My point is that how is that not a hawala system, just facilitated by a distributed ledger instead of phone calls? If it is, why isn't illegal just like those other systems?

The similarity here I thought was the trading of IOUs -- this seems to be very similar to what hawala is/was.

There is no middle man facilitating ripple. (Well, ideally. RipplePay was centralized. But it didn’t need to be.)

Also, hawala is legal in most jurisdictions I believe.

Thanks, I think this might be the big differentiator -- the existence of middlemen is probably the large difference here, but it feels like at some point you're definitely going to need someone to keep track of value across IOUs somehow and at the very least who is trust worthy.

Well to be accurate there are middlemen in most ripple transactions, but not a middleman of the traditional sense. They're not pure facilitators, but rather active participants in the transaction. I'm not a lawyer, but I understand that by some interpretations this makes a difference in the regulation.