency, like you’re gonna look for their liquidity services, their payment services, their connectivity to on-ramps and off-ramps. That’s gonna be the first place that you’re gonna look. And so by adding custody, that’s gonna make Ripple the leading enterprise solution provider in this space. So, you know, I’m just so super excited about that. HSBC, they plan to offer a custody service for digital assets to their clients. So it’s kind of like a layering service, where HSBC is using some technology for custody, and that sort of makes them able to provide a custody, a sort of relay custody service to their clients. What’s great about that, is HSBC can do the sort of compliance part for them. So if I keep my money at a bank, I’m almost completely reliant on the bank’s compliance to make sure that like I don’t fund terrorists or I don’t receive money from, like, I don’t have to have my own compliance department if I have a bank account, because my bank account is at an institution that has all those things. Now with cryptocurrencies, many people will self-custody, and they’re like, I’m just not worried about all that stuff. They don’t have to have a compliance department, because they don’t have a regulatory burden. But if you’re an institution that has a regulatory burden, it doesn’t make sense for every institution that wants to hold cryptocurrency to have its own cryptocurrency compliance, like, department. Obviously they’re still gonna have something, because they have to monitor, but to actually build out all of those services doesn’t make sense. So layering is just like a very logical way to do that. And they’re looking at things like digital asset insurance. They’re looking at tokenized commodities like gold. So I think those are, tokenized securities. HSBC is extremely interested in those types of projects. Their Orion project, which was tokenized gold. So it’s extremely exciting. It’s strategically important to Ripple, and I think we’re still in the process of processing exactly how the strategic, like Ripple had strategies that they were working on that required custody. But Metaco has so much more, they have those things of layered services with compliance. They have this possibility for a tokenization platform, and this integrating it with payments and liquidity. And I think we’re still thinking through exactly, you know, we know what Ripple brings to the table, we know what Metaco brings to the table. Obviously the two of them together is great. But then what’s the extra, what’s the synergy that you get? I think we’re still in the process of figuring out how we can adjust Ripple’s strategy and Metaco’s strategy, to take advantage of what the other can provide, and it’s gonna be interesting to see if there’s… I wish I could talk about some of those ideas, ’cause they’re great, but I mean very little is finalized yet. So that’s something. And again, we couldn’t really do that until us and Metaco were on the same side of the table. You know, and we’re totally willing to give the crazy ideas and the bad ideas, as well as the good ones, without having to worry about blowing up, you know, a quarter of a billion dollar deal.
• Now let’s talk about CBDCs and stablecoins. Certainly there’s been news about piloting happening on the XRP Ledger with CBDCs being issued, Palau with their, I think it’s a stablecoin if I’m not mistaken. How have those pilots been going? Do you anticipate any of those going into production in 2024?
• So Palau actually issued a stablecoin on the XRP Ledger, which is not usually what we think. I mean one could even argue that that’s not really a CBDC. I mean, well I guess, I mean it’s a central bank digital currency, literally, buy it is, you know, a stablecoin on a decentralized, like you wouldn’t have expected that to be an early CBDC model, right? You would’ve expected something much more contained. So you know, that’s super exciting. Yeah, so on the stablecoin front, that’s mostly happening through the Ripple X side, the XRP Ledger side of Ripple. We’ve recently announced partnerships with STASIS, which is the leading euro stablecoin, one of the top 10 stablecoins globally in Novade, which brings, you know, large ERC-20 stablecoins like USDC and USDT, as well as an Australian dollar stablecoin to the XRP Ledger DEX. One of the things that’s been missing on the XRP Ledger DEX, is like a large number of high quality assets. Like there’s XRP and then there’s a couple of like medium, you know, and then there’s a long tail of interesting stablecoins, but not, like, not access to the, like a high quality US dollar stablecoin obviously is extremely important. So, and the euro stablecoin. So that’s gonna help bring some of those things to the XRP Ledger side. On the CBDC side, it’s interesting to see how that’s progressing. There’s definitely way more interest now than there used to be. Right now, if you look at the countries that have said at least that they’re exploring a CBDC, it’s 98% of global GDP. So like all of the major countries have at least said they’re exploring a CBDC. Now they could be just playing lip service to a new technology, but then again, like if you look at central banks, that’s not usually what they do. Central banks are usually like more conservative than