How Blockchain Can Finally Fulfill Its Promise in Global Payments

[felixesteban]

There has been much debate about the potential benefits of blockchain technology to improve the world of payments -- particularly international payments.

This is a business where many different parties need to reach consensus to route the payments, perform currency conversions, and deploy and manage liquidity in different jurisdictions, all subject to heterogeneous regulatory constraints.

One of the main issues blockchain can tackle is the high complexity of payments networks, due to the fragmentation of the financial industry itself, which makes it impractical for individual banks to deal directly with all other banks on the planet.

For example, when a bank gets a payment instruction from a client, it needs to find a correspondent bank that is willing to take the client's funds and terminate the payment locally at the receiving bank. And in order to do so, the correspondent bank needs to have a nostro or vostro account with the receiving bank (or with another correspondent bank that has access to the receiving bank, thus adding an extra hoop), ideally with enough pre-funded liquidity to complete the payment on the client's behalf.

But when this happens, the receiving bank has no way to verify that the incoming transfer from the (last) correspondent bank, in fact, corresponds to the original client sending the money. That is why a SWIFT message from the sender is needed, so the receiving bank can understand the purpose of the incoming funds, do proper due diligence or anti-money laundering checks on the payment, and inform the receiver of the funds.

All the parties involved have different ledgers, i.e. they do not share a single version of the truth, and the coordination between all these parties is slow and error-prone, many times relying on manual interventions by back-office teams. Furthermore, someone needs to perform currency conversion at either end, and different parties need to manage liquidity levels at nostro/vostro accounts, which involves settling against central bank accounts as well.
Blockchain's promise

Blockchain's big promise is precisely providing that single version of the truth that is missing in the picture above.

Indeed, a true, smart contract-enabled blockchain provides a single ledger and transactional engine where balances can be maintained and transacted upon and where payments can live as single, common digital objects that make messaging and reconciliation unnecessary.

By using smart contracts, different parties can not only register tokenized funds and payments, but they can also set in stone the rules applying to all aspects of the end-to-end payments processes, eliminating errors and misunderstandings, increasing transparency and auditability, and reducing fraud and cyber risk. The result: Everything on the same ledger, with the same smart contracts for all, and with the same computational engine, with no possibility of errors or tampering.

Read more:
https://www.coindesk.com/blockchain-can-finally-fulfill-promise-global-payments/

[altcoingamer]

Thank you for your perspective, I really enjoyed the write up and the aritcle. + Karma