Ripple’s CBDC Innovate 2023: Bridging Gaps in Digital Payments and CBDC with ExtoLabs – Futurum Tech Webcast

Disclaimer: The Futurum Tech Webcast is for information and entertainment purposes only. Over the course of this webcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such.

Transcript:

Steven Dickens: Hello and welcome. My name’s Steven Dickens, and you’re joining us on another Futurum Tech Webcast, brought you in collaboration with Ripple. We’re working with them on their CBDC Innovate 2023 project, and I’m joined by Orang from ExtoLabs. Welcome to the show.

Orang Dialameh: Thank you, Steve. I’m glad to be here.

Steven Dickens: So tell us a little bit about your role in ExtoLabs.

Orang Dialameh: I’m the CEO and co-founder of ExtoLabs. We’re a California-based startup. We have been working on digital payments for the last four years.

Steven Dickens: Okay, so let’s dive in. Tell us a little bit about what you are doing to digitize cash and how that’s increasing financial inclusion. Always a great place to start from some of the brief and material I’ve been given. I think you guys have got a role to play in this. Maybe let’s double-click and give us a little bit more detail on the role that you play.

Orang Dialameh: Absolutely. Yeah, so through my last startup, we came to recognize that there was a lot of friction in digital payments. And so when we talk about digitizing cash, there are really a few attributes of cash that we wanted, we saw were missing from digital payments. One, of course, cash is free to consumers and merchants. Digital payments have a pretty high expense for merchants and retailers. Large retailers usually negotiate probably better rates, but small merchants, it’s a challenge for them. And we saw that this was causing, both in mature markets, we know these frictions exist, but also in emerging markets, it was really causing… Even though mobile money was being adopted 10 years after M-Pesa, there were a billion people using mobile payments, but still, 90% of the transactions were in cash, even in markets with very high penetration.

And we could sort of track this to several attributes. One, connectivity is a challenge at times in these emerging markets, even if people have smartphones or feature phones, geographically, they were limited on where they could do payments. They were using SMS and USSD as a means of doing these payments, and that’s got its own challenges, and then the fees were still high. Even mobile money has higher fees for these merchants. So we set out to try to address these problems, and what resulted was a system that would allow users to transact with no connectivity. So in our wallets as we’ll get into it more, we use Bluetooth. We allow them to load value onto these wallets when they’re connected and then transact using Bluetooth. And we selected Bluetooth because we wanted interoperability with all mobile devices. And then when they would connect back up, they would settle these transactions.

And a whole host of issues have to be addressed like security, how you secure this offline value, and how you make these transactions robust so that there are no failures. Because it’s almost like cash being blown away if there is a failure when you’re offline. So we set out to do this for e-money, actually, when we started, by connecting to bank accounts, but later the CBDC initiative started, and they started really asking for the same attributes and features that we had been focused on.

Steven Dickens: So that’s really interesting. What we’re seeing is kind of, the access to technology is very different in those parts of the world. Pervasiveness of 5G is what we see from a Western perspective, but you look at some of the conversations I’ve been having with Ripple, they’ve had me chat to people out in the Pacific, small island nations, a really different access to technology. Being able to use wallets offline is a key requirement, because there’s not that pervasiveness of technology, from a network perspective primarily. One of the interesting things that came through in the brief for me as I got the information from Ripple was around what you’ve been doing with the XRP ledger and how you’ve been able to interface with that as a technology stack. Maybe you can just double-click on that for me and sort of position what you guys are doing from an ExtoLabs perspective.