the Catholic Church. They’re very, very slow. I mean, I think it is pretty unprecedented to see that rate of even just an expression of interest, because when you’re a central bank, like, your country’s gross domestic product and its economy, is based on you not being insane. And so when you embrace a brand new risky, unproven, uncertain technology that has a lot of skeptics, like that’s actually pretty, even just paying lip service to it is, is pretty big. And of course there’s a lot more than that. There’s six countries that we have CBDC or stablecoin pilot programs with, Palau, Bhutan, the Hong Kong Monetary Authority, Columbia, Montenegro, and Georgia. That’s pretty, I mean I’m honestly surprised that we were able to, you know, we got some really talented people, and we said go out to all the central banks in the world and tell them that like, we’d like to help them launch CBDCs and explore with them. And we thought like it would be amazing if they got one. Like that would be great, because like, again, ’cause these organizations are so conservative, even pilots, like, ’cause if you think about it, like if you do a pilot with a company that turns out to be like a scam and blow up in their face, like that’s really, like sure, the probability of those things is low, but like the consequences are very high. The reputational risk is enormous. And so the fact that they were able to convince so many people that, you know, so many central banks, to be willing to launch these pilots, you know, was quite remarkable. And, I think it’s a testament to sort of our position in the ecosystem and the technology that we’ve built. As far as going into production, though, it’s gonna be interesting to see how well these things translate into production. These are very slow. I’m hoping that some of the smaller countries, you know, it’s obviously much more impressive to say, “Hey, we signed a deal with Columbia or we signed a deal with the Hong Kong Monetary Authority,” than to say we signed a deal with Palau or Bhutan. But same thing with banks. Like you sign a deal with HSBC, it’s big news, but they are very, you know, maybe not, maybe in some parts of their, you know, especially like a central bank with a stablecoin, they’re gonna be very slow moving. So the smaller countries, one benefit is they have less existing infrastructure. So for example, if you wanted to launch a CBDC in the United States, are you competing with Visa? You know, like there’s all these, like, should the federal government be competing? Like, but if you go to a country that doesn’t have as much infrastructure, you know, countries that are looking to leapfrog techno, you know, countries that skipped landlines and went right to mobile, countries that sort of, you know, are looking for these leapfrog, they’re trying not to industrialize on oil and move right to renewable energy directly. If they’re trying to do these leapfrog, move to EVs immediately, like they may be much more agile in terms of their movement. I think it would be, honestly, I think one of these going into production in 2024 wouldn’t surprise me. But I think it also could be, I think you also could see larger scale pilots, bigger tests, and more refinement of the understanding of the use case. I think one of the problems is the understanding of the use case is not super refined. Like we have specific visions for what we think CBDCs could be used for and where they fit. And these countries have somewhat different visions, because they’re aimed at specific problems that they have. And it’s not always the right approach to take the specific problem you have today, and some technology that’s really like about changing your entire economy, and sort of making them fit together. So there’s a little bit of a mismatch that’s gonna take some time as we sort of try to move these pilots and these tests towards something that could, you know, scale into production. But I don’t think, it wouldn’t surprise me if one of them moved into, it’s probably not gonna be one of the larger, if it’s one of the larger countries, it’s probably gonna be a smaller, it’s gonna be production, but it’s not gonna be like, you know, open to everybody who could use it. It’s going to be like a small production. But you could see one of these smaller countries. It’s not inconceivable that one of these smaller countries could go into rollout, especially because they’re not super excited, particularly like in the Middle East region, they’re not super excited with the control and surveillance that the United States and the EU has over their internal payments. ’cause there’s really, I mean these are sovereign nations. There’s really no reason that there should be US and EU sort of surveillance and invasion into them. And they’re kind of concerned about having more control over their own fate. And so that might be a driving factor for smaller countries in those kinds of regions. We’ll see. But, these are very slow moving institutions. Honestly, I am stunned that we have six countries that are even doing pilots right now. I mean, it’s like when you send a dog to chase a car and the dog comes back with six cars, like, you know. I mean, it is remarkable. I know, whatever you have, everybody wants more. We’ll see though.
