Saturday, June 9, 2018

What is Blockchain

Blockchain Technology - Replacing Outdated Global Payment Systems

Certainly one of the key issues blockchain can tackle is the high complexity of payments systems sites, due to the fragmentation of the financial industry itself, that makes it impractical for individual banks to interact directly with all other banks in the world.

For example, each time a lender gets a payment instruction from a client, it needs to find a reporter bank that is prepared to take the customer's funds and terminate the payment locally at the acquiring bank. 

And to do so, the reporter bank needs to have a nostro or vostro account with the acquiring bank (or with another correspondent bank that has access to the acquiring bank, thus adding an additional hoop, ideally with enough pre-funded liquidity to complete the payment on the client's behalf.

buy cryptocurrency onlineBut when this happens, the acquiring bank has no way to verify that the incoming transfer from the (last) correspondent bank, in fact, corresponds to the initial client sending the money.  For this reason a SWIFT code from the sender is needed, hence the  acquiring lender/standard bank can be familiar with purpose of the inbound funds, do proper scheduled diligence or anti-money washing checks on the repayment, and inform the recipient of the funds.

Almost all of the parties involved have different ledgers, and the coordination between all these parties is slow and error-prone, many times depending on manual interventions by back-office teams. 

Furthermore, someone needs to perform foreign currency conversion at either end, and various parties need to manage liquidity levels at nostro/vostro accounts, which involves settling against central bank accounts as well.

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

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

Through the use of smart contracts, different functions can not only store tokenized funds and obligations, they can also establish in stone the principles making use of to all aspects of the end-to-end payments procedures, eliminating errors and uncertainty, increasing transparency and auditability, and reducing fraud and cyber risk. The end result: Everything on a single ledger, with the same smart agreements for all, with the same computational engine, without having the opportunity of errors or tampering.

But a key concern arises when one makes an attempt to scale such systems, particularly if large  payments issued by corporate clients are at stake: management of liquidity.

You will discover recommendations to use cryptocurrencies or unbacked crypto-assets to play this role, but this approach is experiencing an amount of limitations.

 The industry risk of such assets is quite difficult to hedge, due to significant movements, and the total fluidity in circulation is small  in comparison with exactly what is needed in the market.

As a pragmatic alternative, several leading institutions are working towards producing tokenized, digital central bank money.

Some, like the Utility Settlement Gold coin project which lender|, Santander, is part of, alongside with UBS, Krauts Bank, Bank of New York and many others), do this through intermediate vehicles that carry the backing funds on a real-time gross arrangement (RTGS) account. 

Others, like project UBIN in Singapore or project Khokha in South Africa, recently executed  and demonstrated by ConsenSys, direct implementation RTGS data files on smart contracts.

Both way, these initiatives show a viable approach to increasing liquidity management for commercial banks and market makers, with the assurance  of providing much better liquidity, velocity and visibility, with the potential consequence of enabling a significant decrease in liquidity levels within the whole economic environment.

As these initiatives develop fully and flourish, we believe that they will be a key enabler of the decentralized, tokenized economy the world is so intrigued about.

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