Fintech

Ripple’s CEO is being sued by the SEC. He talked to us anyway.

In the face of a lawsuit over its digital currency, Brad Garlinghouse manages to be both confident and conciliatory. "We can't ignore governments. We can't ignore regulation," he said.

​Ripple CEO Brad Garlinghouse

Ripple CEO Brad Garlinghouse is both confident and conciliatory, saying government regulation has a role in cryptocurrency.

Photo: Ripple

Crypto took another beating in Washington last week. It wasn't encouraging for the industry to hear itself denounced at a Senate banking committee as "a shady network of online funny money."

But in an odd twist, the CEO of the company targeted by regulators in the biggest crypto legal offensive thus far actually had nice things to say about the proceedings at the Capitol.

In a series of tweets as the Senate committee hearing was wrapping up, Ripple CEO Brad Garlinghouse praised the committee's effort to "understand the nuances within crypto — a far cry from just a few years ago when some thought crypto is just a fad or mostly for criminals."

He even cited Sen. Elizabeth Warren, a staunch crypto critic, and her view that "our current banking and payments systems need improvement." Garlinghouse highlighted the goal many in the crypto world say they hold "to provide access to those who have consistently been left out" — and suggested the Massachusetts Democrat might be on board.

The tweets were striking given that Ripple and the federal government haven't exactly seen eye-to-eye on what crypto and blockchain are all about.

Ripple, a crypto and blockchain pioneer founded in 2012, uses blockchain technology to process payments, and uses a cryptocurrency called XRP.

In December, the Securities and Exchange Commission sued Ripple, Garlinghouse and founder and executive chairman Chris Larsen, accusing the company of raising $1.3 billion in unregistered digital-asset securities by issuing XRP tokens. The SEC's key claim is that XRP is not a currency, but a security, and therefore subject to strict securities laws.

The legal action, which stunned the crypto world, sent the value of XRP dropping dramatically. Coinbase, a major crypto exchange, suspended trading in XRP.

The legal brawl is widely expected to have major implications for the entire crypto industry. It will also define Garlinghouse's tenure as the leader of the blockchain industry trailblazer.

Garlinghouse joined Ripple as COO in 2015 and was named CEO the following year. He is a tech industry veteran and former Yahoo exec who became famous for a quirky 2006 critique of the web giant, known as the "Peanut Butter Manifesto."

In the memo, which the Wall Street Journal obtained and published, Garlinghouse, then a Yahoo senior vice president, argued that the company lacked focus and was trying "to do everything and be everything — to everyone," comparing the strategy to "spreading peanut butter across the myriad opportunities that continue to evolve in the online world."

"I hate peanut butter. We all should," Garlinghouse wrote.

In an interview with Protocol, Garlinghouse explained why he's optimistic about heightened government interest in crypto and blockchain, what he sees as Ripple's chances in the legal battle with the SEC and how some parts of the "Peanut Butter Manifesto" are still relevant in his current role.

This interview has been edited and condensed for clarity and brevity.

You tweeted upbeat comments about last week's Senate banking committee hearing on crypto even though some senators had harsh words about the industry. What specific points made you feel good?

I will answer that a little bit circuitously. One of the things that has been interesting in my opinion is a lot of people in the crypto business have been pretty anti-government, anti-regulation, anti-everything. I do subscribe to the point of view that if we want crypto to thrive globally, we can't ignore governments. We can't ignore regulation. I think that just the fact that the United States Senate is holding a hearing, that's a positive. Like, wow. When I got involved in this industry six-plus years ago, certainly the Senate wasn't talking about it.

There were some things said at that hearing which I certainly don't agree with. An important theme to remember, in my judgment, is you can use currencies, the U.S. dollar, for good things and you can use them for bad things. Crypto is clearly here to stay. These are technologies and currencies that can be used for good and yes, in the kind of edge cases, they can be used for bad.

What I worry about is we don't discount real-world positive use cases where you know we can help in lots of ways. It would be unfortunate and short-sighted, I think, to take actions focused on the few at the expense of the many.

It's easy to poke holes and say, "Here's what's wrong." I think it's a net win that the U.S. government is getting smarter and talking more about some of these dynamics. I think that's good for the industry.

You got hit with the SEC lawsuit seven months ago. Can we go back on how you reacted and what has changed over the last few months?