Orang Dialameh: Absolutely. Yeah, so XRP has been at the center of our system. The backend ledger that we’ve established for this system is a modified version, an instance of XRP. And the motivation for us, there were several key attributes that really came through the use of XRP. One was the high security that you gain when you have sort of these distributed ledger-based protocols. The wallets create a private key, and that key cannot be easily taken away from consumers. So in most payment systems, fraud is a big issue and challenge, whether it’s online or offline, but it leads to enough of a leakage in the system that those transaction fees need to be there. So with using this edge cryptography that comes with distributed ledgers like XRP, that problem gets solved. Of course there’s a problem then of how you recover the wallet, but in the case of a regulated sort of e-money solution, that problem is addressable, because the user has to be known, and there are ways to recover that once you have an identity of the user.

But another very important aspect of XRP was the fact that it was designed to handle transactions rapidly and at very low cost, and the fact that it would support a federated architecture. So we adopted XRP, we made some modifications to it to handle offline transactions, which meant your transactions will come in at different times, not all in sequence. We had to link the accounts to a user’s identity and create recovery methods. Also, what we used was the fact we created a two tier hierarchical architecture with XRP, where clusters of these DLTs would be used for a particular regulated financial institution to issue wallets. And then in order to be able to allow an open-loop system where another financial institution was also running their own cluster and issuing wallets, we created this inter-ledger layer which allows settlement between these two institutions. So users from bank A could transact with users from bank B, for example. And this type of autonomous, almost self-organizing settlement system is very unique.

So in a lot of jurisdictions, we have that in the form of real-time gross settlement systems, for example. Or if you look at India, there is universal payment interface with organizations such as the National Payment Corporation of India that can handle it. What we saw was that this would essentially allow a much more low overhead for governance, where this self-organizing federated architecture was a lot of interest to us. We were also trying to enable vouchering for government-to-person payments. That’s another very key thing in these emerging markets. Aside from reaching remote areas or users that don’t have connectivity, there are big flows of government-to-person payments or retail remittance that comes into these countries. And there were interests to be able to tokenize, use the tokenization features of a system like XRP, to restrict funds for fertilizer or funds for healthcare, and ensure that these could be spent that way.

So we have sort of a long list of attributes of XRP that have been exactly right for the use with CBDCs. Another thing that we’ve done with XRP is, because we started as an e-money solution, we were linking the issuance of tokens on XRP to balances that were in bank accounts or unbanked users with money agents. We had already a system in place that would allow us to create tokens linked to a balance that’s in an e-money system. When we started addressing CBDC scenarios, it also allowed us to create interoperability between e-money solutions and CBDC. And this really critical, because if you launch a CBDC system and it’s a separate currency system, it can’t interoperate, you’re kind of dividing your economy and not allowing that interoperability to happen.

Steven Dickens: It’s interesting, I mean, hearing you talk about some of the friction that’s in the existing payment and the cost for merchants and cost that ultimately gets transferred onto end users. One of the things I’m interested to double-click on more, though, is the privacy and then anonymity. You talked, those are some of the characteristics that people want to keep, but then you’ve also got to know your customer. You’re interacting with people’s bank accounts. Maybe just double-click there for a moment, and how do you address this kind of competing requirements, if you will?

Orang Dialameh: Yeah, absolutely. That’s become sort of a hot topic in terms of sensitivity. People sort of assume that when you mention a central bank digital currency, it means the central bank is monitoring every single one of your transactions. We’ve actually found, we’ve participated in about four different CBDC competitions. We’ve been finalists in one or two of them. And in these, we’ve seen that regulators are actually very cognizant of this privacy issue. So in a CBDC system, essentially, if it’s a two-tiered distribution model, then financial institutions really become the entities that do the KYC and essentially the issue, the onboarding and distribution of these CBDC. In that scenario, what we’ve done is we’ve separated the KYC database and put it in the hands of regulated financial institutions, the same relationships we have today with our banks, and therefore the transactions are not visible and identifiable to a central bank entity.

Steven Dickens: So it’s anonymity to the central bank, but KYC to the bank that you’ve got a banking relationship with, which is crucial.

