The Big Picture – Talking Crypto Regulation with Ripple’s Sagar Sarbhai

Ripple has become one of the most well-known names in the cryptocurrency space, providing global financial settlement solutions to enable banks to improve the speed and reduce the cost of cross-border payments. Regulation Asia sat down with Sagar Sarbhai, Head of Government and Regulatory Relations for APAC and the Middle East at Ripple, to discuss the company’s business proposition and the regulatory challenges it faces across the region.

Regulation Asia: You previously worked for traditional financial institutions Deutsche Bank and JP Morgan. How did you make the shift to Ripple?

Sagar Sarbhai: My previous jobs with JPMorgan and Deutsche Bank revolved around working with regulators and central banks before the regulations were finalised, and then handling compliance of regulations. I started to work with Deutsche Bank’s capital markets division when they were exploring the use of blockchain technology in 2014. Because of my computer science background I was considered an in-house expert on blockchain regulation.

I then pursued a course at MIT, where Ripple founder Chris Larsen was lecturing, and I was blown away by his vision. Back then, Ripple was still in its nascence. After that, I took a break, left my banking job, and went to do my MBA at INSEAD Singapore. I told myself that I had to get into fintech and preferably, something to do with blockchain or cryptocurrency. By chance, Ripple was opening an office in Singapore at that time. Things fell into place and I was able to join the company, which happened to be my dream job post-MBA. In some ways, I got lucky.

RA: That was quite a move. So what do you do at Ripple now?

SS: I’ve been with Ripple for eight months. I lead central bank and government relations for APAC and the Middle East. My job is to work with central banks and governments on approvals for the blockchain-based software solution we license to banks. I also work with our client banks and help them to get approval to use the software.

More recently, I have been working with central banks and governments across the region to work on policy frameworks for virtual currencies and digital assets. This includes educating them about the company Ripple, XRP, and how digital assets can help solve specific enterprise use case problems – as in the case with XRP, which solves very specific cross-border payments problems. I help to frame the policy narrative, which I believe is quite exciting, given the times we live in.

RA: Besides cross-border payments, are there any other areas you are currently working on with banks?

SS: Not really. When Ripple was founded, the founder of Ripple took a stand to be very laser-focused in our mission. We wanted to keep our focus only on cross-border payments.

That being said, we have two open-source products. One is what we call the Interledger Protocol (ILP), an open-source protocol that we use in our software for a very specific cross-border payments problem.

The other is the XRP Ledger, which itself is an open-source technology but Ripple uses it to address a very specific cross-border liquidity problem. Other people are free to do their own thing on the XRP Ledger. For example, three years ago, the MAS (the Monetary Authority of Singapore) used the XRP Ledger for a project on trade finance.

RA: One of the common arguments against Ripple is that XRP is not decentralised. How do you typically respond to this criticism?

SS: I think that is absolutely not true. The critics of XRP or the XRP Ledger essentially have two arguments for saying that XRP is not decentralised.

The first argument they give is that Ripple controls the validators. But I think there is a knowledge gap about the system of validation XRP uses. Anyone can download and run the XRP validator. In fact, XRP exists independently of Ripple the company. The XRP Ledger is free, open-source and decentralised technology. Others can and do develop on it and use it – as illustrated by our recent Xpring Initiative. If Ripple went away tomorrow, the XRP Ledger would continue to exist.

The second argument that critics offer for why they think XRP is centralised is to do with Ripple’s ownership of the majority of XRP. It is true that we own 55 billion XRP, and some people think Ripple will end up dumping XRP on the market and that holding it is a risk. But it does not make sense for Ripple to ever flood the market with XRP, as Ripple is the biggest steward and most interested party in XRP.

To dispel these types of fears, we have locked the 55 billion XRP into a series of escrows. Ripple the company gets a very specific amount of XRP every month which we then sell to big institutional players and market makers. The unsold XRP is automatically returned to the escrows.