I would be disingenuous to not acknowledge I find a certain irony that, you know, one of the reasons why Ripple as a company has been controversial in the crypto industry is because we've always taken it pretty pro-regulation. Existing financial regulations are there to protect consumers, and that's not a bad thing.

It's kind of ironic that we've been unpopular among some in the crypto community who are very anti-government or anti-bank or anti-regulation, and then we are the ones that got targeted. Wait a minute!

I do think the industry is full of good actors that want to comply with rules. They are seeking more guidance and clarity. Talking to governments around the world has been a material part of my job for years. We've been talking to the U.S. government and different parts of the U.S. government for a long while. I admit I was surprised that the SEC decided to bring that lawsuit.

The good news for Ripple is that our core business has continued to grow and grow materially. We are still growing in the United States, but have certainly been stymied. Outside the United States, we've had a ton of growth.

I won't go through all those different details, but my point in saying all that is yes, it's frustrating. I don't love it. But the good news is people see real-world use cases and the benefits we're delivering, and so we're continuing to drive forward.

What's the latest on the lawsuit? You were going to depose a former SEC commissioner. Has that happened?

Ah, yes. [Laughs.] To be totally honest, I never know what I'm allowed to talk about. When it comes to lawsuits, I try to say less. I don't say a lot. We're in the discovery phase. Our track record there speaks for itself, and the judge has overwhelmingly agreed with us. There's some things that the judge has done which are almost unprecedented in terms of giving us discovery. The SEC I think is trying to paint a picture that is not quite there.

Is there a chance there will be a settlement or that this won't go to trial?

My hope has been since the first day we started speaking to the SEC that there'd be a constructive path forward that served the purposes of the SEC and what I mean by that in terms of protecting investors and having orderly markets. I have thought that there is some constructive path that doesn't involve going through a lengthy and extremely expensive litigation process. I still hope that there's a path forward that doesn't involve spending more and more money.

It's worth noting that the exact group the SEC is purporting to protect is trying to join this case because they think the SEC is hurting them.

You mean the XRP holders…

Correct. We don't have a relationship with this group. I'm not a lawyer but they effectively said, "Hey, we want to bring a class action against the SEC." And it's kind of weird. The SEC is protecting them, and the SEC is objecting to them entering the case. And you're like, "Wait a minute." The whole thing gets a little bit confusing.

In your tweets, you noted how Sen. Elizabeth Warren recognizes the need to improve the banking and payments system. But she's also one of the most outspoken crypto critics. During the hearing she warned against a system controlled by "the whims of some shadowy, faceless group of super coders and miners." Why mention Warren?

I mentioned Sen. Warren out of respect. I go back to what I said earlier, I think it's net positive for the industry that you have education happening. I'm not disputing that there are bad actors within the crypto community. That goes back all the way to Silk Road. What I was trying to call out in tagging Sen. Warren in that tweet is to say there are also a lot of good constructive, positive use cases that have developed. I think for Sen. Warren, the desire to protect consumers against bad actors is spot on. But I think it's important to note that the industry is full of good actors who are compliant and want to comply with rules and are seeking clarity of those rules. I don't think the way the U.S. government has engaged here is ideal, as contrasted with other governments around the world. Many other markets in the G-20 have taken a much more constructive engagement with the crypto industry where you do have certainty, you do have clarity.

We have continued to talk to government entities, agencies and representatives. I think we've gone from regulatory uncertainty to regulatory kind of chaos, when you bring regulation through enforcement. That doesn't foster innovation.

I am hopeful that good, clear regulation, consistently applied, will lead to predictable and constructive results. There's a massive new industry growing here which obviously is great. I say this as a U.S. citizen; let's make sure the United States is a major participant leader.

Sen. Warren also recently urged Treasury Secretary Janet Yellen, as head of the Financial Stability Oversight Council, to take the lead in developing regulations for crypto and blockchain, saying a "fragmented" approach involving different agencies simply won't work. Would you support that?

I support anything that provides clarity, anything that provides an organizing principle. You got the SEC, you've got FinCEN, you've got OCC, you got the CFTC, you got the IRS. You also have state licensing [agencies] — each of them have a slightly different view and classification. [SEC] Chairman [Gary] Gensler, my impression is he wants to see the SEC take a more significant role at the expense of some of those other groups.

The challenge for an entrepreneur or an investor looking at investing in companies in this space or purchasing the currencies in this space is: Which of those do I listen to?

