Remaking the Financial Rails: Ripple CEO Chris Larsen

Welcome to today’s show.

One night last summer I attended a small dinner in New York hosted by the editors of a global financial publication, on financial innovation. We had some of fintech’s brightest stars seated around the table, but I remember offering the view that the person there who was most likely to actually revolutionize the financial system was Chris Larsen, the CEO of Ripple. Most fintech innovators are building new things on the system’s old footings.  Ripple is trying to reshape the foundation itself.

As you’ll hear in our discussion, Chris and I first met about five years ago when the wider world had barely heard of Bitcoin, and blockchains and digital currency were still causing mostly head-scratching (at best). He had an impressive past that included co-founding eLoan and Prosper before Open Coin, which is now Ripple. The company’s mission is to create  interoperable global finance -- easy movement of money, and other forms of value, throughout the world. An analogy (which we also discussed in my earlier podcast with Circle CEO Jeremy Allaire) is to do for money what the internet did for information, enabling it to move instantly, cheaply, and accurately to everyone, everywhere.

I notice that people whose work is hard to explain use lovely, lively language and imagery. It’s certainly true of Chris. He talks about paper mail and rails and siloes and blocked pipes and, my favorite -- shipping containers, which he says boosted global trade by 700%, with the simple step of standardizing containers so they can fit efficiently on any ship, truck or train, anywhere in the world. He discusses a book on how this changed the world -- The Box by Marc Levinson. That inspired me to include the picture below, of a fully-loaded container ship as it passed along beside my apartment, which overlooks Boston Harbor.

In this episode, Chris says interoperability in finance is the last missing link that’s needed for truly efficient global commerce. He discusses the possible “science fiction” of connecting 50 billion devices through the internet of things. He describes how micropayments can transform functions ranging from ocean monitoring to financial access. He talks about people in huge swaths of Africa who have phones and Google but no connected way to pay for things -- and imagines the global growth that would be sparked by adding two billion people into mainstream payments and commerce. He imagines these solutions even helping to solve the problems caused by globalization.

Chris also talks about the crucial roles of banks, which are key partners for Ripple, and of regulators, including the risk that America’s splintered regulatory system could undermine our leading global role in finance which he says will be “up for grabs” as many countries compete.

And he explains, tellingly, how his views on “disruption” have evolved over time.

We recorded this discussion last summer -- before the presidential election, which he mentions -- and also before Chris’ announcement this month that he plans to step down as Ripple CEO at the end of 2016 in order to rebalance his life. He’ll remain active with Ripple and will work closely with its incoming CEO, Brad Garlinghouse.

More links:

• Chris's blog post on stepping down as CEO is HERE
• Ripple video  
• My blog post: The Benefits of Bitcoin

I loved this conversation with Chris Larsen, and I think you will too. Enjoy!

Barefoot Innovation news….

We’re posting this episode during a flurry of activity. Ten days ago I had the fun of doing a fireside chat at Money 2020 with CFPB Director Richard Cordray -- who used the venue to make some big new on big data and data aggregation.  I raced back from that to speak last week at the FTC’s fintech conference, and I’ll be missing the SEC’s first fintech event next week because I’m off to the Singapore fintech/RegTech festival that’s being co-sponsored by the Monetary Authority of Singapore, MAS. Money 2020 drew 11,000 people this year -- the largest financial conference in the world -- and the Singapore conference expects over 10,000, including for the first-ever RegTech conference in Asia.

Meanwhile, our direct subscribers to Barefoot Innovation more than doubled last month. Every week I’m encountering people who tell me they’re fans of the show. Please do send in your “buck a show” to help us keep it going -- I’m having to bring in more helpers for it. And please remember to review us on Itunes. Also come to the new Facebook fan page. And please come to www.jsbarefoot.com  to get onto our mailing list.

Most of all, come back next time, when my very special guest will be Alfred Hannig, the executive director of AFI -- the Alliance for Financial Inclusion. We recorded this one on an idyllic day in beautiful Fiji!  AFI is driving tremendous change in global financial inclusion and I know you’ll find the episode fascinating.

