<p>Any of those things can happen. Likely, there will be some "hot potato" going on as people rush to offload any IOUs they hold to people who haven't yet gotten the news. It's unlikely other gateways would honor the IOUs unless they were contractually obligated to. This would likely harm their customers as they'd have to make up the losses somehow -- likely with higher fees.</p>

<p>Gateways are in the business of being trusted. So they have a huge incentive to find ways to induce people to trust them. We don't yet know what will happen, but some possibilities include:</p>

<ol>
<li><p>Gateways could cross-insure each other. (But this might make you less likely to trust a gateway for fear that it will collapse due to the collapse of another gateway.)</p></li>
<li><p>Gateways could be insured by governments or private insurance companies. (They hold other people's fiat currency, so the legal framework for doing this exists in many countries.)</p></li>
<li><p>Gateways could post bonds or liens on physical assets that could be seized or sold if the gateway defaults and used to cover their obligations.</p></li>
</ol>

<p>Note that this is only a significant issue for people who wish to use the Ripple system to hold fiat currencies as a store of value. It's not a major issue for a merchant who just wants to get paid in dollars as they can use a gateway that electronically deposits the currency in their regular bank account on a daily basis. If that gateway goes out of business, they'd only lose a day or two's revenue and could switch gateways on the Ripple system with no disruption. (You might think losing two days revenue is a big deal, but remember, businesses already pay 2% to take credit cards. That's like losing seven days revenue every year.)</p>

CC BY-SA 3.0
2013-02-13T15:20:15.270Z
2013-02-13T15:20:15.270Z
David Schwartz
<p>This question actually gets at the fundamental nature of Ripple. Ripple is essentially an online P2P implementation of free banking. Free banking is somewhat similar to how banking worked in the United States for much of the 19th Century (with a few major caveats) prior to the Federal Reserve and FDIC systems, and indeed back then banks would sometimes just vanish overnight. Because of this, banks went to great lengths to emphasize their trustworthiness; for example in my neighborhood in Brooklyn the Williamsburgh Savings bank built a colossal structure (<a href="http://farm4.static.flickr.com/3370/3597562434_d456b0192d_b.jpg">exterior</a>, <a href="http://nyunplugged.files.wordpress.com/2012/06/img_20120627_1229101.jpg">interior</a>), basically as a way of signaling they were in it for the long haul. </p>

<p>Interestingly, bills of exchange (that is, IOUs) were also broadly traded at the time, and of course are a major feature of Ripple (more explanation <a href="http://jpkoning.blogspot.com/2013/02/ripple-or-bills-of-exchange-20.html">here</a>). In a fundamental way, free banking (and Ripple) seek to build a banking system on trust among parties without relying on promises from a centralized authority such as a government or central bank.</p>

<p>Free banking is a popular idea among Austrian economists because it would be a way of removing government intervention from the currency and banking sectors. You can read more about it on <a href="https://en.wikipedia.org/wiki/Free_banking">Wikipedia</a>.</p>

CC BY-SA 3.0
2013-03-06T00:42:34.683Z
"as a way of signaling they were in it for the long haul" George Akerlof wrote an interesting paper about this called ["The Market for Lemons."](https://www.iei.liu.se/nek/730g83/artiklar/1.328833/AkerlofMarketforLemons.pdf)
Nick ODell
CC BY-SA 3.0
2014-04-04T23:35:25.243Z
Bills of exchange traded at a discount depending on the public's perception of that bank's creditworthiness. Ripple has an option to do it this way, but the default is to accept them at par.
Snowbody
CC BY-SA 3.0
2013-03-05T23:59:06.763Z
2013-03-05T23:59:06.763Z
John McDonnell
<p>If I understand correctly, IOUs issued by different gateways are not mutually fungible, even if denominated in the same underlying fiat currency.</p>

<p>So basically I you were to hold IOUs from a gateway and that gateway vanished, or simply refused to honour its IOUs you'd be out of your money.</p>

CC BY-SA 3.0
2013-02-13T11:48:20.647Z
Yeah, that's what I thought as well. So you need to be very particular about which Gateway IOUs you hold.
ripper234
CC BY-SA 3.0
2014-04-04T23:36:18.630Z
Unless you can find someone who is willing to exchange one gateway's IOUs for another of the same currency. By default this is done at par, but users can set quality levels of different gateways to treat them like different currencies.
Snowbody
CC BY-SA 3.0
2013-02-13T11:05:28.890Z
2013-02-13T11:05:28.890Z
David
<p>The same that happens when an exchange or bitcoin business that accepts deposits disappears: users will likely lose their deposits.</p>

<p>Unless the gateway somehow binds their IOUs issuance to a legal contract through some <a href="http://en.wikipedia.org/wiki/Digital_signature#The_current_state_of_use_.E2.80.93_legal_and_practical" rel="nofollow">digital signature scheme</a>. 
In that case, users may be able to sue them or get something from the bankruptcy process of the company.</p>

CC BY-SA 3.0
2013-02-13T16:14:01.837Z
2013-02-13T16:14:01.837Z
jtimon
<p>What happens when a gateway on the Ripple network defaults or simply vanishes? Do people that got their money from it lose that money, do other gateways honour the IOUs issued by that gateway still, or does something else happen?</p>

CC BY-SA 3.0
2013-02-13T11:47:41.413Z
Why the vote to close?
ripper234
<ripple><trust><money><iou><ripple-gateways>
What happens when a gateway on the Ripple network defaults or simply vanishes?
ThePiachu
# What happens when a gateway on the Ripple network defaults or simply vanishes?

