Ripple Labs is proud to welcome noted economist Susan Athey to its Board of Directors. Athey, who was previously an advisor to the company, is Professor of Economics at Stanford Graduate School of Business.
Having received her bachelor’s degree from Duke University (where she holds an honorary doctorate) and her Ph.D. from Stanford, she has held teaching positions at MIT, Stanford, and Harvard.
Professor Athey received the prestigious John Bates Clark Medal in 2007 by the American Economic Association to “that American economist under the age of forty who is adjudged to have made the most significant contribution to economic thought and knowledge” and was elected to the American Academy of Arts a year later. In 2012, she was elected to the National Academy of Science.
Her current research focuses on the economics of the Internet, marketplace design, and the intersection of computer science, machine learning, and economics.
How did you get into the virtual currency space?
My teaching and research over the last few years has focused on competition in digital platforms—platforms that bring together different groups to interact, such as buyers and sellers, advertisers and consumers, or in the case of payment systems, consumers and merchants.
The recent innovations in cryptocurrency immediately caught my attention, because I had observed how challenging it has been for new entrants to successfully challenge the incumbent financial services players in the past. In cryptocurrency, I saw an opportunity for disruption and innovation in financial services.
I was also intrigued by the ability of cryptocurrency to expand commerce and financial services to the people in the world who as of today aren’t able to access these services locally, let alone have access to international financial and commercial markets.
How has your perspective of the technology evolved over time?
When I first heard about Bitcoin, my initial reaction was that this seemed like a speculative bubble. A lot of the early writings on Bitcoin seemed to focus on its ability to help people opt out of government-sponsored currencies.
Economists typically focus on the advantages of avoiding exchange rate risk, and most mainstream economists have a fair bit of confidence in the U.S. Federal Reserve’s ability to keep inflation within reasonable bounds, so these arguments seemed less compelling to me, at least for the U.S. (high-inflation developing economies are another story, of course.)
But in the process of trying to understand what it really was, I became inspired by the promise of the underlying technology for moving money between individuals and around the world in a frictionless way. Along the way, I also became less optimistic that some of the inefficiencies in our current official systems for moving money would change anytime soon, enhancing the importance of private innovation in leading the way towards the ultimate goal of efficiency commerce.
What do you see as the next big milestones for taking the movement to the next level?
The big milestones I see are first, getting more clarity on the regulatory framework. That is moving forward, and every step towards clarity helps. The good news so far is that the U.S. seems to appreciate the benefits of keeping the industry on-shore, and thus seems motivated to work with the industry.
An on-shore industry will, in my view, be one with more responsible and competent companies, and thus greater consumer confidence and protection. If the industry is allowed to develop in the U.S., it will have the benefit of the expertise of the best investors and most experienced advisors, and best practices for financial services companies can be followed.
The second big milestone is closely related to the first: the cryptocurrency ecosystem needs to plug in more seamlessly to the traditional financial sector, which is the world that most users will operate in for some time to come.
A third important milestone is that cryptocurrency’s reputation and press needs to move beyond the sensationalistic, beyond the focus on crime and failed exchanges or speculative investing, and on to a more tactical discussion of how this new innovation can be used to provide value to individual consumers, corporations, and financial service providers.
What brought you to Ripple Labs?
When thinking through Bitcoin from an economist’s perspective, I focused on a few potential inefficiencies in the use case where you use Bitcoin to move money, say, across borders.
In today’s institutional environment, the sending user needs to send local currency to an exchange, convert it to Bitcoin, send the Bitcoin, and then the receiver has to put the Bitcoin on another exchange, change it out to their own currency, and withdraw it.
One problem is that you need to have public exchanges functioning in both sender and receiver currencies, and that users need to have accounts on those exchanges. That typically requires sharing sensitive personally identification and financial information with unknown startup companies, perhaps in foreign countries, where there would be little recourse if anything goes wrong.
A second problem is that you are subject to exchange rate risk along the way, especially if users do not execute transactions immediately.
A third problem is that if you attempt to hold virtual currency rather than take it out of exchanges in order to avoid transaction costs, you face exchange rate fluctuations.
A fourth problem is that banks may be wary of banking public exchanges, where it is difficult to know who you are doing business with. In particular, it is hard to know when you give out Bitcoins for fiat currency, who owns Bitcoin addresses.
Now, all of those problems can potentially be addressed, and indeed startups are working on all of them within the Bitcoin community. However, it made me wonder whether there wasn’t a simpler way to solve this problem, one that still took advantage of the fundamental innovation from Bitcoin, a secure ledger.
As I was grappling with these questions, I learned about the Ripple protocol. I realized that it addressed all of these problems. Ripple is designed to allow users to hold their local currency on participating gateways; the ledger handles multiple currencies. Thus, individuals can be nimbly connected to the ecosystem (including the Bitcoin ecosystem) without facing exchange rate risk, and they can work with local gateways who are not functioning as public exchanges.
In addition, the “exchange” function is built into the Ripple protocol. But professional market-makers substitute for the role of a public exchange. The Ripple protocol provides a quote to move money from one individual and currency to another individual and currency, where the quote is based on bids and asks of market makers in the network. All requisite trades are confirmed simultaneously, so that there is no exchange rate risk for users.
To deal with concerns about who you choose to do business with, gateways can choose only to allow their users’ local accounts to transact with a short list of trusted professional marketmakers, allowing their users to access the global economy (through the native currency, XRP, or by trading fiat currency for other cryptocurrency such as Bitcoin), but without operating with or interacting with a public exchange.
Thus, Ripple appears to be well architected to plug into existing financial systems, and to allow end consumers or institutions to use it as a “payment rail” without having to think very hard about a currency at all. Individuals can move in and out of positions in XRP instantly, and face no risk about exchange rate fluctuations for particular transactions. Thus, the users can abstract from the notion of a new currency altogether, and just think about using the network to move funds efficiently.
Any thoughts on the recent IRS guidance or comments by the St. Louis Fed economist?
David Andolfatto, Vice President of the St. Louis Federal Reserve, recently said the following: “Well-run central banks should welcome the emerging competition. There is (in my view) room for beneficial coexistence; for example: A politically independent Fed operating an “elastic” currency supply with congressionally assigned mandates (e.g., price-level stability), together with Ripple, a currency-agnostic P2P payment system to facilitate low-cost payments.”
This is an interesting perspective that resonates with my own views as an economist. In the U.S., the Fed plays an important role, and monetary policy can be crucial for economic stability. But the government also plays an important role in the operation and oversight of payment systems and mechanisms for transferring funds, and there, all else equal, a more efficient payment system is better from an economic perspective.
If new technological innovations make efficient movements of money possible today rather than in the decade or more it might realistically take to gain consensus about reform to existing systems, this is something that economists should embrace, and it is consistent with the Fed’s mission to support those innovations.