Most of the analysis in this article has been taken from my book Behind the veil of Crypto, however, since its release at the start of February, more information has come out concerning Ripple and its connection with DTCC. As such, I will use the writing of this article to add more depth to my original arguments. Asking two questions,
Why did the SEC choose to Ripple Labs to court and other platforms like FTX or Binance, we're there real allegations lie?
What is the connection between Ripple labs and institutional finance?
Ripple Labs, protocols and governance
Ripple uses a centralized blockchain technology called XRP Ledger, which allows for secure, fast, and low-cost transactions. XRP Ledger is unique in that it is not a proof-of-work or proof-of-stake consensus protocol, but rather uses a distributed agreement algorithm called the Ripple Protocol Consensus Algorithm (RPCA).
The RPCA works by having nodes on the network agree on the state of the ledger through a process of iterative rounds. In each round, a proposal for the next state of the ledger is formed, and nodes on the network vote on whether they agree with that proposal. If consensus is reached, the state of the ledger is updated. The nodes are called trusted validators.
In terms of governance, Ripple has a company-led approach where they have control over the majority of validator nodes. This allows them to make updates and changes to the network more efficiently and quickly than a traditional decentralized network.
Ripple labs work with Central banks concerning the creation of CBDCs
Ripple has been actively exploring the potential of digital currencies and blockchain technology with central banks, including the potential creation of CBDCs. The company has developed CBDC Private Ledgers, which is a platform for central banks to issue, distribute, and redeem digital currencies.
One example of Ripple's work in this area is its partnership with the Central Bank of Brazil to explore the feasibility of creating a digital version of the Brazilian Real. The project is focused on improving payment infrastructure and expanding financial inclusion for the country's unbanked population.
Ripple has also been collaborating with the Hong Kong Monetary Authority (HKMA) on the development of a proof-of-concept (POC) for cross-border payments using CBDCs. This project aims to demonstrate the potential benefits of CBDCs for cross-border payments, including faster transaction times and lower costs.
In addition, Ripple has been working with other central banks, including the Bank of England, the Bank of Thailand, and the Central Bank of the United Arab Emirates, to explore the potential of CBDCs and other digital payment systems.
The DTCC and ProjectIon
Now let'stake a look at The DTCC (Depository Trust Trade Corporation). DTCC is working on a variety of prototypes and proofs of concept related to blockchain technology. The Biggest Blockchain project DTCC is working on is ProjectION.
DTCC describes ProjectION as an innovative software project management tool that helps streamline project delivery and provide insights into project performance. It is designed to replace traditional project management methods and provide a more efficient and effective way to manage projects. It provides a comprehensive view of projects, enabling users to track progress, analyze performance, and manage resources.
It also provides a detailed view of project tasks and allows users to create custom reports and visualizations. ProjectION is a powerful tool that can help project teams identify potential problems, improve project performance, and ensure successful project completion.
DTCC’s cryptographic initiatives are focused on providing secure and efficient solutions to financial services organizations. The company has implemented various initiatives to improve security and reduce the risk of cyberattacks. These initiatives include multi-factor authentication, encryption, tokenization, and digital certificates. Multi-factor authentication is a security process that requires two or more pieces of evidence from the user to prove their identity. This helps to ensure that only authorized personnel have access to sensitive information. Encryption is a method of obscuring data by transforming it into a secret code that can only be decrypted with a specific key.
Tokenization is an approach to security that replaces sensitive information with unique identifiers (tokens) that can be tracked and monitored. Finally, digital certificates are used to verify the identity of a user or organization. Overall, DTCC’s cryptographic initiatives are designed to provide secure and efficient solutions for financial services organizations. These initiatives help to ensure that only authorized personnel have access to sensitive data and that the data is kept safe from malicious actors.
DTCC is looking to leverage blockchain technology to ensure that only authorized personnel have access to personal data. By using blockchain, DTCC can limit access to personal data to only those individuals who have specific permission to access it. Additionally, blockchain allows for the creation of a digital ledger that records all transactions related to personal data, including who accessed the data and when. This ledger can be used to track and verify access to personal data, ensuring that only authorized personnel have access. Blockchain also provides a secure, immutable, and transparent platform, which helps to protect the privacy of individuals and their data. DTCC can use smart contracts to automate the authorization process, allowing the system to grant and revoke access to authorized personnel quickly and securely.
The protocols DTCC is working on are all centralized. DTCC views the importance of creating centralized protocols rather than decentralized protocols for several reasons.
Ripple labs work with DTCC
Let's now look at DTCC's move into blockchain technology, and its relationship with Ripple, given Ripples' long-running court case with the SEC. Ripple’s Interledger Protocol (ILP) is a protocol designed to facilitate the transfer of value between different ledgers (clearing and settlement). It is designed to enable payments between different payment networks and currencies, allowing for global payments with low cost and fast settlement times.
Ripple, announced in May 2018 that it had partnered with the DTCC to enable faster and more efficient processing of payments. The collaboration between Ripple and DTCC is focused on leveraging Ripple's blockchain technology and distributed ledger capabilities to provide a more efficient and cost-effective way of settling payments and other transactions.
Ripple and DTCC are working on similar services, and while arguing they are in different industry spaces, the connection goes deeper.
