Under the shadow of the SEC, David Schwartz has been tinkering with Ripple's payment tools

Ripple’s chief technology officer David Schwartz wants to talk about payments, not cryptocurrency per se. Specifically, he’d like to tout all the incremental improvements made to the XRP Ledger in recent months.

XRP Ledger relies on a native digital asset called XRP. But Schwartz would rather focus on the rails. A series of recent changes, he says over a video call, have “gone towards just making it the absolute best system for payments.”

It is tough, however, to avoid the elephant in the room: the outstanding action against the company filed by the Securities and Exchange Commission (SEC) in December of last year which alleges that Ripple has illegally raised over $1.3 billion selling XRP.  

The SEC says XRP is an unregistered security. Ripple is defending itself and has described the singling out by the SEC as “perplexing.”  

The SEC action triggered a collapse in the price of XRP from around $0.50 to around $0.20 at the start of the year, causing a number of venues to halt trading in the asset over fears of a lack of liquidity. But XRP has bounced back since then, sharply rising to an all-time high of $1.80 in mid-April and is today trading at around $1.50.

Unregistered security or not, XRP resides at the center of Ripple’s payment system. And Schwartz admits that volatility in the price of a digital asset “is definitely a negative if you’re using the asset for payments because it increases holding costs and it creates risk that you have to spend money to mitigate.”

That’s why Ripple is focused on “solutions where the volatility doesn’t really matter,” says Schwartz, because the inefficiencies associated with the conventional processes for certain cross-border payments outweigh the risk that XRP’s price will move during the transaction. 

By way of example, he points to inefficient cross-border payment “corridors” such as converting US dollars into Mexican pesos. Ripple’s On-Demand Liquidity service helps companies to execute these types of trades — using XRP to bridge the two currencies — while eliminating the need to pre-fund destination accounts, which it claims cuts costs.

“USD-to-euro is a pretty efficient corridor, costs tend to be pretty low,” Schwartz explains. “USD-to-Mexican peso costs tend to be pretty high. So we’re going after the low-hanging fruit to prove that the technology can be competitive.”

The changes Schwartz has been spearheading are highly technical in nature and, he concedes, not the sexiest.

Stuff like “resource reduction," which is effectively an effort to bring down the cost of running a server as part of the XRP network. Historically, XRP ledger software has consumed a lot of memory, Schwartz says. But his tinkering in recent months has cut memory consumption by roughly 50%.

The company has also been working to improve the security of the software. Schwartz, on animated form, tries to paint a picture:

“This is one of the hardest things to talk about, because the analogy I use is: imagine there’s a nuclear power plant, and they say ‘hey we have great news, we reduced the chance of a meltdown by 30%.’ Like, objectively, that’s fantastic, but when they announce it all you’re going to say is, ‘wait a minute, what is this 70% chance of a meltdown that’s still there?”

Ripple has introduced a string of new security features: negative UNL, forward ledger replay, and improvements to routing so that messages travel more reliably within the network.  

“It’s hard to talk about these because it’s like reducing the chance of a meltdown by 30%,” says Schwartz.  

One cannot help but wonder, though, whether strategic partners — key to growing usage of the payment system — will be able to focus on Ripple’s upgrades to the XRP Ledger with the SEC action over the firm’s XRP sales still out there.

Ripple and MoneyGram, the money transfer service, announced the end of their strategic partnership in March — a collaboration which, according to Schwartz, saw billions of dollars in transactions processed.

“Obviously, their regulator is the SEC, you know, so we made the decision with MoneyGram to end the current partnership agreement,” says Schwartz. “We shared with MoneyGram a belief that digital assets and blockchain technology could radically change the status quo in payments for the benefit of billions of consumers. It’s kind of sad that it ended the way it did.”

On the other hand, Ripple has managed to drum up new business while under the shadow of regulatory trouble.

To summarize: the company has signed up more than 20 corporate customers since the SEC filed its suit; its On-Demand Liquidity service grew 12 times in terms of transaction volumes last year (although this year’s numbers will surely be the more telling); and more than two dozen customers now use the service, including United Kingdom-based fintech firm Azimo and Novatti, the Australian money transfer company.

Ripple has even been so bold as to announce, in March, a pilot Central Bank Digital Currency (CBDC) private ledger — a private version of the open-source, public XRP ledger which caters to central banks as they explore the potential for digital currencies. A spokesperson for Ripple said the firm is involved in early-stage conversations with over a dozen central banks.

It’s a gutsy move in that stablecoins and CBDCs could, in fact, constitute serious competition for Ripple and XRP. Schwartz went so far as to call a single stablecoin achieving global dominance as the “biggest competitive threat” facing the company.

He doesn’t think that scenario is likely to play out, however, because stablecoins and CBDCs will always be pegged to fiat currencies — and so will face the same sovereignty-related issues that restrain fiat currencies vying for global dominance. 

As Schwartz put it, Saudi Arabia’s government doesn’t want its transactions to be subject to the United States or European oversight, for instance. That’s part of the argument for using a volatile cryptocurrency in a payments network. 

It does appear, however, that Ripple is learning to expect the unexpected in the perilous frontier of the future of money.

“I’ll admit, the market moves in various different directions and you could even have the best solution technically, just the momentum could shift against you,” says Schwartz. “That’s kind of why we came up with our own CBDC strategy, and our CBDC strategy where central banks can run their own ledgers does enable XRP to live in that ecosystem and move along with those CBDCs.”