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Cost Cutting with the Blockchain - Blythe Masters, CEO of Digital Asset Holdings

Barefoot Innovation usually explores technology that touches financial consumers - new products and new ways of managing money. Today's episode pivots 180 degrees and looks internally, inside financial companies, at the equally transformative change underway in how financial products are made and delivered.

My conversation is with Blythe Masters, CEO of Digital Asset Holdings, and our topic is the blockchain -- distributed ledger technology, or DLT.

Most of our listeners know that the blockchain, created by the inventors of Bitcoin, is expanding far beyond digital currency and has revolutionary potential for changing how society operates.  Any complex system that keeps records or involves chains of transactions - payments, contracts, titles, tickets, warranties, exchanges of all kinds, government records, medical information, purchasing systems - anything -- can potentially be managed through distributed ledgers that can eliminate most of the current costs as well as errors, uncertainty, and fraud. DLT can also enable trustable transactions among parties who don't know each other, without need for a trusted intermediary. That's because safeguards are built into the technology itself, by making all the records and transactions transparent to all parties and preventing duplication or fabrication of information.

Blythe Masters says she began as a skeptic because, like many people, she equated the blockchain with Bitcoin and, given Bitcoin's colorful developments, dismissed both. However, after leaving her long career as a senior executive at JPMorgan Chase, she took a closer look and became a convert. Today she's leading one of the most exciting and best-financed firms in the field, Digital Asset Holdings in New York.

We had a chance to sit down together at the 2016 Fintech Forum of Women in Housing and Finance in Washington, where she shared her vision for the power of DLT to transform the internal operations of banks.

Note that DLT systems can be either open-access and "permissionless," moving information on the open internet as with digital currency, or can be closed and "permissioned" within a single organization or a gatekeeping group that shares a common need. (For more on open systems and digital currency, see our episode with Jeremy Allaire of Circle.) Large banks are actively exploring use of closed DLT systems to streamline their internal operations to cut out expense, mistakes, and the slowness caused by the need for reconciliation of records. These efforts will bring enormous cost savings, for three reasons. First, the DLT system is simply cheaper to operate. Second, it eliminates many kinds of errors - and preventing, detecting and correcting errors is a massive source of expense in every financial company. And third, reducing delay will also reduce the need to hold capital against the risks that attend pending transactions.

I would add that DLT will, over time, open up the opportunity to modernize and streamline regulation itself, through use of "reg-tech" relies on automated data in many areas that are now subject to expensive traditional examination.

Blythe thinks DLT is coming to banking much faster than people think - that these solutions will be in commercial deployment in just two years! One reason is that banks can modularize them, dropping DLT into functions that need it and then connecting them up with the other, older systems.

She makes another interesting argument, which is that those notoriously outdated old systems are going to have to be replaced soon anyway. Many are about thirty years old use computer languages no longer taught in college. The industry will have to invest in new technology, and DLT solutions will fortunately be ready at just the right time to permit a real leap forward in efficiency and effectiveness. Blythe also says regulators are thinking right about these challenges and have the right tools to manage them.

Her company is focused on banks' non-consumer activities, but think about the impact of these changes for everyone. Smart phones are demolishing the cost structure of delivering financial services, worldwide. Simultaneously, DLT is demolishing the cost of manufacturing and servicing them. The combination will bring vastly more efficient, affordable and accessible services.

Blythe Masters is a fascinating person. She was previously a senior executive at J.P. Morgan, where she started as an intern and spent 27 years. In 2007 she was named head of Global Commodities, and left the firm in 2014 upon the unit's successful sale. She had also been responsible for the Corporate & Investment Bank's Regulatory Affairs, and was a member of the J.P. Morgan Corporate & Investment Bank Operating Committee and previously the firm's Executive Committee.

From 2004 to 2007, she was Chief Financial Officer of the Investment Bank. Previously she headed the Global Credit Portfolio and Credit Policy and Strategy. Earlier positions included head of North American Structured Credit Products, co-head of Asset Backed Securitization and head of Global Credit Derivatives Marketing.

From 2012 to 2014, Blythe was chair of the Global Financial Markets Association (GFMA). From 2008-2010 she was chair of the Securities Industry and Financial Markets Association (SIFMA). She currently chairs the board of Santander Consumer USA Holdings and serves on the boards the Breast Cancer Research Foundation and the Global Fund for Women. She is an avid amateur equestrian.

