Blockchain in Cross-Border Payments

[Infosys]

 Blockchain technology in cross-border payments can enable

secure transfers between an infinite number of bank ledgers. This
allows one to bypass banking intermediaries who serve as
middlemen to help transfer money from one bank to another. The
transaction is secure, quicker, and cheaper and has end-to-end
visibility.

 Since SWIFT established common standards for financial

transactions and a shared worldwide banking network in 1973, it
has connected more than 11,000 financial institutions in more than
200 countries and territories, facilitating cross-border payments
and supporting economic development around the world. 

 The system, however, is archaic, inefficient, unreliable and costly,

especially with the advent of Blockchain technology. For example,
an average international payment takes 3-5 days, and 4% of
payments using SWIFT fail right now. This leads to a lot of
frustration for both corporates and their customers, especially in a
globalized e-commerce era where every second matters .
 The Blockchain Technology can help in solving these pain-points
at the infrastructural level.
 The use of Blockchain technology in cross-border payments is
very different from existing methods such as SWIFT. Even
SWIFT’s new GPI (global payments innovation) relies on the same
unidirectional messaging, which means that it is not connected to
 any underlying settlement process. Such a system has its
drawbacks, where individuals can manipulate the banking system
to commit fraud. A case in point was the Punjab National Bank
fraud case, where INR 14,356.84 crore was stolen because
perpetrators of the fraud made unauthorized transactions on the
SWIFT network, where payment messages sent were not linked to
the system that actually settled the transaction.
 There are no such issues for payments processed on the
Blockchain. Any transactions can be settled instantly. Using the
bidirectional messaging and settlement component employed in
Blockchain solutions, such as Ripple’s, ensure that the transaction
is validated on the Blockchain before the funds are transferred
across the ledgers of transacting parties. If for some reason the
payment does not go through, both banks are immediately notified
and no funds are transferred.
 In India, Blockchain technology has been adopted by banks to help
improve the payments experience for its customers. For example,
last year, YES BANK has signed a partnership with Ripple to help
facilitate inbound remittances from North America, the Middle East
and the United Kingdom.
 For example, let’s say an Indian construction worker in Dubai
urgently needs to transfer funds back home for a medical
emergency his family is experiencing. If his bank used Blockchain
technology, the remittance transfer could be completed within
minutes, with fees that are significantly lower than existing
methods of transferring money. Had the conventional means of
cross-border payments been used, it would have taken 3-4 days,
with the money going through multiple intermediaries and incurring
extra fees, before finally reaching the worker’s family.[YES BANK]
 Blockchain is a universal ledger present in a distributed network
which is accessible to everybody in the network. Thus each node
in the network will have a complete copy of the entire database or
the ledger and any modifications to the same will have to be duly
verified by other nodes/ parties to validate on the modification
done. Thus, it requires a consensus of nodes to agree upon the
state of the ledger for it to be valid. This would mean that direct
transfers can occur instantly now and without fear of manipulation
even for cross-border payments, because there are no
intermediaries or correspondent banks involved. The underlying
concept of distributed ledger makes it possible for the banks to
have a bilateral, visible, and immutable transfer of value,
adjudicated by the settlement agency.

 According to a recent industry survey conducted by Accenture, it

was found that around 30 percent of organizations are involved in
conducting PoCs (Proof of Concept) along with other FinTech
companies around Blockchain and Distributed Ledger technology,
while 27 percent of the organizations are involved in formulating a
strategy around the same. Among the PoCs being explored, below
is the sequence of priorities attached by various organizations:
o Intra-bank cross-border payments

o Cross-border remittances

o Corporate Payments

o Inter-bank cross-border payment systems

o Person-to-person payment
 The below set of critical factors need to be addressed for industry-
wide adoption of distributed ledger technology (DLT ):-
o Standardization – Lack of standardization in formats. With
globalization, we have several global standards for
messaging like SWIFT, ISO20022, ISO8583, etc.
o Cost and time benefit with added payment transparency
–It is difficult to assess and deduce charges incurred through
multiple correspondent banks. The identity of the involved
banks are not always known between sender and beneficiary
bank and hence, the lack of transparency.
o Data protection and privacy

o Compliance and regulatory reporting – Adhering to the

compliance and regulatory reporting like the anti-money
laundering (AML), know your customer (KYC), financial
action task force (FATF), and others in order to ensure there
is sufficient payment transparency and to keep a tab on the
high-risk corridors or high-risk payments.
o Collaboration – Cooperation among payment service
providers to create inter-operable Blockchains. Need for an
extensive global network.

 Benefits of Blockchain in cross-border money

transfer

o It leads to exclusion of any middlemen, central agencies, or

correspondents from the payment processing.
 o Reduced cost with minimal charges along the payment
chain.
o Reduced turnaround time for settlement as there is no
need for central agencies and movement of messages.
o The intraday liquidity need not be ensured with the central
banks. Since it is a distributed ledger and the nodes of the
network have a copy of the balances as they are maintained
in the settlement accounts with the other banks, the balances
are duly maintained.
o Since the details of the transaction are encrypted and
hashed, there is hardly any possibility to modify the data.
o Increased payment transparency with distributed ledger as
sender and receiver are the nodes of the network / chain.

