Will Ripple Cripple the Ideal of Crypto?
The Australian crypto currency community has raised concerns over the recent announcements from Australia’s big banks, regarding their intention to adopt Ripple. Ripple is new, it’s digital and has advantages as a powerful tool for international business.
As a distributed system Ripple exhibits some “blockchain-like” qualities, but unlike bitcoin, it fails as a decentralised network if we consider one very important feature of the Bitcoin network, that no party has the power to freeze or reverse a transaction. A recent event demonstrates very clearly how vulnerable to interference the Ripple network actually is.
In April, one of the Ripple founders, Jed McCaleb, after a long-running dispute with the other Ripple principals, attempted to sell approximately US$1M worth of XRP, (the internal tokens of the Ripple network) through the Bitstamp exchange which acts as a ‘gateway’ for the Ripple network. (A Ripple gateway provides the service of exchange between XRP and other currencies, including dollars, bitcoins, etc.) A relatively recent new ‘feature’ of the Ripple network allows a Ripple gateway to freeze the XRP of any user, across the entire Ripple network. Jed McCaleb’s XRP are now frozen through the action of a single gateway operator, allegedly at the behest of Ripple Labs, who it would seem have ultimate control of the network. Settlement of this dispute will now play out in the courts, but the important truth is that a Ripple transaction can be prevented by a single party.
Why are banks beginning to adopt Ripple? Ripple has now been around for some time and has proven itself a successful operator. In May of this year Ripple could be said to have been embraced by the US Treasury through a fine of US$700K and agreeing to various conditions around their AML compliance practices. It is important to note that they weren’t shut down, and this now ‘cleans up’ their history within the system and allows them to join the ranks of ‘legitimate’ financial services operators, many of whom have also had their wrists slapped by regulators. The end result is that Ripple is now clearly regulated while Bitcoin the network isn’t and actually can’t be; there are no individuals or central organisation to regulate.
It is therefore very understandable that banks are prepared to do business with Ripple and remain interested in, but wary of bitcoin. Why do these developments concern many from the crypto currency community? It really comes down to reputation. Mass adoption of true, decentralised crypto currencies is the dream of a vast majority of crypto enthusiasts, and if the public readily associate Ripple with crypto in general then the fate of crypto could well be impacted if Ripple experiences a disaster while being used in the services of a major bank. Such a scenario is clearly possible. A single gateway can freeze the XRP assets of any user across the whole network and we now have a proof of this fact.The banks may be comforted by the fact that the Ripple system provides “safety” through the ability to disrupt particular transactions and users, but it is this very feature that makes the whole system eminently corruptible.
We raise these concerns for two main reasons. Firstly, we, along with the general public, are weary of seeing people place their trust in centrally controlled, increasingly fragile systems and then having that trust betrayed. Most of us accept that the banks don’t wilfully operate vulnerable systems and understand the incredible effort and expense that keeping centralised systems even remotely safe requires. Secondly, we are concerned that the banks are choosing a system that, while speeding up transactions times and reducing costs, will potentially increase vulnerabilities to corruption and bad actors. We wish to distance ourselves, as crypto-enthusiasts, from Ripple and we assert that the Ripple protocol, as implemented, is not properly representative of the reliability, security and general utility of fully-decentralised, block-chain technologies. It is important to emphasise that failures in Ripple will not be failures of other crypto currencies.
Overall, we share a disappointment that this particular technology has been chosen by three of our four major banks.