• That makes sense. And absolutely I think, you know, we who are in crypto, we often want things to move fast, but these banks and these legacy institutions, they don’t move that fast. And I’ve seen it in the corporate world a bit, but I can’t imagine, you know, just these government agencies and banks and so forth, they’re not gonna move as fast, so it’s-
• Let’s target the smaller ones though. Weirdly, I mean there are smaller countries. Like with banks, it’s obvious, like, don’t go after HSBC, Deutsche Bank, Credit Suisse, you know, go after your neighborhood banks, or, you know, meet challenger banks that are one level down, which is, if you look at like Ripple’s partnership list with banks, there’s a lot of those banks that are, like Santander’s a good example, that are like one level down. They’re not the very top banks, but they’re not irrelevant. Not that any bank is irrelevant, but they’re not like names that nobody’s heard of, right, they’re household. And you can do the same thing with countries. Like, you know, you go for the biggest countries, because obviously you gonna have the most impact, but the smaller countries can move faster. You know, there’s countries where, if the king wants something done, there’s no regulatory obstacle to do. That’s it. Like if it’s on the king’s priority list for the year, it’s gonna happen. No wait, you’re right, like it’s like a blank check to get whatever. You know, and if you get a country like that on board, then those obstacles can melt away.
• Yeah, absolutely. Let’s talk about the AMM. There’s a lot of questions from folks about this. I would love if you can break down what is the AMM? What are the features and benefits of it?
• Sure. So the AMM is a feature, it exists on many smart contract chains and Ethereum-based chains, that literally, it makes markets automatically. So what it does, is it algorithmically tries to both buy and sell the same asset at the same time. And so what that allows, is that allows anybody who wants to buy or sell the asset to go to the AMM and say, hey, I wanna buy the asset, because the AMM is willing to sell it, and vice versa. And so it’s essentially a system that provides liquidity. And the XRP Ledger historically has not had that capability. We do provide liquidity, but we do it through order books. And it’s kind of funny, when I first started looking at the AMM feature, I was super excited about AMMs, like, why the hell are we using order books? Like we’re using this ancient technology, when there’s this newer technology. But what I realized is, I looked at it closer and I think it’s generally acknowledged now that both of these technologies have their strengths and weaknesses. And there are sort of advantages and disadvantages. AMMs, for example, are not super capital efficient. They need a lot of capital sitting around in order to provide, you know, moderate amounts of liquidity. Whereas order books are, but the advantage of an AMM is it doesn’t require a human being to place an offer. It’s always available. Whereas order books require somebody to actually like actively provide liquidity. There’s advantages and disadvantages to both. The reason that most blockchains went to AMMs first, is because implementing an order book on a blockchain like Ethereum is just impractical. Like there’s dozens of orders placed for every order that executes. And if it might cost you $1.40 to cancel an offer that no one’s gonna execute, that never executes, it just doesn’t make any sense. So the plan for the XRP Ledger with the AMM feature is to support both order books and the AMM in a way that sort of synergistically allows them to each benefit the other. And we’re excited to see that working in practice. You know, we’ve run it in simulation, and it not only continuously provides liquidity, but it sort of facilitates payments, which is, most other blockchains don’t do that. So what will happen on the XRP Ledger, once AMMs are enabled, if you’re gonna make a payment, let’s say you hold a USD stablecoin and you wanna pay me XRP, you’ll be able to use AMMs and order books as sources of liquidity inside that payment. Which we’re super excited about. So the features has been implemented, it’s deployed. We’re now waiting for the sort of governance process of the XRP Ledger network to sort of agree to enable it. It’s been surprisingly controversial, but it’s steadily gaining votes. I think 10 more to go, so let’s see how it goes.
• Sure. But maybe right around the corner, the coming weeks or so.
• I hope so. You know, one of the things that’s sort of delayed it, is that there’s a concern about sort of any increase in the amount of work that the XRP Ledger has to do, ’cause it’s a finite resource, and so everything that you use resources on, means less resources available for other things that you might wanna do. And so that’s kind of a judgment call. A big factor in favor of AMMs, is like, they don’t just use resources when nobody’s using them, they use resources when people are using them. So, you know, if people find benefit in them and are using them, then you should use resources for that. We’ll see how it goes. It’s a slow… I mean, another thing is blockchain should be slow to change. A blockchain that can rapidly be changed is a dangerous thing. It should be a slow and deliberate process. It’s a little frustrating when there’s a feature you really like that’s just sitting around, just waiting for people to be convinced that it’s safe to enable it. But on the other hand, like if it was broken in some fundamental way, it could cause, you know, hundreds of millions of dollars in losses. And so I also understand. You know, the child in me is like, “Come on, I want this toy so I can play with it.” But then, like, the adult is like, you know, it makes sense for this to be a slow and difficult process, because you don’t want a blockchain to be completely different two years from now than it was today, because then nobody can sort of trust it and rely on it. So it’s a delicate balance.
