PDF《NOTE》

NOTE Understanding and Regulating Twenty-First Century Payment Systems: The Ripple Case Study Marcel T.

Rosner* &

Andrew Kang** Ripple is an open-source Internet software that enables users to conduct pay- ments across national boundaries in multiple currencies as seamlessly as send- ing an email. This decentralized Internet payment protocol could provide a cure to an inefficient cross-border payments system. Although Ripple'

s tech- nology can reduce significant risks and costs that exist in the international- payments system, regulators should adopt a new regulatory framework that responds to how this technology works. This Note performs two functions to help regulators realize this goal. It first helps regulators and other market par- ticipants understand how Ripple operates by explaining what Ripple is and comparing it to current payments systems. Second, it suggests a series of prin- ciples that regulators should use to monitor decentralized Internet payment protocols like Ripple. It does this by drawing from and tailoring existing regu- latory principles to account for the risks reduced and presented by Ripple. Table of Contents Introduction

650 I. Noncash Payments: Moving Money Through Settlement

652 A. Moving Money in the United States

652 B. The Complexity, Risk, and Expense of the Current Cross-Border Payments System.656 II. Ripple: Powering the Movement of Money Through Distributed Settlement.657 A. Ripple Balances and Distributed Settlement

658 B. Changing the International-Payments System: Atomic and Straight Through Settlement

660 C. Decentralized Governance

663 D. Current Regulatory Status of Ripple

664 III. A Principles-Based Approach to Regulating Ripple

666 A. Principle I: Comprehensive Legal Frameworks for the Institutions That Use Ripple

667 * Law Clerk to Vice Chancellor Laster, Delaware Court of Chancery. ** University of Michigan Law School, December 2016. We would like to thank Professor Michael Barr in particular for his care, guidance, and support throughout the development of this Note. We would also like to thank Ryan Zagone, Karen Gifford, and Jess Cheng from Ripple for their comments on earlier drafts, as well as Chance Hill and Danielle Kalil-McLane and the rest of the Notes office for their helpful comments.

649 650 Michigan Law Review [Vol. 114:649 B. Principle II: Stakeholder Buy-In: International Forums of Regulators and a Ripple-SRO.670 C. Principle III: Managing Financial Risks

674 D. Principle IV: Transparency: Ensure Regulators and Market Participants Understand the Ripple Protocol

676 E. Principle V: Operational Risk Management of Vital Participants: Focusing on Nodes, the Consensus Algorithm, and the Ripple Protocol

677 F. Principle VI: Risk Management of Ripple Users: Systemic Risk and AML/KYC

679 Conclusion

681 Introduction Joe lives in a rural town in the United States and has an account with a small bank, AmeriBank. Joe wants to pay $100 to Mary, who lives in a small town in India and has an account with another small bank, IndiaBank. How does that $100 get to Mary, and what will it cost Joe? First, it moves from AmeriBank, through the Federal Reserve, to a large New York bank that has a contractual relationship with a large Delhi-based bank. Then, it moves from the New York bank across national borders to the Delhi bank. Finally, it moves from the Delhi bank through the Reserve Bank of India, and to IndiaBank. The ultimate transaction between Joe and Mary occurred through three separate settlements, and at each point in the transmission of the transaction and at each settlement point, the bank earns a fee. But what if Joe and Mary could complete the transaction in a single step? Ripple is an open-source Internet software that enables users to conduct payments across national boundaries in multiple currencies as seamlessly as sending an email.1 Created by Ripple Labs, Inc. ( Ripple Labs ) in 2012, this software is embedded with a protocol that dictates how Ripple-connected computers interact with each other.2 This protocol uses a distributed ledger―a collection of financial accounts updated by numerous and dis- persed entities―through which Ripple users can conduct cross-border pay- ments in a way that is faster, less costly, and more efficient than traditional means.3 1. Phillip Rapoport et al., Ripple Labs Inc., The Ripple Protocol: A Deep Dive for Finance Professionals 4,