And when we talk about Bitcoin being decentralised, we have to keep in mind that almost 97 percent of Bitcoin is owned by 4 percent of the wallet addresses out there, with the top five mining operations controlling the majority of Bitcoin mining. How do you then say that Bitcoin is decentralised and XRP is not? But I agree that there is a knowledge gap out there and this is something we are trying to make sure people are more aware of.

RA: How would you respond to recent suggestions that XRP is an unregistered securities offerings and traded illegally?

SS: I don’t believe that is true at all. They are basically saying that all the ICOs [initial coin offerings] out there are securities – and I may agree that a majority of them are securities. But then they extend the argument to say that since XRP is also comparable to ICOs, XRP is also a security. This is a flawed argument.

Firstly, what people need to understand first is that XRP came into existence 4-5 years before the concept of ICOs came about. Secondly, holding XRP does not get you dividends or a stake in Ripple, so I don’t see why that is a security. And thirdly, unlike all the other ICOs, Ripple actually raised funds through traditional venture capital funding from traditional investment groups; we did not use XRP to raise funds. The US SEC [Securities and Exchange Commission] is looking into this and we will wait for further guidance from them.

On the other hand, XRP has a specific use case for cross-border payments for enterprises. There is no intention to replace fiat currencies, but to effectively connect fiat currencies. This is why we refer to XRP as a digital asset and not a cryptocurrency.

Mind you, if we view XRP as a security, that would mean that as the company’s performance improves, the value of XRP should keep going up. But that hasn’t happened. In Q1 2018 we experienced Ripple’s best quarter in the company’s history. We signed the most number of deals and had the most number of clients on our network during this period. By that logic, the price of XRP should have gone up in line with the behaviour of securities. On the contrary, it went down.

There are many arguments I could use to say XRP is not a security. It is a digital asset which is used by enterprises, banks, and FIs for a very specific use case on cross border payments. But again, we are awaiting guidance from the US SEC on this matter.

RA: So how are banks using your platform?

SS: Basically we have two products. One is essentially a blockchain based technology product known as xCurrent, which we license out to banks. This product does not use XRP at all and directly competes with the likes of SWIFT, as it is essentially a messaging and settlements platform using DLT [distributed ledger technology].

The platform is being used by 100-plus banks today, including Standard Chartered, Santander, India’s Axis Bank and Thailand’s Siam Commercial Bank, as well as a consortium of 61 Japanese banks. What we’ve seen this year is that almost every week a new bank signs up with us to use xCurrent, so we are seeing exponential growth in our network. The xCurrent technology has already been blessed by central banks and it is already live and in production.

RA: Are you experiencing any regulatory hurdles with regards to the xCurrent messaging and settlements platform?

SS: I have personally met 20-plus central banks across the Middle East and APAC – none of them, even the most conservative of them have raised any objections; they have all blessed the solution.

RA: You mentioned a second product?

SS: The second product is called xRapid – it uses XRP as a bridge currency to connect different fiat currencies out there. Instead of replacing fiat currencies, we are providing a mechanism for connecting fiat currencies across the globe.

Let’s say I want to send USD100 from the US to Singapore. The payment provider will convert the USD100 to XRP through a licensed exchange in the US. The exchange will then send USD100 worth of XRP on the XRP ledger to an exchange in Singapore, which will then convert it in real-time to SGD – all this happens in a matter of 3-4 seconds.

There is no mining involved, and XRP can perform 1500 transactions per second, thus shielding banks and payment providers from any volatility risk.

MS: We understand you are facing a bit more regulatory pressure on this front. Could you explain?

SS: That is right, but I would not call it regulatory pressure and instead, I would use the term lack of clarity. The challenge is that banks and FIs will not work in this environment unless there is some clarity on regulations. So basically the route we are taking is that we are only launching pilot tests in regions where there are regulations and approved licensed exchanges.

For example, we did a pilot test last year between Mexico and the US, where both have licensed virtual currency exchanges and it worked really well. We already have six payment providers, including Western Union, MoneyGram, Mercury FX – some of the biggest payment providers out there – for whom liquidity is a big problem, have successfully completed pilot tests, and we are expecting them to go live soon.

I believe that the non-bank payment providers will be the first to use this. When there is more clarity around regulations, and more exchanges across the globe get licensed, more banks and FIs will start adopting this model.