Her efforts have long generated interest and buzz, including this feature story in Bloomberg, others in Fortune and CNBC, and a Financial Times story on her company's blockchain test with Chase.

In our discussion I quoted from an invaluable report on DLT by the Bank of England. Here is the quote I cited in our conversation - the report's opening lines:

              "The progress of mankind is marked by the rise of new technologies and the human ingenuity they unlock. In distributed ledger technology, we may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation....that could prove to have the capacity to deliver a new kind of trust to a wide range of services."

Please enjoy this thought-provoking conversation with Blythe Masters.
 

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Support the podcasts - A buck a show!

I've decided to distill a lesson from the popular podcast series Hardcore History, by emulating their habit of asking everyone to send them "a buck a show." Some years ago, the show's host Dan Carlin realized the podcast was taking over his life - much as Barefoot Innovation has been doing with mine! He hit on the idea of asking listeners for "a buck a show," and eventually reached the point where he can devote himself to producing the series. Barefoot Innovation is produced part-time by me and two young, very talented helpers. One of them has a day job and the other is a full-time graduate student. If all our listeners will chip in a buck a show, we'll be able to expand our interviews, accelerate our pace (believe it or not, we currently run at a four- to five-month backlog from recording date to posting!), and be able to do some fun new things we have in mind for you. We'll appreciate any and all help to keep the show going, and growing!

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Transforming Payments: Circle CEO Jeremy Allaire

Welcome to our first episode focused on Bitcoin, digital currency, and the blockchain. My guest is one of the most thoughtful people anywhere on this topic and on payments overall: Circle CEO and Founder Jeremy Allaire.

I met with Jeremy at his office in south Boston's "Innovation District," a few blocks from where I live myself. They have quintessential startup space in an old brick warehouse, and we sat down on a New England winter day for a really fascinating conversation.

I often talk about the five huge technology trends that are revolutionizing financial services. Number 4 on my list is digital currency. Not long ago, even senior leaders in banks and regulatory agencies dismissed Bitcoin as insignificant and weird at best, and dangerous at worst. Today, many people still think it's weird and dangerous, but no one thinks it's unimportant. I'm going to assume our listeners know the basics - that Bitcoin invented the "blockchain," which is an open "distributed ledger" of transactions, visible on the internet, and that being on the internet makes it (like everything else there) instant and free. Most people also understand that this can transform our slow, high-cost payments system, and also any other system that is, in effect, a chain of transactions or records. Most people also know the blockchain record is unfakeable, unbreakable, and again, visible - attributes that can fundamentally change how we organize things from money and contracts and legal titles to operational systems and markets of all kinds.

I once wrote a blog post called "The Benefits of Bitcoin", arguing that the cheap and instant movement of money can bring incredible upside potential for financial consumers, as well as new risks. It will eventually change everything from remittance services to the struggles facing people on tight budgets who now rely on cash, since it's the only way to be sure a bill gets paid exactly when it's due.

As understanding of Bitcoin has spread, a new conventional wisdom has emerged - the notion that the crucial innovation here is not digital currency, but rather the blockchain, including closed chains inside companies and closed networks. In our conversation, Jeremy challenges that idea head-on. He argues passionately that the big power in this technology is its openness.

He reminds us, for one thing, that the internet initially spurred hot debate over how to secure the unprecedented free-flow of information. In a widely-circulated article on re/code.com last November Jeremy wrote,  "Remember, the Internet was unreliable, insecure, and filled with creeps and hackers. People wanted safe, secure, trusted and proprietary networks. That was the future...(yet) We all know what happened. Smart creators and engineers from all around the world got inspired by the open Internet...Permissionless innovation took hold, and we changed the world." He thinks we now need to take the basic DNA of the Internet - open protocols and distributed and decentralized networks - and apply them not just to sharing data and information, but to the sharing of value.

