Q&A with Ripple’s James Wallis about CBDC and blockchain

At the FinovateFall 2022 conference in New York, FinTech Futures sat down with James Wallis, VP of Central Bank Engagements at Ripple, to get his take on the rise of central bank digital currencies (CBDC), use cases for cryptocurrencies in banking and payments, and the future of blockchain technology.

James Wallis, VP of Central Bank Engagements at Ripple

FinTech Futures: You’re here to give a keynote on digital currencies, CBDCs and blockchain, so if you’re starting with digital currencies, how would you say banks, especially in North America, are looking at digital assets at the moment, it’s still a some skepticism there or have established operators started to embrace it?

James Wallis: I would definitely say that the level of acceptance has increased quite a bit in the last 12 months. If you think specifically about digital currencies like CBDCs and stablecoins, there has been a huge increase in interest from commercial banks.

Originally, many of the projects that were going on around the world were started by the central banks, so the Federal Reserve of the United States and the Bank of Canada, but the commercial banks have now realized that this is going to happen and they have to figure out how to participate in it.

So there is a lot of interest from the commercial banks, and there are also many initiatives starting elsewhere, such as the digital dollar initiative. We just announced that we will be taking part in their technical sandbox. So it’s really to try to imagine what a digital dollar might look like. It is clear that the Federal Reserve basically makes all the decisions, but this is an independent think tank that provides input to the Federal Reserve.

Given the volatility of the crypto market and talk of a “crypto winter”, has that dampened any sentiment or is there still the sense that this is building for the future and there is a place for it and the space will only mature from here?

I think from my perspective, I’ve seen these ups and downs in the tech industry, like the dot-com bubble, so to me this feels a little bit like that, and it’s a bit of a shake-up. So I think the companies that have a strong value proposition and have a strong funding level or balance sheet, I think they are well positioned.

To talk specifically about Ripple, we have a long-term view. We build enterprise solutions for banks and other financial institutions, and this is an opportunity for us to actually keep driving when other companies might not be as lucky and unable to keep going. We employ a lot of people. I think we are close to 700 people now, and we are hiring more next year so that we can continue that growth. So I think the crypto market – however you want to define it – will come back, and I think those companies that have invested in growth and are able to continue to invest will win. Of course, we’d rather not have the crypto market where it is, but for us it’s an opportunity to dig in and keep working away.

On that note, what has Ripple been working on recently?

We have a lot going on. I am personally responsible for the CBDC initiative, so we can talk about that a bit more. We have our RippleNet network, which is our global payment network. We just announced that we can now do a lot more work with Brazil. We have to get regulatory approval when we enter new markets, and that is something that is very important to us. We work hand in hand with central banks and government entities that regulate these things.

We have a lot of work going on around liquidity, which is always a big topic when it comes to payments and money movements across national borders. And then we’re also doing a lot of work to try to market the XRP Ledger. It’s the underlying ledger that we use in many of our solutions, and that’s where the XRP cryptocurrency sits naturally.

We also have things like grant programs. We just did something called CBDC Innovate. So basically it was a challenge or a competition if you will, or some would call them hackathons. We invited people to come up with and design some use cases for CBDCs beyond the basics of using it as a cash alternative or for wholesale bank settlement designs. It is a two-stage program. Stage one has just finished. Close to 500 people showed interest, and we’ve narrowed it down to the top 16 who will now move on to the next phase, which is between now and November. And that’s where they get to work with our team building on our sandbox to build out this idea they had and turn it into a working prototype.

So we invest quite a bit in educating people and helping people access the technology. We are of the opinion that the more developers and the more participants in the ecosystem, the better. It provides a healthier long-term view.

Switching to CBDCs we are starting to see quite a bit of uptake globally, so how do you see this area developing?

CBDC research, testing and pilots are on the rise globally

Yes, that is the big question. There are always new statistics coming out, but I think the last statistic I saw was that it has gone from 80% to 85 or 90% of central banks are now doing something in this area. That something can be basic research to do proof of concepts or pilots, and there are one or two that have limited but live pilots with real money.

