Chris Larsen, who disrupted consumer finance in the 1990s and 2000s with E-Loan and Prosper, is seeking to shake up the industry again with Ripple, a peer-to-peer payment and lending system.
Ripple looks to improve on Bitcoin, the decentralized virtual currency and payment system that emerged three years ago and is beginning to gain some respectable traction. He's teamed up with Jed McCaleb, a serial tech entrepreneur and a major figure in the Bitcoin community.
"The time has come for virtual currencies," Larsen says. "Bitcoin has been very successful" and has shown how digital currencies can work.
Larsen would say little about the details of the venture. "We're in stealth mode," he says, and Ripple's website says a beta version is "coming soon" that will let users "easily, cheaply, and safely send money over the Internet to anyone, anywhere in the world." Dribs and drabs of the plan have been leaking out through people who have spoken with Larsen and McCaleb and from online discussion boards.
This much is clear: Ripple aims to disintermediate banks in their roles as facilitators of commerce and as lenders, and it taps into consumers' disillusionment with the financial system since the financial crisis.
Like Bitcoin, Ripple is a decentralized peer-to-peer system offering an alternative way for parties to pay one another for goods and services. A key difference is that Ripple is also a platform for individuals to grant credit to one another.
The idea is to make debts issued by individuals tenable as a widespread form of payment. You might not trust a stranger enough to accept his $1,000 IOU as payment. But suppose the two of you have a mutual acquaintance you believe is good for it, who is willing to lend that much to the stranger. Then the stranger could pay you with that acquaintance's promise to pay.
The Ripple system is designed to allow this kind of mutual credit issuance on a broader scale than otherwise possible. It keeps track of who knows whom on the network, who trusts whom and for how much. So if a user wants to pay someone who doesn't know her using Ripple, the network identifies a chain of trusted intermediaries between the two.
"Ripple puts control in the hands of individual participants to decide how to issue credit, and makes them strictly responsible for those decisions," says Ryan Fugger, the software developer who came up with the original idea. "This design is important because the power to issue currency is the power to decide what we collectively ought to value, and in my mind, that power ought to be distributed as democratically as possible."
It may be a hard sell for consumers and merchants, even though they transact every day in dollars, a currency also predicated on trust.
"In a way you could look at the U.S. dollar as virtual," says Dave Kaminsky, an analyst with Mercator Advisory Group. "The U.S. dollar is not tied anymore to an amount of gold at Fort Knox. The trouble is trying to start a brand new currency… because there's not only many years back the U.S. dollar but also many people."
But for all the drawbacks the U.S. economic system has, "we know it works," says Kaminsky. Bitcoin has achieved a lot, but it's hard to create a currency from scratch when most people will think the investment is dangerous, he says.
Fugger conceived Ripple in 2004 after working on a "local exchange trading system" in Vancouver. This experiment in community currency was plagued by free riders who never fulfilled their obligations, says Fugger.
"My idea to fix this was that credits should never be owed to the system as a whole, but only to individuals within the system who have explicitly agreed to trust the issuer, and bear any loss if those obligations aren't fulfilled," Fugger says. "All that you need is a routing system for finding intermediaries to connect payers with payees who don't trust them directly."
Fugger built the first iteration of this system, RipplePay.com, which says on its homepage that it has 3,914 users. Larsen and McCaleb, who had been collaborating on their own digital currency idea, approached Fugger this past August, and he recently handed them Ripple's reins. According to Larsen's assistant, there will continue to be "a decentralized open source platform owned by everyone," and he and McCaleb are building a for-profit venture to use the platform.
"I see a future where waves of people gradually migrate their funds from bank accounts over to Ripple accounts because, as an open system, Ripple will spark a lot of innovation, leading to superior services that give people greater control over their finances at cheaper prices," Fugger says.