Here are a few examples of people who have worked with both Ripple and DTCC, and their roles in each company:
Schwartz is a computer scientist who has worked for both DTCC (Depository Trust & Clearing Corporation) and Ripple. At DTCC, Schwartz was the Chief Cryptographer, where he was responsible for leading DTCC’s security and cryptography initiatives. He helped design the company’s cryptographic protocols and also provided expertise on new technologies such as blockchain.
At Ripple, Schwartz is the Chief Technology Officer, where he oversees the development of Ripple’s core technology and provides expert advice on blockchain and cryptocurrency. He has also been instrumental in developing Ripple’s XRP Ledger, which is a distributed ledger technology designed to facilitate fast, secure, and low-cost international payments. Schwartz has also been involved in the development of Ripple’s Interledger Protocol, which is designed to enable the seamless transfer of funds between different payment networks
Michael Bodson is the current President and CEO of DTCC, and he previously served on the board of directors for Ripple from 2014 to 2017. In his role at DTCC, he oversees the company's operations and global business strategy.
Vanessa Pestritto worked at Ripple from 2016 to 2018 as the Director of Business Development, where she focused on building relationships with banks and financial institutions. She then joined DTCC in 2019 as the Managing Director of Digital Products, where she is responsible for developing and implementing new digital solutions for the company.
These individuals all played important roles in helping to shape the direction of both Ripple and DTCC. This partnership allows Ripple to leverage DTCC's expertise in the financial services industry and its deep understanding of the regulatory landscape. It also provides DTCC with access to Ripple's blockchain technology and its ability to facilitate fast and secure payments. Through the partnership, DTCC and Ripple are looking to provide banks and financial institutions with the ability to process payments and other transactions faster, more efficiently, and cost-effectively.
Ripple labs, DTCC, and why the court case with the SEC benefits both
Why would DTCC welcome the court case between Ripple and the SEC? Precedence is an important concept in legal theory as it serves to guide legal decisions and provide a framework for interpreting and applying the law. Precedence is based on the principle of stare decisis, which is Latin for “let the decision stand”. Precedence means that judges must follow the decisions of higher courts when making their decisions. This ensures that the law is applied consistently and prevents different courts from reaching different decisions on similar issues. It also ensures that the law is kept up to date, as new precedents can be established when new cases are heard. Precedence also helps to ensure that the rights and obligations of individuals, organizations, and governments remain consistent. It is key to the functioning of any legal system as it provides a degree of certainty and predictability.
That’s now try to bring this all together. Ripple will need a brokerage license if XRP is classified as a security because it is the only way for Ripple to legally offer securities trading services. Securities are highly regulated and require companies to adhere to certain standards and regulations to ensure fair trading practices and protect investors.
For Ripple to provide a legitimate and safe trading environment, it must be certified by the proper regulatory authority. A brokerage license allows Ripple to lawfully buy and sell securities on behalf of its customers, providing them with a secure and transparent platform to invest in XRP. Additionally, a brokerage license is necessary for Ripple to offer margin trading, which allows customers to borrow money to purchase securities and amplify their returns.
Ripple’s brokerage license will also have to comply with all applicable laws and regulations related to securities trading. A brokerage license is seen as a sign of trust and ensures that Ripple is following the proper procedures and is taking the necessary steps to protect its customers. By obtaining a brokerage license, the SEC would argue that Ripple would be able to provide its customers with a secure and reliable platform on which to trade XRP
If Ripple were to get a brokerage license from the U.S. Securities and Exchange Commission (SEC), it would be subject to certain restrictions and requirements under the SEC’s regulations. One of these requirements is that Ripple must use a “clearing agency” to settle and clear its transactions. A clearing agency is an organization that acts as an intermediary between two parties in a transaction, ensuring that all obligations are met. As such, DTCC is the only trusted party Ripple would be allowed to use for clearing and settlement. This is because the SEC requires that all transactions handled by clearing agencies must be cleared through the DTCC.
What will be the SEC's arguments
The SEC will make the argument that DTCC has a long history of providing safe and secure clearing and settlement services. This is important because it helps protect investors from potential fraud and abuse. Additionally, the DTCC has a proven track record of providing reliable, cost-effective services to its customers. By requiring Ripple to use the DTCC for its clearing and settlement services, the SEC is ensuring that these services are provided safely and securely. This helps protect investors from potential fraud and abuse and helps to ensure that all transactions are properly cleared.
Conclusion
Central banks are creating their CBDCs, and The DTCCise moving onto a blockchain platform. While there is a small possibility that moving to a more transparent and decentralized platform, for the Clearing and Settlement of securities, bonds, insurance, derivatives, and committees, could be for the benefit of all of society. If we don’t understand the practices and culture of such organizations, then it's impossible to demand the external oversight, due diligence, and decentralized control that’s needed.
There is a clear commercial reason why Ripple and The DTCC are perhaps the same. If XRP is classed as a security, then The DTCC will be tasked with clearing and settlement of all Cryptocurrency exchanges. Ask the question, why didn’t the SEC take on FTX, now that we have seen the collapse and the deviation played in real-time? I believe that the process being pursued by the SEC will have the same effect on the crypto sector as the creation of the Federal Reserve Bank had on the banking industry. Whereby it will reduce the industry to a small group of large companies all interlinked to the current hegemonic that controls the industry.
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