• Yeah, absolutely. That totally makes sense. Tell us about NFTs minting on the XRP Ledger. Any updates there in addition to just generalized tokenization?
• So there have been some projects that have been awesome. There’s xrp.cafe, which is a partner of ours on XRP, several other projects. I think there’s been a little bit of a shakeout in the NFT industry, where a lot of the projects that were just low quality garbage, but just were trying to ride the trend, have kind of shaken out. So the numbers are down. But I think that’s a good thing. I think the people who ride the trend and just would like, you know, procedurally produced garbage that’s not, you know, basically just buying a GIF that was, you know, a JPEG that was produced by a machine, that doesn’t even have, you know, doesn’t have anything attached to it. The numbers are still good though. So in Q4 of last year, there were more than 5 million mints, more than a million NFTs sold to about $10 million in sales volume. So not as big as the numbers that we were, you know, that we were seeing before. But I think it’s kind of good that it’s kind of settled down to where people actually see value, and less of just, gee whiz, there’s this new thing that people are messing with. I think it’s still to be seen whether these projects continue to mature and grow and offer some sort of a quality product that people really want, or if it turns out to be a technology that, you know, was one of those things that just kind of, you know… I’m excited and sort of positive that I think there are real use, I think even just collectibles I think is a real world use case that people really do care about. But there have to be something, you know, some quality connected to something meaningful. It’s gonna be interesting to see. One of the things that surprisingly reduced, was the sort of incumbent adoption of like, Nike offering NFTs or Disney offering NFTs, or, those kinds of things have kind of reduced. And that’s still surprising to me. I mean, the NBA proved that that can work, or at least could work while people were super excited about it, so.
• What do you think, it’s related to the SEC and what they did with “Stoner Cats” and this, you know, uncertainty there?
• That was, yeah, that was really weird. That was really, yeah.
• Sorry, I was gonna say, I could see-
• I hope not, but you’re probably right.
• Yeah, that could have been. And look, every market, right, you have the speculation bubble, the froth that builds up and then that has to be cleared away. And then you have the true builders who are still there, but then you throw into the mix the SEC, we don’t have clarity, and the SEC look like they could go after anybody who issues an NFT, is kind of ridiculous. So maybe, you know, those risk departments are like, “Ah, let’s cool down,” right before-
• And there’s nothing about their argument in “Stoner Cats” that doesn’t apply to a human artist.
• Yeah.
• You know, if I decided to become an artist, my early works, people who are buying them, are hoping that my later works will build a market, they’re looking at them and thinking, “Hey, this guy’s probably gonna go on to do great things in his later works.” Or what’s gonna build the market if I stop painting? Those paintings are never going to go. Like, you’re hoping that I’m gonna become a famous artist. And what’s going to do that is my later works. So I mean, if you buy the model that a security is something where that you buy with an expectation of a profit, where you’re relying on the person who sold it to you to do things that will increase its value, well, that applies to art.
• Yeah.
• And lots of other, I mean-
• So many things.
• It can’t be the law.
• Yeah.
• Just, it can’t be the law.
• Yeah, hopefully, boy, Congress can act this year or early 2025. I know it’s an election year, so it’s gonna be tough, but it seems like we’re on the path to getting things done. There’s some bills in the house, I think a couple in the Senate. There’s more political candidates talking about crypto now, whether they’re presidential candidates or candidates for Congress, or whatever it may be. So it looks like we’re moving in the right direction at least.
• I think that’s true. I hope you’re right.
• Now, David, what are you guys thinking? This is a tough question, and what are you guys thinking, you know, as far as the next two years about, like, use cases? It seems like every cycle there’s like a new thing that pops up. There was NFTs in the last cycle, right? The first cycle was ICOs and different things, tokenization is now a big thing. Larry Fink, CEO of BlackRock is talking about it. What do you and the folks at Ripple looking at from a use case standpoint? I don’t know if you can share, ’cause, you know, I don’t want you to give away your secret sauce and competitors can pick up on it, but, you know, what are you thinking about for the next future?
