LONDON (Bywire News) - The blockchain has long been seen as a potential way to improve cross-border payments. However, until now the volatility of cryptocurrencies, a lack of awareness, and insufficient regulation have stood in the way. Now, though, all that is changing. Awareness about cryptocurrencies is growing, technology is evolving and regulators are getting to grips with the concept.
Most importantly of all, a number of proof of concept vehicles have shown how it can be done.
This month Citi successfully used the blockchain to make a cross-border payment. Working with the Inter American Development Bank, it used the LAC Chain Blockchain network, which runs on the EOSIO blockchain to send payments from IDB’s headquarters to a recipient in the Dominican Republic.
To make the transaction, they deposited funds in a Citi Account, tokenised, and transferred into a digital wallet before being transferred back into Dominican Pesos at an exchange rate set by Citi.
The IADB hopes this project will show how the blockchain can improve cross-border payments in development assistance and international remittances.
It builds on a number of other PoC projects focused on blockchain-based cross-border payments including a collaboration between the central banks of Hong Kong, UAE and China to develop blockchain technology for regional payments.
Projects such as these build on Swift’s landmark PoC from 2018 which demonstrated how distributed ledger technologies could solve some of the pain points regarding real-time liquidity monitoring involving cross-border payments. Meanwhile, Visa and Paypal have both said they will allow cryptocurrencies on their platforms.
Blockchain for payments
Momentum is building and it’s easy to see why. The blockchain appears tailor-made to manage cross-border payments in an increasingly global way. It addresses many of the key demands all parties need including speed, cost, transparency and affordability.
Although demand has risen dramatically for cross-border payments, the system for doing so has remained unchanged. Increasingly it looks overly complicated, inefficient and costly. To move money across borders a company would have to ask a bank in its home country to send the money. That bank will partner with a corresponding bank in the destination country to process the transfer. They will receive the money and move it on to the final recipient’s bank account.
Each step takes time and money. According to the World Bank, the average cost of sending payments around the world is around 6.51%.
Cross border payments are also vulnerable to criminals. Firms are struggling to manage issues around money laundering, cybercrime and fraud.
The blockchain has the potential to ease all of these issues. It stores everything in a distributed ledger and cuts out the middle man. The payment could be sent from one wallet to another with the recipient receiving the money almost instantaneously. Once a payment has been entered it cannot be reversed.
These proof of concept projects appear to have tokenised fiat currencies allowing them to be moved over the blockchain before being changed back again.
In theory, therefore, the blockchain is cheaper, faster and more secure.
According to Deloitte, the blockchain could reduce the cost of cross-border payments by as much as 80%. Rather than paying multiply parties you only need to pay a single nominal fee or, in some cases, nothing at all.
Rather than waiting days for a payment to be completed they could happen in close to real-time. This will reduce barriers between territories and allow businesses to work in a more agile way even when shifting between borders.
It is more transparent with no risks of differences in record keeping. The data is publicly available on the distributed ledger. This is not maintained by a centralised company but is there for all to see. It can also track and store large amounts of data which can be of use to regulators and authorities.
Because records are not kept by a central authority, it is also inherently more secure. For example, if one bank is hacked or compromised the transaction could be at risk. However, hacking the blockchain is more difficult. A hacker would have to alter the data in all previous transactions. Governments have been rigorously testing the blockchain and have found it to be remarkably secure.
What’s standing in the way?
The potential is enormous and plenty of people insist the blockchain is the future of international payments. However, they have been insisting on the same thing for a number of years.
Blockchain payments have been held back by a number of factors such as a lack of familiarity, insufficient regulation. One by one those barriers are coming down.
Regulators are collaborating to develop more coherent frameworks for cryptocurrencies and the blockchain. People are becoming more aware of the concept, and major financial institutions are investing in blockchain technologies.
These PoC projects are answering a host of practical questions about how blockchain solutions can be implemented and the benefits they offer.
(Written by Tom Cropper, edited by Klaudia Fior)