1. Distributed Financial Technology in Payments
Jessie Cheng, Deputy General Counsel, Ripple
Weil, Gotshal & Manges Roundtable
Increasing Payment Efficiency
Yale Law School — March 3, 2017

2. What is distributed ledger technology?
No - it’s just another network.

3. What is distributed ledger technology?
Blockchain — Technology that collects transactions into blocks and chains them in chronological order, with copies distributed across a number of different servers
Digital signatures — A cryptographic scheme used by parties to authorize transactions and by the protocol to authenticate transactions
Consensus mechanism — A process by which multiple nodes agree to update the blockchain with new transactions
No - it’s just another network.

4. Distributed ledgers aren’t limited to virtual currencies
Different ledgers can record different things:
Virtual currency balances (e.g., bitcoin, XRP, ether)
Fiat currency balances (e.g., U.S. dollars, euro, yen)

5. Suppose that Alpha Corp
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Beta Corp.

6. Suppose that Alpha Corp
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.

7. Hypo #1: Common correspondent bank
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Sigma Bank
Beta Bank
Beta Corp.

8. Hypo #1: Common correspondent bank
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Sigma Bank
Beta Bank
Beta Corp.
Sigma Bank
Debits Alpha Bank’s account (-£)
Credits Beta Bank’s account (+¥)

9. Hypo #1: Common correspondent bank
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Sigma
Bank
Tao
Bank
Upsilon
Bank
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.

10. Hypo #2: Distributed Financial Technology
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.

11. Hypo #2: Distributed Financial Technology
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

12. Hypo #2: Distributed Financial Technology
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.
Alpha Bank
Connector’s balance ↑ (+£)
Beta Bank
Connector’s balance ↓ (-¥)

13. Hypo #2a: Distributed Ledgers
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Distributed Ledger
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

14. Hypo #2a: Distributed Ledgers
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Distributed Ledger
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.
Alpha Bank
Connector’s balance ↑ (+£)
Beta Bank
Connector’s balance ↓ (-¥)

15. Do you actually need distributed ledgers?
No - it’s just another network.

16. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

17. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
ILP Validator
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

18. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
ILP Validator
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

19. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
ILP Validator
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

20. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
ILP Validator
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.

21. Hypo #2b: Interledger Protocol (ILP)
Suppose that Alpha Corp. based in the United Kingdom wishes to make a payment to Beta Corp. based in Japan.
Alpha Corp.
Alpha Bank
Connector
Beta Bank
Beta Corp.
Alpha Bank
Connector’s balance ↑ (+£)
Beta Bank
Connector’s balance ↓ (-¥)

22. What are some key differences?
Common correspondent
Centralization of trust in one counterparty, Sigma Bank
Sigma Bank records transfers of money between banks
Banks reconcile their own records with Sigma Bank’s books
Distributed Financial Tech.
Distribution of trust through a protocol, the process itself
Settlement occurs on the banks’ own books, coordinated by technology
Changes are updated in real time

23. One last variation…
No - it’s just another network.

24. Hypo #3: XRP
Suppose that Alpha Corp. based in Brazil wishes to make a payment to Beta Corp. based in Thailand.
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.

25. Hypo #3: XRP
Suppose that Alpha Corp. based in Brazil wishes to make a payment to Beta Corp. based in Thailand.
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.
Alpha Bank
XRP balance
Beta Bank
XRP balance

26. Hypo #3: XRP
Suppose that Alpha Corp. based in Brazil wishes to make a payment to Beta Corp. based in Thailand.
Alpha Corp.
Alpha Bank
Beta Bank
Beta Corp.
Alpha Bank
XRP balance ↑ (+XRP)
Beta Bank
XRP balance ↓ (-XRP)

27. Questions? jcheng@ripple.com
No - it’s just another network.