• Well, so I’ll give you the short version, and you can dig into any of them that you’re particularly interested in. One of them is real-world asset tokenization. Things like tokenized securities, things like tokenized carbon credits, those kinds of things. Another one is the convergence of AI and blockchain. As far as things like making blockchain safer, making it easier to develop smart contracts, making it easier for users to understand how to use, you know, blockchain products, and perhaps blockchain providing some of the functions for AI safety and security. That’s changing very rapidly though, so it’s kinda hard to say there. So another one is decentralized identity, sort of making a way for enterprise DeFi. One of the biggest blockers for sort of enterprise adoption to DeFi right now, is the fact that there’s no sanctions, there’s like no sanction screening capability. So like, you could receive money from a terrorist, you could send money to a terrorist. Technologies like these, like DID, will make it possible to have sort of compliance on public blockchains, which is something that like we’ve never had. It would be opt-in, you know, you don’t have to comply if you don’t want to. Or it could be that you have separate blockchains that are specifically screened for, you know, particular sanctions regimes, but that’s gonna allow a type of institutional adoption that currently it’s just not possible. Another big one is interoperability, movement of assets and information. There is no blockchain that’s going to, and there’s no Layer 1 blockchain that’s gonna be able to provide what everybody wants. It’s just not possible. And so, like, it’s not gonna be scalable. So getting that scalability through interoperability, and then people being able to innovate at the blockchain layer. So like if you wanna build a smart contract on Ethereum, you are stuck with Ethereum’s fee structure and its resource structure. And if your project fits within that, great. But if it doesn’t, there’s virtually nothing you can do. Whereas if you could innovate at the blockchain layer, you could create blockchains that had different fee structures, or different capabilities, storage, you could draw different balances and that would allow you to do things that are currently not possible. Like if you wanna build a decentralized exchange that can support high frequency trading, like centralized exchanges can, you’re not gonna build it. You can’t build it on Ethereum. Like you have to be able to, right, that’s not what Ethereum does. You can’t build it on really any current. So that interoperability. And then the last one is the evolution of stablecoins and CBDCs. I think their impact on global finance, I think in the next two years you’re gonna see new foreign exchange corridors, probably reduced dependence on the US dollar, particularly in areas like the Middle East, where they’re very, very incentivized to not have this sort of US and EU regulatory and surveillance thumb.
• Speaking of AI and blockchain, there’s been a rise of deepfakes due to AI. Hard to tell who’s profile is popping up or messaging you, right? Impersonations. Are you looking to partner with media companies or social platforms to have the XRP Ledger be used to, like you said, digital IDs, and you know, fight deepfakes and things like that?
• Well, we’re definitely promoting the decentralized identity standard on the XRP Ledger, to like get an identity standard on the XRP Ledger, so you can bind identities to accounts that give people control over their own identity, and allow them to decide what they want to reveal on a basis, you know, in a way that they can control. But that is very much a first step. It’s not going to solve any major problems all by itself. But it is an enabling tool, and it’s one of those things that’s going to take, you know, some time and some effort to get to meet these sort of broad objectives. I’m not sure that we’ve talked, I don’t think we’re quite ready to do those sort of things yet, but like nothing would prevent you from binding, you know, a social media presence to an XRP Ledger account, or binding it to a decentralized ID, individuals could do that. It would be nice if platforms supported it, so that they could give some sort of an indication. The thing that you have to be careful with, and this is the challenge, this is the challenge in this space, if your system is so-so and not that difficult to penetrate, then it’s not that useful. But if it’s really good and really difficult to penetrate, then the incentive to penetrate it is enormous, because the amount of credibility that it gives you is much greater. It’s gonna be combating deepfakes is going to be a very, very difficult challenge. And it’s not just a technical challenge, it’s also a sort of social challenge and a sort of sort of procedural, like, there’s an interoperability issue. That’s gonna be a really big thing. I don’t think you’re gonna see Ripple trying to tackle that particular problem on our own, certainly. I do think blockchains have a role to play, because they can bind identity, they can bind cryptographic identities to real world identities, and they can provide a sort of irreversible, unforgeable sort of repository of information, that prevents me from saying, you know, different things to different people. It compels me to say the same thing to different people, and it prevents me from tampering with the historical record, so once I’ve said something, I can’t unsay it. Those things are helpful primitives, but how to piece that together in something that could actually combat deepfakes, it’s gonna be very challenging. And it’s gonna get bad. In less than 10 years, for less than a million dollars, somebody who wanted to wreak havoc could buy the hardware necessary to produce dozens of fake streams, let’s say showing a terrorist attack in Paris right now. And then you would have people in Paris like sending this, and it’s like, “I’m right here, I don’t see anything. I don’t know what they’re talking.” And then you have like these 20 streams that say that the attack is going on, and these, you know, a dozen streams that say it’s not. It’s gonna be very challenging to figure out, you know. Or you have evidence of a person committing a crime, you know, someone says that they were sexually harassed by someone. You have the video of the incident, the person’s like, “That’s not real.” Like that never happened.
