Brad Garlinghouse is the CEO of Ripple — owner of XRP, the fourth-most-valuable cryptocurrency. That currency is now worth almost $9 billion after starting the year being valued around $250 million. I spoke to Brad last week about the explosion in popularity of cryptocurrencies this year, whether we are in another dot-com era, and what he sees as the long-term role for cryptocurrencies to play in our world.
Here’s an edited version of our conversation from last week (and audio of our discussion is located here on my podcast).
Eric Jackson: You joined Ripple a couple of years ago as COO and are now CEO. What attracted you to the company?
Brad Garlinghouse: It reminds me of the dot-com era in that this is a transformational platform that will affect far more industries than are aware today. Blockchain technologies will change transactions in a broad way.
I had been exposed to bitcoin early. I thought the consumer application of it felt, to me, further away. I thought there would be faster adoption of the blockchain in the enterprise space and with banks.
When you look around Silicon Valley at new companies, there are very few ideas that are going to make a dent in the universe. But when I met with [angle investor] Chris Larsen, his vision was to enable the Internet of Value. There are secondary and tertiary implications of that vision which I think even people at the company aren’t aware of yet.
Jackson: Why did you decide to focus initially on wire transfers at banks?
Garlinghouse: The term “wire transfers” dates back to the 1800s. It’s based on an antiquated system. The friction of moving value remains surprisingly high. XRP is built to solve a payments problem. And we can help make that a much more Internet-ready process.
Jackson: What makes it easier for your customers to do wire transfers with XRP than their old SWIFT process?
Garlinghouse: We are selling these banks a financial process that allows them to transfer money with each other and settle the transaction in a matter of seconds versus days. The cost to do that is dramatically lower. The visibility into the whole process is much higher. I could send you a wire transfer today, but there’s no Fedex tracking number for that transaction. Yet, we expect on-demand alerts and notifications of what’s happening with some process. So we sell our software to banks to do this sending and receiving in real-time at massive scale.
Some in the bitcoin community have always taken an anti-government, anti-fiat, anti-bank approach to their philosophy. Ripple takes the orthogonal side of each of those. I don’t think governments or banks are going away in my lifetime. Most governments are going to continue to have Know Your Customer and Anti-Money Laundering rules. That’s not going away. We also believe there’s a powerful role that digital assets can play but that fiat currencies are going to continue to exist. Because we’ve engaged banks, governments and regulators and educated them on how digital assets can benefit them, we’ve found a receptive audience. We’ve signed up 90 banks now including the Bank of England, the Fed’s Faster Payment system, and many others.
Jackson: Some libertarian critics have said Ripple/XRP is centralized (vs. decentralized), that transactions can be reversed, and that identity is known (vs. hidden).
Garlinghouse: When I hear those criticisms, I usually think that those people aren’t up to speed on exactly what we’re doing. With respect to centralization, if Ripple (the company) went away tomorrow, the XRP ledger would continue to exist and trade. So it is decentralized. Ripple provides validation on the XRP ledger but we’re not the only one. Participants in that ledger can choose to rely on us as a validator or others. The choice is in their hands.
On the topic of reversing transactions, today banks can always choose to reverse a transaction if the other bank agrees. The transaction will still have happened, but it will get reversed in another transaction.
On identity, banks require identity verification. I and Ripple don’t have visibility on the identity of all transactions happening on the XRP ledger, but we can identify transactions between our banking customers using our technology because they require it. There are some cryptocurrencies out there that provide anonymous transaction between users, but we operate in a sphere of banking, laws and regulation and we abide by those. We think the market opportunity for the non-black or gray market is much greater and in the trillions of dollars. Ripple is going after that opportunity.
Jackson: Tell me about that opportunity. Is it just the wire-transfer opportunity or is this the thin edge of the wedge into other opportunities?
Garlinghouse: Any time you are building a business and you see a transformative opportunity, you get excited about all the adjacent opportunities, but you have to think of insertion points. But you can’t boil the ocean or spread your peanut butter too thin. Today, the world sends $155 trillion across borders. If we solve this payment opportunity, we enable this Internet of Value and should have lots of other opportunities beyond that.
When Amazon started, it just focused on books. They chose a vertical, got really good at it, and expanded to other verticals. We see lots of other compelling verticals to go after in the blockchain space.
Bank liquidity is measured in the trillions of dollars. And using a digital asset to change the nature of how banks can reduce their costs and needs for liquidity is transformational in a multi-trillion dollar way. Our focus in this part of bank payments is like Amazon’s initial focus on books. At some point, as we gain momentum, we will lean into other vertical markets. We think the XRP ledger is so much more performant in throughput, speed of transactions, and cost per transaction.
