Cross Border Payments “Incredibly Ripe” for Disruption, A Case for Ripple & Stellar

Hyun Song Shin, Economic Advisor and Head of Research at the Bank for International Settlements (BIS) shared the game approach (the study of mathematical models of strategic interaction between rational decision-makers), they took with Distributed ledger technology and large value payments.

Talking about the “plumbing” of the bank transfer where one needs to make to his friend in another country and in that person’s currency, he goes onto explain how that payment transfer goes.

It is a lengthy process as it involves the domestic branch, the central bank and main branch of the first person’s bank that has to make the transfer and then the main branch and domestic bank of the person that has to receive the money.

The bank on the top is the major global bank which it is plugged into SWIFT messaging system that transmits messages to banks all over the world and the money will follow the settlement route according to the messages sent.

According to the presentation slides, several banks have experimented with DLT payment systems in terms of Cash-in-advance payment systems with digital tokens redeemable at the central bank and periodic netting arrangements to reduce credit needed for payments where central bank retains some role.

There are two issues, first of confidentiality and how to provide credit to finance payments as real-time gross settlement (RTGS) systems have heavy credit needs and with this comes coordination problem.

Moreover, it addresses the issue of how to achieve consensus and also which is good enough for action when there is something at stake.

It concludes with two issues for DLT payment systems where early attention and discussion is on how to overcome technological challenges in DLT for the payment system.

Another one is how to overcome the need for credit to finance payments in large value payment systems that it states is “likely to prove more challenging for free-standing DLT systems that are less reliant on central bank balance sheets” especially in cross-border and cross-currency context.

Jessie Lund, the head of IBM’s blockchain solutions, took to Twitter to share the

“great overview from one of the inside experts on how cross border payments works… and why it's so incredibly ripe for disruption.”

Cross border payments is a trillion dollar market that two big cryptocurrencies Ripple and Stellar working on transforming it. Stellar has collaborated with IBM and Deloitte among others to further its game in cross border ecosystem.

Ripple has claimed to partnered with over 200 banks and the likes of MercuryFx, one of Ripple’s partner recently shared that they moved “86,633.00 pesos (£3,521.67) from the U.K. to Mexico in seconds,” while saving “£79.17 and 31 hours on the transaction.”

Competing with Swift, through xRapid that uses XRP, Ripple is making faster and cheaper cross-border payments by eliminating the need to park money in banks and the need to change the currencies multiple times.

Publication date: 
02/11/2019 - 01:52