What are the biggest challenges ahead in the political and regulatory realm?

One set of challenges that I am primarily interested in relates to political and regulatory affairs. While Bitcoin gained its initial popularity as a pet-project for anarchists, it is my belief that we have moved beyond cryptocurrencies being used as a way to withdrawal from the global financial system. Therefore, it will be regulated in some form. We see already the first, uncoordinated steps, specifically in Europe.

In this realm, policymakers are faced with a daunting challenge. No government wants to be seen as stifling innovation—and as such, many are taking cautious and hands-off approaches to policymaking. But at the same time, because of money-laundering and criminal concerns, they cannot simply let this industry develop in a vacuum.

Further, many people will look for regulations as one precursor to participating in this ecosystem, creating a chicken and the egg problem. Governments will need to find the right balance in order to safely facilitate innovation, protect consumers, and avoid regulatory arbitrage.

In addition, the power of the leading players in the banking industry is often underestimated. For many decades they have been the driving force shaping regulation in transaction banking with powerful intra-industry bodies (e.g., the Wolfsberg Group in correspondent banking).

What’s your assessment of the current space regarding payments? Where do you see us headed?

The traditional payments system is antiquated, costly, inefficient, and in need of disruption. The problem is that it is very profitable for entrenched players (oligopolists) who have a vested interest in maintaining the status quo. Additionally, it is not in the DNA of large firms to innovate effectively.

There is no question that cryptocurrency and the associated infrastructure—specifically the Ripple protocol—represents a dramatic step forward that cannot be ignored. Put another way—this technology cannot be un-invented or have the genie put back in the bottle. Even more important is Ripple Lab’s approach and potential to redefine the environment of (international) financial transactions.

Traditional banking models like correspondent banking urgently need to adapt to the realities of a digitized and interconnected world.  Large and small firms across the financial services industry will need to integrate this technology into their operations or risk being passed by competitors.

As one government official recently told my firm—we cannot stick our heads in the ground and pretend this technology does not exist. The vision of Chris Larsen and his team is in my eyes the most innovative and promising concept on the market.

What sort of time horizon should we expect for things to start developing and improving in a material and fundamental way?

I believe that a reasonable time horizon for material change is at least another two to three years. Mainstream cryptocurrency adoption will not take place until consumer applications become commonplace and easily usable for people, and we are still in the first stage of VC funding in the industry.

Significant and reliable regulatory changes for transaction banking will probably even take longer as the complexity and interdependencies of the matter requires an in-depth understanding, and governmental bodies around the globe will need to catch up.

A final challenge among all participants in the ecosystem will be to effectively manage consumer expectations. All of the publicity around cryptocurrency is creating the impression that it is more developed than it is. Likewise, episodes like MtGox garner widespread negative publicity, harming the credibility of the industry, even of other products than just the currency. People need to realize that there will be some hiccups along the way—like any new technology, and understand the risks that they face.