(Asked by: username_0 on 2013-02-13)

What happens when a gateway on the Ripple network defaults or simply vanishes? Do people that got their money from it lose that money, do other gateways honour the IOUs issued by that gateway still, or does something else happen?

**Tags:** ripple, trust, money, iou, ripple-gateways

> **Comments:**
> **username_1**: Why the vote to close?  

---

## 4 answers

### Answer by username_2 on 2013-02-13. Score: 12

Any of those things can happen. Likely, there will be some "hot potato" going on as people rush to offload any IOUs they hold to people who haven't yet gotten the news. It's unlikely other gateways would honor the IOUs unless they were contractually obligated to. This would likely harm their customers as they'd have to make up the losses somehow -- likely with higher fees.

Gateways are in the business of being trusted. So they have a huge incentive to find ways to induce people to trust them. We don't yet know what will happen, but some possibilities include:

1. Gateways could cross-insure each other. (But this might make you less likely to trust a gateway for fear that it will collapse due to the collapse of another gateway.)
2. Gateways could be insured by governments or private insurance companies. (They hold other people's fiat currency, so the legal framework for doing this exists in many countries.)
3. Gateways could post bonds or liens on physical assets that could be seized or sold if the gateway defaults and used to cover their obligations.

Note that this is only a significant issue for people who wish to use the Ripple system to hold fiat currencies as a store of value. It's not a major issue for a merchant who just wants to get paid in dollars as they can use a gateway that electronically deposits the currency in their regular bank account on a daily basis. If that gateway goes out of business, they'd only lose a day or two's revenue and could switch gateways on the Ripple system with no disruption. (You might think losing two days revenue is a big deal, but remember, businesses already pay 2% to take credit cards. That's like losing seven days revenue every year.)


---

### Answer by username_3 on 2013-03-05. Score: 10

This question actually gets at the fundamental nature of Ripple. Ripple is essentially an online P2P implementation of free banking. Free banking is somewhat similar to how banking worked in the United States for much of the 19th Century (with a few major caveats) prior to the Federal Reserve and FDIC systems, and indeed back then banks would sometimes just vanish overnight. Because of this, banks went to great lengths to emphasize their trustworthiness; for example in my neighborhood in Brooklyn the Williamsburgh Savings bank built a colossal structure ([exterior](http://farm4.static.flickr.com/3370/3597562434_d456b0192d_b.jpg), [interior](http://nyunplugged.files.wordpress.com/2012/06/img_20120627_1229101.jpg)), basically as a way of signaling they were in it for the long haul.

Interestingly, bills of exchange (that is, IOUs) were also broadly traded at the time, and of course are a major feature of Ripple (more explanation [here](http://jpkoning.blogspot.com/2013/02/ripple-or-bills-of-exchange-20.html)). In a fundamental way, free banking (and Ripple) seek to build a banking system on trust among parties without relying on promises from a centralized authority such as a government or central bank.

Free banking is a popular idea among Austrian economists because it would be a way of removing government intervention from the currency and banking sectors. You can read more about it on [Wikipedia](https://en.wikipedia.org/wiki/Free_banking).

> **Comments:**
> **username_4**: "as a way of signaling they were in it for the long haul" George Akerlof wrote an interesting paper about this called ["The Market for Lemons."](https://www.iei.liu.se/nek/730g83/artiklar/1.328833/AkerlofMarketforLemons.pdf)  
> **username_5**: Bills of exchange traded at a discount depending on the public's perception of that bank's creditworthiness. Ripple has an option to do it this way, but the default is to accept them at par.  

---

### Answer by username_6 on 2013-02-13. Score: 4

If I understand correctly, IOUs issued by different gateways are not mutually fungible, even if denominated in the same underlying fiat currency.

So basically I you were to hold IOUs from a gateway and that gateway vanished, or simply refused to honour its IOUs you'd be out of your money.

> **Comments:**
> **username_1**: Yeah, that's what I thought as well. So you need to be very particular about which Gateway IOUs you hold.  
> **username_5**: Unless you can find someone who is willing to exchange one gateway's IOUs for another of the same currency. By default this is done at par, but users can set quality levels of different gateways to treat them like different currencies.  

---

### Answer by username_7 on 2013-02-13. Score: 1

The same that happens when an exchange or bitcoin business that accepts deposits disappears: users will likely lose their deposits.

Unless the gateway somehow binds their IOUs issuance to a legal contract through some [digital signature scheme](http://en.wikipedia.org/wiki/Digital_signature#The_current_state_of_use_.E2.80.93_legal_and_practical).
In that case, users may be able to sue them or get something from the bankruptcy process of the company.


---