• Scary, scary world.
• Yeah, by the way, I have a good tip for people. Get a prosthetic fake finger and clip it on your hand. And then any video of you will look like an AI fake.
• Man, and I’m hoping we don’t have insane amounts of deepfake content with this upcoming presidential cycle, as we know how crazy that can get. Hopefully it’s not outta control.
• It’s gonna get worse before it gets better.
• It’s true. I know we’re up on time, so I got a few more questions here for you. Any updates around PolySign that you can share?
• I wish I could say more. I mean, I think everybody knows that PolySign is in trouble and is going through a little bit of a crisis right now. You know, I’m on the board at PolySign. I’ve been working, you know, Jack McDonald and several other people at PolySign have been working as hard as they can to try to stabilize the company and get, you know, the best outcome possible for all of the stakeholders, you know, including investors. Ripple’s helped a lot, but yeah, unfortunately I can’t give more details.
• No worries. What are you most excited for in this upcoming cycle? It seems like we’re headed into a next bull market cycle. I know you’re on the building side, so I’m not asking about price predictions, but, you know, what are you most excited about? What are you looking forward to this year?
• Well, regulatory clarity or resolution to the lawsuit, obviously would, you know. There is some reasonable chance that Ripple’s lawsuit with the SEC will be resolved in 2024. Still could be appeals, I suppose. I mean, whether that would be resolved, I don’t know. Big on sort of scaling at the blockchain layer. I think right now people can’t really innovate right at the blockchain layer. And technologies like sidechains, and some of the zero-knowledge proof stuff, will enable people to innovate more sort of right at that lowest layer and enable more scalability. Just getting more people into the ecosystem, I think is the biggest thing. Like we have to create user experiences that are compelling to people, and I’m hoping that we can do that. On the XRP Ledger side, I’m hoping the AMM amendment will eventually activate, decentralized identity doesn’t seem all that controversial. And seeing things like carbon markets and tokenized securities, I think one of the problems particularly, so like in the United States and in most of Europe, like we’re over-served with financial products. Like we have access to everything. Like I can invest in anything I want right on my my phone with an app. But there’s a lot of people who don’t have those opportunities, and they basically, their choice is to stuff cash in a mattress, or not. You know, and giving them access to tokenized securities, and giving them access to things like collateralized lending, obviously they would be on the… So, that’s the other interesting thing. So like, when you think about collateralized lending or centralized lending, we often tend to think about, like, rich people having a tax-efficient way to like access their crypto profits. You know, that’s not the way I wanna change the world, but if you think about it from the other side of the sort of low-risk loan for a person who can get a return, who might not have access to other financial products or services, like that’s really big, because the way you build wealth, is by saving up a little bit over a period of time. But, it has to compound, otherwise inflation is just going to destroy it. So giving people who haven’t had an opportunity to build wealth an opportunity to build compounding wealth and a system where it can’t be regulated away, or, you know, or taxed away by fees and everything that, you know, eat into those riches. You know, small fees today, the fees compound too. So those kinds of things are exciting. And of course institutional adoption. We’ll see what the Bitcoin ETFs lead to.
• For sure. And there was one question, what’s your favorite dessert?
• Gotta be tiramisu. So if anybody ever asks you, “Would David rather have the tiramisu or the whatever,” it’s gonna be the tiramisu. I’m a huge fan of tiramisu.
• David, always a pleasure chatting with you. I appreciate the insights and the information, and I’m excited for, you know, the rollouts of the updates around the XRP Ledger. Thank you for joining me.
• My pleasure. This was fun. Oh, I’ll just say one last thing, I will be at EatDenver this year, speaking at the XRPL zone around February 27th, or so. So sign up.
• Yeah, I gotta make it out to EatDenver in one year, maybe this year.
• I hope to you there.