Blockchain technology has been occupying the minds of financial services industry professionals for a while now and for a reason. With a wide array of financial and non-financial use cases, blockchain is often considered as a solution to almost any problem in the banking industry and beyond (in insurance, supply chain and logistics, commerce, matters of inclusion, compliance and security, cannabis business, etc.).
International financial institutions and other organizations come to realize the importance of research and blockchain application pilots and projects in discovering the right use case and consequent benefits. The World Economic Forum (WEF) being among those entities has recently performed an extensive research on the way blockchain can reshape financial services. Some of the most interesting findings were about the way distributed ledger technology can transform global payments.
How will blockchain transform future global payments?
Blockchain technology will have a beneficial impact on each of the four parts comprising the global payments structure:
We have touched upon the matter of blockchain-powered digital identity before but in the light of financial inclusion for the citizens in poverty. When it comes to global payments, WEF suggests that trust between the sender and a bank or money transfer operator as well as the authentication process can be established via digital identity profile stored on distributed ledger technology.
Further, as the request for money transfer has been sent, smart contract will firm the obligation to transfer funds between the parties involved.
In the case of multi-currency transfers, the liquidity providers will be responsible for facilitation of the currency conversion. “Through smart contracts, foreign exchange can be sourced from participants willing to facilitate the conversion of fiat currencies.”
When it comes to international money transfer, the matter of security and compliance is especially important. The international movement of funds requires strict AML compliance and real-time alerting in case of suspicious activities. Blockchain technology will enable international regulators to monitor transactions in real-time and enforce AML policies via smart contracts should the alerts notify about controversial transfers.
The matter of blockchain-powered security is not as much the future, as almost a present given that there is already a range of innovative startups applying distributed ledger technology to security and compliance.
Needless to mention, blockchain has long been considered a cost-cutter as it will allow “real-time transfer of funds with minimal fees and guaranteed delivery without the need for correspondent bank(s).”
Blockchain-powered smart contracts are almost an all-in-one ‘cure’ for everything. From the first step to the last, smart contracts serve unbreakable chain of the whole process. On the stage of delivery, “funds are deposited automatically to the beneficiary account via a smart contract or made available for pickup after verifying KYC.”
Proof of payment
“The transaction history is available on the ledger and can be continuously reviewed by regulators.” As the payments history and supporting information will be carved into blockchain, it will create a tamper-proof record for regulators and other involved parties to access it any time upon necessity to easily settle issues with payments if they arise.
What is required to build the future global payments system on blockchain?
There are three critical elements emphasized by WEF as prerequisites for blockchain to enhance the global payments ecosystem:
- Members of the ledger as well as regulators need to converge on common KYC processes to effectively identify stakeholders involved in the transaction and ensure a corresponding template data set is available on distributed ledger technology.
- Regulators, central banks and legal participants will need to collaborate from different countries to reach a valid legal framework for global payments.
- Consensus on the choice of distributed ledger technology platform across a significant number of FIs will allow economies of scale and higher return on investment.