RA: With regards to Asia, in which countries are you finding it the easiest to do business using xRapid / XRP?

I think Japan took the lead in coming up with a regulatory framework years before anyone even started thinking about it. I often give the example of Japan because I believe they are probably by far the most forward thinking in terms of having a framework in place.

The Philippines also came up with a framework last year, but there needs to be some customisation around it to enhance investor protection, anti-money laundering [AML] and so on. But even as we speak, they are working on a revised framework.

Some Southeast Asian countries are also working on their own new frameworks. For example, Thailand recently issued a new law for virtual currencies and digital assets; South Korea is expected to implement a new framework by the end of Q2 or beginning of Q3 this year – so that’s good news for us.

Of course, there are more conservative players around Asia as well. We all know about the recent RBI move to block banking relationships with cryptocurrency exchanges. I’m hopeful it will only be a temporary measure and not a permanent one.

China has also taken a more conservative approach but I think we are now seeing some of the senior PBOC officials coming out with statements suggesting that they may be open to at least studying the merits of digital assets, and assessing if there are any benefits in coming up with a new regulatory framework.

So while it’s still very early days, I would say Japan and the Philippines have taken the lead. Thailand has now followed suit and we expect South Korea and potentially Malaysia and Indonesia to develop some sort of a regulatory framework.

RA: What are your thoughts on taxation as a way to indirectly regulate the crypto markets?

SS: Taxation remains a very complex issue. Even the G20 seems to be grappling with this issue. If I were to say from my own point of view, there are two types of taxes we’re talking about. One is a capital gains tax, which may be slightly easier to implement and may not have that big an impact on the market or the ecosystem.

On the other hand, certain countries are considering to apply a VAT (value-added tax) or GST (general service tax) on every transaction. To me, this would be a problem because if banks and FIs were to use XRP as a bridge currency and the government levies a certain percent for VAT on each transfer, they are virtually killing the whole point of using digital assets to save costs.

To me that will kill the market, the ecosystem and innovation. But I think regulators see that and I would be very surprised if they actually implement this.

RA: What would you say is the best approach for formulating a framework?

SS: I think there are three broad points.

The first point is to not impose a blanket ban, as this is detrimental to innovation. Imagine banning the Internet in the 90s because of concerns over its negative elements. Regulators may ban the negative aspects, but they need to make sure there is a framework in place to encourage innovation.

The second point emphasises the importance of differentiating between the retail use case and the enterprise use case of cryptocurrencies and digital assets. Regulators should regulate the use case and not the technology itself.

The final point is to come up with a framework for regulating the exchanges, similar to how the framework to regulate CCP (central counterparty) clearing houses was implemented after the 2009 G20 Pittsburgh Summit. Similarly, a global body should come up with a global framework for cryptocurrency exchanges so countries can go back and implement more localised or nationalised versions of digital currency exchange frameworks.

They should include things like principles for anti-money laundering and counter terrorist financing (AML/CTF) , customer protection, capital requirements, cybersecurity requirements, and so on. And only those exchanges that fulfil those requirements should get a licence to operate.

I do believe that a global framework for exchanges is important. Hopefully by the end of this year, the G20 will be able to come up with one – that would be historical, and a watershed moment for cryptocurrencies and digital assets.

RA: What would you like central bankers and regulators to know?

SS: The main point I would like to highlight with XRP is that we are not trying to replace fiat currency. I think that’s the most important thing. We are only providing a medium for the seamless transfer of fiat currency.

The larger goal is to create an ‘Internet of Value’, whereby we can move money like we move information today, real-time, in seconds, across borders.

The way of doing it is to solve two problems. First, there is a problem with connectivity, so connecting banks, FIs, central banks, payment providers by using DLT is important. Second, the problem of liquidity can be resolved by using XRP as a bridge currency.

So two different tools can solve two different problems, but they work together on the bigger goal of creating an ‘Internet of Value’. This is what Ripple is trying to accomplish, we are not doing anything else, and I believe that in the years to come, this will all become a reality.

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