Orang Dialameh: Absolutely. And then we’ve actually designed the system so that below certain levels, there is no KYC requirements. So in those scenarios, we act as if it’s a crypto wallet, effectively. So the user creates self custody, and if the balances and transaction limits are below a certain amount and acceptable to central bankers, this can be effectively completely anonymous type system. Now, there is another part of privacy that’s also very important, and that’s with counterparties. So in mature economies right now, as much as people are concerned about CBDC privacy, right now, our retailers, our supermarkets, let’s say the loyalty systems we tie into in our retail stores, these share level three receipt data with brands. Literally every single item you’ve purchased is data that we agree to share with. So what we’ve done is we’ve made this system so that on each transaction there is a new account that’s being used. This is visible to the issuer, to the bank, again, for KYC and compliance purposes, but the counterparties can’t track you. Effectively, they’re transacting with a new…

Steven Dickens: So that’s how you get the anonymity piece whilst doing KYC.

Orang Dialameh: That’s right.

Steven Dickens: Makes sense.

Orang Dialameh: Now, we’re looking at zero knowledge proof signatures, and again, XRP is a very interesting system because you can easily replace the signature scheme. So we are looking at quantum safe and zero knowledge proof methods for doing that, but it is possible with a method I described to you here. However, I want to bring up something, which is, we think that there is a new data model that’s emerging, and this is a consent-based data sharing model, where the user decides to share data with a particular, it could be credit risk data with a lender or it could be loyalty data to a particular brand, and what we’ve designed in this system is the ability for the user to say, “No, I want to be private. I don’t want to share any data. I want to be anonymous, but I’m willing to share my demographic data, or I’m willing to share data and get something for it in return.”

And we put this lever in the hands of the user, where the GDPR, for example, was trying to bring right to forget to consumers, but you have to call the data aggregator. We’re putting that in the hands of the consumer, literally on their wallet, where they can, in an atomic way, decide to remove this data. Because we feel that data is necessary for optimizing our world, and there has to be a new model for sharing that. We’re seeing that now, that type of consent-based data model actually appear in many jurisdictions. I think in Europe, PSD3 is beginning to investigate that. In India, there are trusted third-party aggregators that are being formed for the purpose of protecting this type of data and making sure that counterparties can’t siphon data completely. So there’s very interesting opportunities where distributed ledgers by design can guarantee these types of data sharing models.

Steven Dickens: I think that’s fascinating. I think the way you described to me, sort of being able to do very strong KYC above a certain transaction level, being able to set some parameters so you don’t need to delve deep there, but then also being able to provide that anonymity out to the user. That’s a multi-level approach, I think, that services a lot of the, not only the requirements, but also some of the concerns of CBDC platforms and why this may be a little reticence for some users that maybe is overstated, but it’s interesting, I think.

Orang Dialameh: Yes, yes. We think that distributed ledgers can solve the data privacy problems we have out there, and whether it’s in the form of a central bank digital currency or as an e-money solution, they address that. I think a lot of the concerns that are coming in, one has to really pay attention. The notion of being able to print money out of thin air and cryptocurrencies…I don’t think we want to live in a world, as we see what’s going on, where we have nefarious use of digital payments. So I think there has to be a balance between these two worlds. And we don’t want complete siphoning of our data where we become the product, that we don’t want to happen, but at the same time, there has to be protections for compliance purposes.

Steven Dickens: Well, I think that’s a fantastic summary there to wrap us up. Thank you for being on the show. Really appreciate this conversation.

Orang Dialameh: Thank you, Steven.

Steven Dickens: You’ve been listening to another episode of the Futurum Tech Webcast. I’m your host, Steven Dickens. Please click and subscribe and do all those things to boost the algorithm, and we’ll see you next time on another episode. Thanks very much for watching.

Other Insights from The Futurum Group:

Ripple Powering the Next Evolution of Central Bank Digital Currencies

Ripple Acquires Metaco to Expand Crypto Custody Services

Ripple Announces $100 Million Commitment to Global Carbon Markets