 Standard Chartered cross-border Ripple Payment

Tapping the Blockchain technology, Standard Chartered

completed its first real-time cross border payment in 2016.
Standard Chartered used Fintech startup Ripple’s Enterprise
Blockchain platform. This transaction made to a major
correspondent bank was completed in less than 10 seconds. This
settlement time included the “full transparency of fees and FX
(foreign exchange)”.
The same payment dispatched through the traditional banking
system and network would have taken up to two days.

 FIAT Currency: Fiat money is government-issued currency that is

not backed by a physical commodity, such as gold or silver, but
 rather by the government that issued it. The value of fiat money is
derived from the relationship between supply and demand and the
stability of the issuing government, rather than the worth of a
commodity backing it as is the case for commodity money. Most
modern paper currencies are fiat currencies, including the U.S.
dollar, the euro, and other major global currencies. Fiat money
gives central banks greater control over the economy because
they can control how much money is printed.
 Fiat money only has value because the government maintains that
value, or because two parties in a transaction agree on its value.
Historically, governments would mint coins out of a valuable
physical commodity, such as gold or silver, or print paper money
that could be redeemed for a set amount of a physical commodity.
Fiat money is inconvertible and cannot be redeemed.

Streamlining Cross-border payment processing with

Blockchain [TCS]

The payments industry has been witnessing an increasing

number of advocates championing the adoption of blockchain
due to its potential to reduce the role of intermediaries and
enable faster processing of cross border payments. However,
the big question that remains unanswered is - how can banks
seamlessly adopt blockchain in payments to reap long-
term benefits. This whitepaper discusses key standards that
banks must follow for adopting blockchain for a faster, cheaper,
secure and digitized way of processing cross border payments.
Banks have invested time and money in exploring new technologies such as
digital and mobile applications in an attempt to transform payments. Going a
step forward on the technology path, the banks are now considering adopting
blockchain for speedy payment processing. Some banks have even conducted
proofs of concept (PoC) to assess the maturity of the technology and determine
its ability to meet both functional and non-functional requirements in payments.

Compared with domestic payments, cross border payment processing is quite

complex. For example, if company A in the US has to send a dollar payment to
company B in Japan, in the existing scenario, it would depend heavily on
correspondent banks in respective geographies resulting in processing delays,
increased transaction costs and poor customer experience.

Using blockchain can help the banks to enable faster processing of the dollar
payment. As soon as the payment is initiated, a block will be created that will be
is broadcasted to all the parties within the network. Authenticated users with the
network will need to review and approve the payment and the payment (block)
is then added to the chain. Each step of the process will be visible to all parties
within the network thus allowing a high degree of transparency and trust.
Authenticated users can then review and approve the transaction enabling the
company B in Japan to receive the payment from company A in the US.

The lack of standardization in technology, security, and governance poses huge

challenges for big-bang implementation of blockchain for processing cross-
border payments. For banks to reap long-term benefits of a blockchain-based
payment platform, several key standards will need to be adopted. Other hurdles
to implementation revolve around meeting geography-specific regulatory and
jurisdictional mandates, especially in reporting.

Technical Standards

The banks will need to focus on developing common technical standards to

enable interoperability and accelerate broader adoption of blockchain, improve
network scale efficiencies, and adopt a standardized mode of communication
(like SWIFT messages) as part of their overall strategy. Banks must run pilots
for cross-jurisdictional use cases to gauge the processing time, scalability, and
compatibility with geographic requirements to facilitate a wider adoption of
blockchain and improve network scale efficiencies.

Regulatory & Compliance Standards

Banks must evaluate if implementing a blockchain-based platform over their

existing technology infrastructure will ensure compliance with existing and
upcoming regulations. Given that the price of regulatory violation is steep, banks
would do well to carefully consider all the regulatory implications of blockchain
adoption before embarking on implementation.
Governance Standards

Banks are currently facing issues around the accountability and ownership of the
distributed ledger that stores the transactions. Another issue that needs to be
resolved is the facility to reverse transactions; since transactions processed
using the distributed ledger are immutable and cannot be modified or cancelled,
banks will need to lay down governance standards to address this and facilitate
amendments, aggregation, reversal and cancellation, all of which is available in
the existing system.
Security Standards

While it is indisputable that blockchain technology is beneficial in terms of

processing time and transparency, the transaction information is visible to all the
participants within the network. This can have adverse privacy and
confidentiality implications concerning personal customer data. The banks must
lay down stringent security standards and educate users about maintaining
robust user credentials, installing anti-virus software, and ensuring periodic scan
of computers and mobile devices. In addition, stringent testing of solutions
supplied by third-party vendors must be undertaken before any integration into
payment systems. Adopting the appropriate technical, regulatory compliance
and governance standards will also play an important role in mitigating security
risks.

Given that blockchain adoption is still at a nascent stage in the industry,

implementation at an enterprise level will come with its own challenges. Hence,
it is absolutely essential for the banks to initiate certain preliminary steps in
order to aid a smooth and hassle-free transition to a blockchain-powered
payments platform. These would include:
1. Identifying suitable Fintech partnerships and defining a strategic
blockchain framework for processing cross border payments.
2. Leveraging cryptographic networks to ensure data security and
establishing appropriate levels of access to protect the network.
3. Ensuring the blockchain framework has the capability to handle growing
traffic; banks can consider storing a subset of the transaction data on-
chain and sensitive information offchain to ensure data privacy.