a new technology for international payments
Progress never stops! That's what we see in our societies, which are focused on innovation and saving financial and energy resources.
Blockchain technology is bringing definite advances in various areas of our economy. Some of these are 'disruptive', transforming operational processes at the level of decision making and transaction application protocols.
Every advance challenges the established order. When large companies and major financial and economic powers are involved, it is not uncommon to see 'distortions' in the face of progress and the added value it brings to the core of their activities. Some innovations bring about changes in strategy at the highest level of our societies and therefore require time for the powers that be to master transformations that can change an economic and political situation at the global geostrategic level.
There is currently a case in point in the digital currency space. The company in question is Ripple in the US. Ripple has developed a highly competitive international payment system that breaks away from the international payment systems used by central banks and large commercial banks.
Just compare the broad outlines of what is currently practised with what Ripple is offering:
Speed of execution is a key factor in the progress made between what is currently practised and what Ripple offers. An international payment in different currencies can take several days from the payer to the recipient of the funds (2 to 5 days), whereas Ripple's blockchain protocol makes a similar payment in a matter of seconds.
The costs are also very different. This is due to the number of interventions and intermediaries required in the current situation compared with a direct payment between debtor and creditor with no intermediary between the two parties involved. The cost of an international transfer can be as high as USD 40, whereas the proposed technology reduces this to a fraction of a cent. This would enable banks to significantly reduce costs for their customers.
The transparency of transactions is a key element in being able to ‘trace’ a transaction from the initial payer to the final recipient. Blockchain technology records each transaction in a decentralised register that is open and immutable, thereby enhancing transaction security. Whereas the current process requires a transaction to be tracked through various payment intermediaries.
Liquidity has to be available so that payments can be made anywhere in the world is an onerous and costly task for banks. They have to maintain ‘nostro’ accounts in various banks around the globe in order to be able to credit a beneficiary wherever they are. This requires management and infrastructure that could disappear thanks to blockchain technology. And so free up huge amounts of liquidity in the interbank financial system.
Clearly, Ripple's technology is superior to what we apply today in terms of international payments. However, it is a disruptive replacement that can only progress step by step, for obvious reasons given the global structures in place today. Take the SWIFT system, which took off in the 1970s and is used by more than 200 countries around the world. It secures payments by means of an interbank communication code, but it is centralised and gives a certain amount of power to the management body. Not only is its technology now outdated, but it is also less and less appreciated by a large number of countries, mainly for political reasons. The SWIFT system is criticised for being used as a monetary weapon against countries sanctioned by the international community. A desire to get rid of a means of pressure is understandable for some, but negative for others who believe that certain countries should be sanctioned. In this case, it is clear that the introduction of a decentralised system where the network's control and validation body does not have the means to impose monetary sanctions on a country cannot be introduced overnight.
Another revealing example that is considerably slowing down the implementation of Ripple's blockchain technology is the elimination of intermediaries in the context of a payment order. This is a particularly sensitive issue for banks, which generate substantial revenues as intermediaries for international transfers. The challenge is to put in place a banking structure that uses this new technology and enables banks to offer a competitive service to their customers by passing on the cost savings achieved by eliminating services that have become obsolete. This requires major changes in banking structures and staff.
In the light of the above, there is a significant point to be made about a decentralised payment system using blockchain technology. This is the counterparty risk among the intermediaries between the originator and the beneficiary. The Ripple system avoids intermediaries and acts directly between the originator and the recipient. In this way, the absence of counterparty risk eliminates the danger of ‘domino effects’ between banks, or even a systemic risk for the financial markets.
A final important point is the release of nostro accounts. Banks maintain accounts in various currencies in various countries in order to minimise exchange and transfer risks. Colossal sums could be freed up and used for more useful purposes for economic growth.
For all these reasons, it seems clear that this new money transfer technology will develop sooner or later. The first economic players to be able to offer a better service at a better price and with greater security will be the beneficiaries of a new distribution of customers who are increasingly aware of new financial applications.