Ripple's RippleNet service offers global payments solutions utilizing blockchain technology. Ripple recently released a policy paper. The paper analyzes the demand among Korean institutions for digital assets and blockchain. It also offers policy proposals for Korean regulators.
If you're curious about the paper, read it here.
I spoke with Rahul Advani, Ripple's policy director for the Asia-Pacific region, on the specifics of this paper. We also discussed Ripple's approach to cross-border payments and Korea's current regulatory environment.
"We feel it's critical that policy makers and regulators understand the benefits of digital assets and blockchain," Advani tells me via a Zoom conversation.
Advani says that Ripple strives to work with policy makers and regulators to move the industry toward better compliance, which is why it partnered with GBC Korea and Oxford Metrica to launch a policy paper. GBC is a blockchain-based global M&A platform, while Oxford Metrica performs research in risk and financial performance.
"We wanted to examine the appetite of Korean financial institutions for incorporating blockchain technology into their operations, as well as provide some policy recommendations for a blockchain ecosystem to flourish in South Korea."
Advani describes Korea as a country that's quick to embrace new innovations, technologies and opportunities.
While drafting its policy paper, Ripple conducted a survey of CEOs and leaders of the country's largest financial institutions to gauge their appetite for blockchain technology.
"I can say that 10 of the top 20 Korean financial institutions participated in the survey."
Advani says that across the board, there was interest in digital assets. However, there was also a poignant desire for more regulatory clarity.
"South Korea has long been an early adopter of new technology, and has a very vibrant market for digital markets."
He cites a recent Financial Service Commission (FSC) report that estimates the domestic digital asset market grew to around $49.5 dollars in 2021.
While Advani applauds the FSC's attempts to normalize crypto trading by bringing Korean exchanges under its regulatory umbrella, he says current regulations use too broad a brush.
"With such a wide scope of implementation, all entities that offer some sort of solution related to digital assets are impacted by the same regulations, even if they're not exchanges."
The FSC's substantial registration requirements resulted in only four exchanges being "fully licensed" by the state. Upbit, Bithumb, Coinone and Korbit are often collectively referred to as "The Big 4."
Advani comments that 60 entities have had to cease operations under current oversight.
Consequently, firms are hesitant to deal with digital assets. This negatively impacts innovation in the sector.
"Right now, market participants don't have a way of assessing where potential projects and products would lie on the risk spectrum when it comes to regulation, which is why they're hesitant to invest in digital assets and blockchain technology."
Advani adds that current regulations don't provide clarity to any entity that isn't an exchange.
For example, Ripple provides enterprise solutions and B2B solutions "that don't directly involve the consumer." Advani argues that it doesn't make sense to regulate Ripple in the same way as exchanges, whose services directly involve the consumer.
Ripple saw this as an opportunity to provide policy proposals.
"We believe our policy proposal provides a framework for technology-neutral and innovation-friendly regulations that are risk appropriate."
Ripple's policy proposal can be summarized as follows:
Establish a digital asset taxonomy that clearly categorizes payment tokens, utility tokens, and security tokens.
Implement a risk-sensitive digital asset regulatory framework that provides certainty and encourages innovation.
Foster digital asset innovation sandboxes that would allow market participants to test new, innovative products and services in a controlled environment. This would give regulators a chance to preview services before they're scaled.
Promote public-private collaboration through active dialogue between regulators and market participants.
"Ultimately, we applaud Korea for having the discussion on how to regulate digital assets thoughtfully," Advani says, adding, "We believe companies should work with regulators, not circumvent them."
What is RippleNet, and what does it do?
Aside from formulating policy proposals and surveying the market, Ripple's main service deals with cross-border payments.
"Hundreds of finacial institutions and payment service providers use RippleNet, a network we've built over the past few years."
Some firms that utilize RippleNet are Azimo in the Netherlands, Novatti in Australia, SBI Remit in Japan, and Tranglo in Singapore.
"2021 was RippleNet's most successful and lucrative year to date. The number of transactions has more than doubled. payment volume exceeding $10 billion," Advani says.
RippleNet enables quick, efficient and cheap cross-border transactions by utilizing on-demand liquidity (ODL). ODL solves the unique problem that payment providers face: the need to pre-fund. In conventional cross-border payment systems, you need to pre-fund accounts at your destination.
ODL gets rid of the need to pre-fund by utilizing XRP to source liquidity during cross-border transactions. ODL uses XRP to bridge two currencies, which happens in a matter of minutes.
"ODL is relatively new, but it's continuing to grow and scale. ODL complements RippleNet."
"We believe that XRP is ideal for global payments because it's quicker, less complicated, more scalable, and more sustainable than any other digital asset. 120,000 times more efficient than proof-of-work (POW) blockchains."
What traditional banking services provide is a real-time gross settlement (RTGS) system that runs on domestic payment rails. ODL solves the different problem of cross-border transfers.
Advani says that even with CBDCs, you face the same problem, because you need interoperability. You still need a bridge asset. If each central bank creates its own CBDC without interoperability in mind, you end up with the same closed-loop system as before.
"RippleNet offers standard APIs and protocols to solve this problem of interoperability."
Ripple recently piloted a CBDC private ledger, which gives central banks complete sovereignty to customize a CBDC based on their privacy and policy requirements.
Advani also stresses, "Our CBDC private ledger is carbon-neutral."
Ripple partnered with Bhutan's central bank to pilot a CBDC using their private ledger. The objective is to increase the country's financial inclusivity to 85%. Currently, only around 64% of Bhutan's population has a formal savings account, while only 16% have access to credit.
The firm also piloted a USD-linked stablecoin pilot for the island nation of Palau.
If successful, this will become "the world's first sovereign-backed stablecoin."
"We're always looking to work with governments and regulators as well as educate them on the benefits of digital assets and blockchain technology, to guide them through the process."
Before closing the conversation, Advani tells me that Ripple will hold a policy event in Seoul in April. The precise dates and venue has yet to be determined.
"We'll use that event as a platform to further engage with regulators and policymakers as well as industry participants."
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