Jackson: Why is the XRP ledger able to handle scale of transactions so much better than other cryptocurrencies?
Garlinghouse: Bitcoin today takes about 4 hours to complete a transaction. XRP takes 3.7 seconds. Bitcoin can handle 3-4 transactions per second. XRP can handle 1,500 transactions per second. The reason is that they were designed for different use cases. The XRP uses a consensus of validators to confirm a transaction. The bitcoin blockchain uses a proof of work framework and that limits its performance. That positions us well. And the XRP numbers are only improving — and our engineers are working on that while not in a civil war about the future of the currency.
Jackson: I spoke to David Sacks a few weeks ago, and he said he thought the blockchain was going to be adopted more quickly in the developing world than here where the financial system is more built out and mature. Do you see that with the banks you deal with?
Garlinghouse: I would compare this to the telecommunication systems that have developed. We’ve seen many emerging countries leapfrog by going straight to the current technology while I still have dropped calls in Silicon Valley. The same will be true that governments and financial institutions will go directly to where the blockchain technology can take you. In Ripple’s experience, we have seen many emerging countries lean in stronger and earlier.
Jackson: You created XRP because you want to sell your software to the banks, but now many investors are trying to determine how to properly value cryptocurrencies. What do you think is the right way to value a cryptocurrency?
Garlinghouse: I definitely lived through the dot-com bubble. Josh Hannah wrote a post about that bubble and what’s going on with cryptos today. Most people think a future discounted cash flow is the best way to value a company. But digital assets are a commodity trading on supply and demand. There’s fixed supply and increasing demand. I think you’re going to continue to see more demand. In the future, I think you’ll be able to buy bitcoin or XRP in your Schwab account. People are looking at the success Ripple has been having as a company, and I think that’s increased the value of XRP. We want to keep focusing on making XRP a valuable payments tool, and that value will increase accordingly.
I’m voting with my feet and pocketbook on the future increased value of cryptocurrencies. One thing I’d like to point out is that gold is not worth $9 trillion because of its future discounted cash flows. There are some uses for gold, like jewelry, but it’s basically a store of value. I’m not a blanket bull on all digital assets. I don’t know where the price of these digital assets [is] going in the short-term, but over the long arc of time I’m very bullish. I do think a comparison with gold is appropriate on a store of value basis. Gold is worth $9 trillion today. Bitcoin is worth $75 billion.
Jackson: What are the pros and cons of a Ripple IPO?
Garlinghouse: It’s a flattering question to get. I want to make sure we have the right managerial maturity, infrastructure, and ability to forecast properly. We’ve been around for 4.5 years. At some point it will make sense. Just not today.
Jackson: Will you go after Visa?
Garlinghouse: The transformative thing about blockchain technology is that it allows two parties to complete a transaction faster than before. We are able to deliver Visa-like scale today with our technology. We certainly feel that the future is bright for us. It’s hard to predict how Visa will evolve, but they are based on an older paradigm.
Jackson: Is XRP going to be involved in Internet of Things?
Garlinghouse: If you go back to my idea of enabling the Internet of Value, I am very excited about our ability to play in this. There are undoubtedly going to be use cases for microtransactions taking place between devices in the future, and we want to be there.
Jackson: Can you give us an example?
Garlinghouse: Sure. There are going to be a lot of devices that are economic actors. Your self-driving car needs to self-fill itself up at the self-serving gas station. How? Maybe it’s going to be with the Visa network and NFC. But I live south of San Francisco and drive into the city for work. What if there are some days when I’m late for work and am willing to pay 5 cents a car to pass everyone in front of me. What tech is going to let me do that? It won’t happen with today’s antiquated financial rails. This will absolutely be possible in the future with this new technology that we’re working on. Think of the use cases of the internet today versus what we thought was possible 20 years ago. There are so many more things possible than we thought. It’s going to be the same way with all these new digital assets.
Jackson: Back in the dot-com era, there were many companies that flamed out and a few Amazons and Pricelines. Is that going to be the same here in the crypto space?
Garlinghouse: Yes. I think that comparison is 100 percent correct. The reason that some will succeed and others won’t all comes back to utility. You have to solve a real problem to create disproportionate outcomes. There are going to be several situations where it’s winner take all.
It’s very hard to predict what’s going to happen in the next three to five months, but it’s pretty clear that there’s going to be real value created in the next three to five years.