Op-ed

International Bank Remittances Need Blockchain Technology Today

How Blockchain can lead the financial system into a new era

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Look inside an innovative sector early in its development, and you’ll often find the foundation in place to enable a quick transition: companies and consumers alike that are ready to take risks, and have flexible expectations in a world in which the rules are yet to be written.

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In contrast, global settlement technology for remittances and payments is mature and ripe for innovation. It’s an essential function for banks, ensuring that asset ownership transfers land successfully. However, settlement is also a realm of firmly set patterns, where entrenched institutions and familiar modes of operation rule the day. It can feel hard to break free from tradition, and all the comforts it holds.

Now banks are recognizing that they need to plot an escape from the usual ways of addressing the cross-border payments that are central to everyday settlement. One example is CHIPS, the leading mover of international remittances in the US, that clears and settles 1.7 trillion dollars of interbank payments in both cross-border and domestic settlement daily.

That’s a lot of money, but it can also be a lot of time, via a process that can take up to 24 hours to complete and comes saddled with sizable fees as well.  The time lag comes courtesy of each mainstream fiat currency having an independent cross-border payment settlement system, with international remittance only possible through multiple agency banks located in different countries.

Fees are turning off bank customers in droves who are tired of paying up to 15% for incoming transfers, depending on

Josh Li, Chief Business Officer, Apifiny
Josh Li, Chief Business Officer, Apifiny

the country their money is coming from. A 2016 study from McKinsey & Company noted an average cost of $25 to $35 for a US bank making cross-border remittance through an agency bank—more than 10 times the average cost of a domestic payment, thanks to expenses associated with Nostro-Vostro liquidity, treasury operations, foreign exchange operations, and compliance. 

Breaking Through With Blockchain

What will it take for the cross-border remittance heavyweights to solve these cumbersome time and cost penalties that businesses and consumers alike must bear? 

Blockchain technology is maturing into a superior solution in the eyes of an increasing number of participants in the settlement ecosystem, with its proven ability to execute peer-to-peer, direct value transfer between parties for traditional assets like fiat currency, securities, and commodities. Coupled with smart contracts, blockchain becomes even more powerful, enabling the instant movement of value between people or businesses with complete transparency and immutable record-keeping. The foundation is in place to apply blockchain technology toward reducing the time and cost of cross-border remittances by building a unified instant global settlement network across systems, asset classes, and markets.

As it turns out, CHIPS’ counterpart in securities, DTCC, is working on enhancing its system with distributed ledger technology (DLT) — a key component of blockchain. Created to help automate, centralize, standardize, and streamline the clearing and settlement of securities, DTCC helped to thoroughly overhaul what, through the mid-1970s, had been a hugely inefficient process of processing physical paper stock certificates. DTCC turbocharged clearing and settlement by centralizing the storage of these certificates, keeping electronic records of ownership changes, and introducing a multilateral netting process that arranges for transactions to be summed at the end of the trading day, as opposed to settled individually. 

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This approach works in U.S. securities since one central holder has been established for this sizable sector — $2.15 quadrillion worth of securities transactions were processed by DTCC and its subsidiaries in 2019 alone. Gathering all of America’s cash under one roof to streamline international remittance would be quite another story. However, just as evaluating DLT is a logical next step for DTCC to further accelerate settlement, blockchain-based solutions can be applied to reducing international remittances’  current multi-day timeline to real-time.

DTCC Draws Closer to DLT

DTCC’s official commitment to DLT commenced in 2016 when the global financial services infrastructure provider announced a white paper calling for industry-wide collaboration on leveraging DLT to “modernize, streamline and simplify the siloed design of the financial industry infrastructure and address certain limitations of the current post-trade process.”

That vision came one step closer to fruition recently, with DTCC’s recent announcement of a pair of projects striving to integrate DLT with capital markets. Project Ion sees DTCC committing to the exploration of asset digitization on DLT, and its ability to reduce cost and risk for the U.S. equities market while modernizing capital markets infrastructure and accelerating settlement. Meanwhile, Project Whitney is focused on applying tokenization as well as other digital solutions for private markets.  Both projects are still in the experimental stage, but they represent the ambitious explorations that banks should be demanding right now from infrastructure providers like CHIPS. 

SWIFT, the international interbank clearing system with its far-reaching financial messaging network, also has DLT squarely in its sights. A SWIFT 2017 pilot project exploring PoC (Proof of Concept) for blockchain revealed the technology’s proficiency at many Nostro account reconciliation functions, including real-time event handling, transaction status updates, full audit trails, visibility of expected and available balances and more. SWIFT’s main hangup with blockchain at the time? Its scalability, a vector of DLT performance that has evolved significantly since the study was conducted three years ago. 

DLT inroads for the sector are also indicated by the emergence of Ripple, a settlement system, currency exchange, and remittance network built on a distributed open-source protocol. The RippleNet global payments network was created to soothe banking’s pain points with international remittances, including reliability issues, slow transaction times, exposure to fiat pair volatility risk, and high operational costs. However, Ripple comes with a major caveat in the form of XRP, the native digital asset in Ripple’s ledger system that has proven to be a volatile cryptocurrency, making banks wary of employing it outside of the XCurrent messaging technology. 

Has CHIPS’ Ship Sailed?

CHIPS, as an organization with its roots dating back to 1853, may prove harder to adapt to advances like DLT. However, banks might not have time to wait for CHIPS to embrace a well-engineered blockchain solution for cross-border settlement that can generate orders-of-magnitude improvement in speed, security, and scalability. The frustrations associated with international payments — widely acknowledged as the slowest, most expensive and most unreliable of all payment categories — are driving retail and institutional customers alike to increasingly evaluate alternative international payment rails, some of which may bypass traditional banks entirely. 

These problems are not insurmountable, however. Just as DTCC is seriously evaluating DLT for securities, settlement for remittances is perfectly poised for reinvention via blockchain technology. One approach could be a DTCC-inspired approach where a responsible distributed finance approach to settlement in which each settlement node maintains custody of assets on behalf of a network of participants. This would enable transactions to be instantly settled between network participants by transferring proof of ownership, similar to DTCC’s approach, via instant, smart contract-backed proof of ownership. 

CHIPS has served the world well, and for a long while. However, this venerable system has a responsibility to thoroughly explore every angle and take a cue from its counterparts like DTCC in moving full speed ahead with DLT for the benefit of banks and their customers. Blockchain is maturing rapidly, and the financial system deserves to see it fully on the map, transcending traditional bottlenecks for a new era of cross-border payments. 

— Josh Li, Chief Business Officer, Apifiny 

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