The IRS says one thing. FinCEN very clearly said back in 2015 that XRP is a currency. Could we as responsible actors have assumed that the U.S. government viewed XRP as a currency? Seems reasonable.

What can you say about Coinbase's decision essentially to comply with what the SEC said about XRP?

I think Coinbase has built an incredible business. They're doing a great job. I think it's good for crypto as an industry to have a public company leader in the space.

I would disagree with your characterization that Coinbase is complying with the SEC because there's been no decision made. Out of an abundance of caution, most U.S. players halted trading of XRP here in the United States.

But XRP has continued to be extremely liquid on exchanges outside the United States. I'm just taking minor issue with the choice of the word "comply." There isn't clarity so some U.S. actors, in the absence of clarity, have decided to say, "Hey, look, this isn't clear. I'm gonna be cautious."

Let's go to payments. One of the main criticisms of blockchain currently is it's very slow compared to the networks of companies like Visa or Mastercard. What are your thoughts on what could change in terms of the speed of transactions?

Let's parse this a little bit, because I don't accept some of what you said as a precondition. Some blockchains are slow; particularly, proof-of-work based blockchains tend to be slow. I've been saying this for many years.

I am bullish on bitcoin. I'm long bitcoin. [But] bitcoin is not going to solve the payments problem, and the reason is because of what you're describing. The speed of transactions, the cost per transaction — those don't match well to ... I mean, comparing those to Visa and Mastercard is not probably reasonable. By contrast today, the XRP ledger is extremely fast and extremely cheap. The XRP ledger is about a thousand times faster per transaction and a thousand times cheaper per transaction than a bitcoin transaction.

I guess I'm reacting to the preamble to the question on the limitations of blockchains that are expensive. Well, I react to it by saying, "Don't use those for payments." I'm not taking anything away from the smart contract opportunity around ether. But in that context, the speed and efficiency aren't quite as critical as if you're trying to be a payments solution. XRP is extremely efficient and [that is] the reason why Ripple is using it for payments.

You're famous for writing the "Peanut Butter Manifesto" at Yahoo.

You're dating yourself by knowing this.

What are some of the lessons from that period for you in this role at Ripple?

I do think there are lessons for the "Peanut Butter Manifesto" that apply to Ripple. When I first got to Ripple years ago, Ripple was actually thinking about multiple different use cases for the XRP ledger, including identity. There was a smart contracts initiative. There were three different kinds of potential business lines that Ripple was looking at attacking and using the XRP ledger to do that.

I arrived in 2015 and I was like, "Look guys, we need to pick one." And we picked cross-border payments because it's very expensive. It's slow. It's ripe for leveraging these technologies. And XRP was uniquely positioned to do that.

It's not that you can't use the XRP ledger to solve an identity-based problem. It's not that you can't use the XRP ledger around smart contracts. But those are some of the lessons that I think apply: Focus matters. Decide what you want to be great at.

How does the "Peanut Butter Manifesto" apply to the SEC lawsuit? At the end of the day, this whole case boils down to one thing: Is the sale of XRP an investment contract? All the rest of it is like noise, right? It's easy to get distracted by — flamboyance isn't the right word, but — the window-dressing stuff. Let's take the emotion out of this. Let's keep it to core principles, and core legal concepts, and be clear about those.

SEC Chairman Gary Gensler, when asked if it is a security or a currency, has said, "It's both."

You know, he has said different things at different times. I think it's clear that there is not clarity, I think it's clear that the U.S. government should provide clarity, if we want this industry to thrive here in the U.S.

Going back to the point about how you pushed Ripple to focus on payments. There's also the view that in fintech, one-trick ponies don't make it, that you need to be in many areas, otherwise you won't be able to thrive. How do you respond to that?

If you're really good at one thing, but it's a really big market, that's fine right now. We started with cross-border payments. That is a very large market, and it continues to grow. And globalization will continue to drive that. We also started to offer new products. We've talked publicly about line of credit, which is basically XRP lending to our customers. We will continue to listen to the customer and understand how we can help them.

One last question. Is it true that you shaved a Y [for Yahoo] on the back of your head, and have you done the same thing with XRP?

I did shave a Y in the back of my head. And there's photo evidence of that somewhere. I have not shaved an X. I do have a Ripple tattoo.

Oh, where?

[Pause.] Yes. [Laughs.]

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