Updated, 5:46 p.m. |
If cash is king, virtual cash may be the crown prince in waiting.
Programmers around the world have been churning out new digital currencies that try to improve on the concept of bitcoin, the hot but controversial virtual money that has swept the Internet.
As questions still swirl around bitcoin’s legality, many technology entrepreneurs are trying to sidestep the currency’s pitfalls by devising new ways to make payments in a cashless future.
Already, dozens of ideas are jockeying for the market. At last count, a website that tracks the market, coinmarketcap.com, listed 36 so-called crypto-currencies, with names like bitbar, freicoin and cryptogenic bullion, and new ones are being added each month. Collectively, these digital moneys had a recent market value of about $4.3 billion, of which $4.1 billion was from the dominant currency, bitcoin.
The online payment system viewed by many insiders as having the best chance of supplanting bitcoin, however, is not even on the list: Ripple. Founded in San Francisco by former bitcoin developers, Ripple holds out the promise not just of a new currency, but also of a novel method to send money around the world. With that potential, it is winning something that has proved elusive for virtual currencies: involvement from more mainstream players in the financial system.
“I haven’t seen anything else as interesting as Ripple,” said Jesse Powell, the founder of Payward, which runs an exchange where digital currencies can be bought and sold. “As far as I’m concerned, bitcoin and Ripple are the only ones that have a real shot at being a big deal.”
On Tuesday, the company overseeing Ripple’s development, Ripple Labs, will announce $3.5 million in financing from six new investors. The company will also announce that it has attracted funds from Pantera Capital, which includes money from executives at the Fortress Investment Group. Chris Larsen, the co-founder of Ripple Labs, said the company had also been talking with banks large and small about joining Ripple’s payment network.
“There’s a lot of interest from the big banks in what’s going on here,” said Mr. Larsen, who previously founded two financial start-ups. “I’ve never seen anything like it before.”
The rapidly growing industry of alternative currencies owes a lot of credit to bitcoin’s surprising success.
Bitcoin has confronted a number of issues that have led to market crashes, but has recovered each time. The latest stumble came after the founder of a popular online marketplace, known as Silk Road, was arrested and accused of using bitcoin to traffic in drugs and other illegal goods. The price of an individual bitcoin initially dropped after Silk Road was shut down, but since then it has risen steadily and recently stood around $260, near a record high.
Still, the entire world of virtual currencies could be rendered irrelevant almost overnight if law enforcement agencies decided to crack down on transactions. Several state and federal authorities have said that they are looking at how to police the market, worried that the anonymous nature of the online transactions make the currencies attractive for criminals. A recent study by researchers at the University of California, San Diego found that most bitcoin transactions were being used for gambling.
Even without such legal hurdles, some critics expect that virtual currencies will eventually come to be seen as a speculative bubble with no foundation.
“It really does sound 21st century, but at the end of the day, do you really want to put your money at stake in that?” said Brian Riley, who covers payment systems for CEB TowerGroup.
Despite the questions, the concept of digital currencies has won a growing number of proponents. In the technology sector, many have been drawn to the broader possibility that virtual currencies could allow money to zip around the world without going through banks and payment processors, with all the fees they impose, not to mention onerous government regulations.
One set of competitors are the so-called centralized currencies, which are operated and overseen from a single hub. These work like the loyalty points distributed and overseen by airlines or retailers and can allow regulators to keep a closer eye on transactions. One such currency, known as ven, is tied to a basket of global currencies that keeps the price stable.
But most online entrepreneurs are dismissive of centralized currencies, saying they give too much power to the companies that run them. Prosecutors have said that one centralized currency service, Liberty Reserve, was devised solely to evade government authorities. Its co-founder, Vladimir Kats, pleaded guilty to money laundering last month in federal court in Manhattan.
In recent months, there has been much more excitement in the industry about decentralized currencies, which exist independently of any company. Such platforms have computer code that is usually open source, or available for editing by any programmer. This setup is seen as a benefit because it means that no central authority can determine things like fees, and who can and cannot have access to the currency.
One of the most popular decentralized currencies is litecoin, which was founded by a former Google programmer and intended to improve on some of the flaws in bitcoin, like the somewhat slow transaction times.
Mr. Powell of Payward and many other industry experts, though, say that litecoin and competitors are just tweaked versions of bitcoin.
Ripple is being heralded in some quarters as a more significant innovation than its competitors. Ripple maintains not only a currency, but also a system on which any currency, even bitcoin, can be moved around or traded — akin to a cross between Western Union and a currency exchange, without the hefty fees.
A person using the system can deposit any sort of money into a personal Ripple wallet through a business that is signed up as a Ripple gateway. That money can then be moved to the wallet of another Ripple user, without going through a bank or a credit card system.
People moving the same type of currency, say dollars or pounds, to another account on the Ripple system will not have to use its currency, known as ripple or xrp, pronounced letter by letter. But ripple is meant to provide the fastest and cheapest conversions, of one nation’s currency to another or among various types of digital money. The hope is that once people begin using ripple they will keep some of their money in the currency and eventually use it directly to make purchases.
Stefan Thomas, an early bitcoin programmer and now the chief technology officer of Ripple Labs, said he was drawn to the company because it improved on the flaws in bitcoin. For instance, he said, users of Ripple put money into the system through so-called gateways, which should allow regulators to monitor transactions more easily. Ripple also does away with the process of “mining” bitcoins, which has eaten up enormous computing power.
“You kept running into the same criticism,” Mr. Thomas said. “Now there is a thing that has solved all these problems in a fundamental way.”
As with bitcoin, a finite number of ripple will be created — 100 billion. Ripple Labs will distribute 55 percent of those free to encourage people and companies to use the system. The 7.5 billion ripple that have been released are worth about $60 million.
The company, with 25 employees, is keeping 25 percent of the currency to sell off to fund its operations.
This setup has drawn criticism from some supporters of bitcoin, who think it gives too much power to Mr. Larsen’s company. But the company will also allow for quicker and more coordinated responses to crises and regulators.
Angela Angelovska Wilson, a lawyer at Latham & Watkins specializing in alternative payment systems, said that Ripple’s more centralized control had allowed it to benefit from some of the bad press surrounding bitcoin, while maintaining the benefits of a decentralized currency.
“Obviously bitcoin was the first mover,” Ms. Wilson said. “But Ripple was right behind it. And then there are a lot of others coming through.”