He also emphasizes a core power of this - the fact that if you don't have to trust a single centralized institution to facilitate value exchange, amazing things become possible. Jeremy refers to bitcoin as a distributor of trust, one that "provides a highly secure ledger to exchange value around the world." He believes that just as the early Internet disrupted media and communications, this wave of innovation will transform the "trust and assurance" industries - "which includes government, law, accounting, insurance and, last but not least, finance."

Entering into a global economy in which everything from social identities to commerce flow instantly and freely is discomfiting to some. Even though today's closed and proprietary technology and networks create frustration and high costs for consumers, Bitcoin critics still doubt the soundness and resilience of the model. For innovators like Jeremy, though, it is creating a whole new set of solutions that use financial technology to build "smart rules" and business logic that can eventually shape the new laws of global commercial and legal governance.

Jeremy's "aha" moment on this came in 2012, and inspired him to start a company that would use blockchain technology, which he calls the "global trust and transaction ledger," to change the way we store and use money. That company is Circle, a provider of mobile apps "aimed at enabling greater ease-of-use in online and in-person payments, enhanced security and privacy for customers, and the convenience of free, instant, global digital money transfers." A revolutionary idea. As I say in our conversation, I'm a Circle customer myself.  Every time I use it, it amazes me.

Before Circle, Jeremy was an entrepreneur who'd already spent two decades building and leading global technology companies. His first startup, Allaire Corp, pioneered the use of the Web as a platform for commerce and business applications, and grew to serve over 1 million customers around the world. In 2000, Allaire Corp was acquired by Macromedia, where Jeremy became Chief Technology Officer and helped transform Flash into a platform for rich applications and video that became the most widely adopted piece of software in the history of computing.

He then founded Brightcove, the first Internet video publishing platform for websites, smartphones, tablets and connected-TVs. The company has customers in more than 100 countries and powers video operations for 25 percent of the top 10,000 websites in the world. From 2003 to 2014, Jeremy also served as a Director at Ping Identity Corporation, an industry-leading software and online service provider for securing identity on the Internet whose clients include many of the largest financial institutions in the world.

 

In our conversation, Jeremy explains his vision, his long background in technology, how Circle works, their business model and plans, and his thoughts about regulation of finance and fintech.  The regulatory challenges are obviously huge. Circle sought and received the first-ever (and at this writing, still only) New York State "bit-license." Jeremy talks about the challenges of becoming licensed as a money transmitter in the U. S. state-by-state regulatory patchwork. He also recognizes that, importantly, governments throughout the country and the world see potential as well as risk in these innovations. An example is that Jennifer Shasky Calvery, Director of the Financial Crimes Enforcement Network, has testified before Congress that FinCENrecognizes the "potential for abuse by illicit actors," and that the agency has for almost five years worked with its regulatory partners on designing rules that provide the "needed flexibility to accommodate innovation in the payment systems space under our preexisting regulatory framework."

Jeremy Allaire has an exceptional gift for making mind-bending technology and regulatory challenges easy to understand - and for provoking thought. This is, without a doubt, one of the most fascinating episodes we've had.

Enjoy it, and please be sure to click the "Donate" button HERE, and to write a review on ITunes, to keep supporting the show.

And.....Introducing my video series: Regulation Innovation

Meanwhile, I have a video for you -- two of them, actually.

Many listeners know I have long been a consultant to the financial industry, first on regulatory matters and more recently on fintech. A couple of years ago, someone suggested that I take the kind of advice people pay me for as a consultant, and distill it into video briefings that are accessible and affordable for a much wider market. It was a great idea, and so I began building a video series offering my advice.

I've focused the videos on the most important question facing consumer financial services -- How to survive, and actually thrive, through the twin disruptions that are hitting the industry:  technology innovation, and regulation.

I think everyone in fintech will enjoy them, but the series is specifically designed as a guide for financial companies - it's informative, thought-provoking, and practical. It's for both traditional companies and innovators. And it's for the people working on innovation, regulation, and building the business.

I am very confident in saying there is nothing else remotely like it.  Please check it out!

And while you're there, check out my little bonus video because it answers, at long last, this burning question: "Why does Jo Ann Barefoot have an Xbox, since she's never played a videogame in her entire life, and what the heck does this have to do with financial innovation?"

www.regulationinnovation.com. See you there!

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