I believe that central banks and governments have realized that digital money is here to stay. And for central banks, part of their mission is financial stability in their country. So on one hand they might want to hedge against any foreign currency or other digital currencies, but they are also moving slowly. So they are at this stage where they know they need to do something. They know it is inevitable. And you have some people who definitely lead the pack.

The Bank of England, the Federal Reserve, the European Central Bank and the Bank of Japan are still doing a lot of research, but some of the smaller countries I would say are moving much faster. Within the framework of what my team is working on, we have announced two pilots so far. One is in Bhutan. The central bank there is called the Royal Monetary Authority. In essence, they are looking to really drive more innovation and digitization in the country. It is an initiative from the top level in the country. And also to drive more financial inclusion and make more financial products available to more of the population. So we started that project a while back. We did an initial pilot covering a wholesale use case. And then the next phase that we’re working on is a real money retail pilot. And then they also work with us on cross-border payments, as markets like Bhutan have quite a high level of transfers in and out of the country.

Another example is in Palau. They don’t have a central bank, they are a dollarized country. So the economy’s official currency is the USD, but they will still have their own digital currency. In that example, we are working with them to create a government-issued stablecoin. So it will be issued by the government and backed by dollars held in a US bank. The view there is that it will be a stable, high-quality coin and very transparent about how much there is, where the money is held and meets all regulations.

What are the main benefits to countries and potentially populations of using CBDC?

I think there are a handful of benefits, and for a given country the importance of those benefits varies a bit, right? So some countries have very inefficient domestic payment systems, and really use digital money, whether it’s a CBDC or a stablecoin or crypto,

having a government-issued or central bank-issued digital currency will provide much more efficient payments and lower fees. Potentially, merchants could use a digital currency and not have to pay interchange fees with credit card companies. There are obviously a lot of nuances and politics around it, but there are definitely some efficiencies to be made there.

Financial inclusion, as I touched on earlier, many of the larger banks around the world cannot effectively serve the poor people in their countries because the banks have many bricks and mortar, they have expensive systems, and they can only t deliver products to low income people and still make money. Then again with a digital currency, you have the opportunity to have new players in the market like fintechs, as long as they are regulated, offering financial services at much lower prices.

For example, one of our partners has a very high amount of cash-based lending. Then on Friday people get paid. They line up at the bank to take all their money out of the ATM, and sometimes lend it to family or friends. It’s a pretty big deal in that culture. So we’re probably going to put in place a very simple, low-cost P2P lending platform so that they can get paid in a digital currency and not have to go to the bank, and they can just transfer it very simply and easily to somebody else, and then it can be repaid automatically, or there can be triggers for when it is repaid.

And so I think the biggest benefit for me is to provide a platform for this innovation. Just to offer a platform that others can build on. Central banks I think will provide the core infrastructure. Commercial banks will be part of this distribution method. So you won’t have an account with the central bank, but you will have an account with a commercial bank where you can get CBDC. But then we imagine many people building these use cases on top of that.

And finally looking at blockchain, what real-world use cases are you most excited about there and how do firms want to implement this technology?

Well, I’m a little biased since I’ve worked in space for a long time, but I think blockchain as a technology has almost infinite uses. If you go back to the basics of what blockchain technology provides, it provides the ability to have parties that don’t trust each other transact in a reliable way, right? You have a single source of truth so they know exactly what is where and when, and then you have the ability to add automation to that through smart contracts.

So when it comes to financial services, payments is an obvious one. Our RippleNet network is global. With this on demand liquidity that we have, it basically enables you to send money immediately without having to pre-fund accounts. There are other areas such as securities, securities depositories, lending, insurance. There is applicability across all of them. I think the ones that will appear first are the ones where I think the benefits are greatest and where it’s actually practical. So I think that’s why we’ve been successful on the payments side, because with cross-border payments, there are so many frictions in the old model that if you can crack that and remove those restrictions, then you’re on your way to a winning proposition .

But I think at the end of the day, if you go back to the beginning of the internet, depending on who you talk to, 1998 is seen as the year where the internet really started to grow up and people figured out what they can use it for, and now 24 years later, the use cases are endless, right? I think blockchain will be the same. I think digital currencies will be the same. We won’t be talking about blockchain in 10 years. I hope not. It will just be a technology that is always there under the covers, like TCP/IP.