International payments have always been a thorn in the sight of investors. A business, involving many different parties has to reach a timely consensus, while taking into account strict regulations, currency conversions, payment routes, deployment and management of liquidity and different jurisdictions. The debate on the topic has been endless. Blockchain can particularly target the issue of the complexity of the payment networks.
International payments are ready to take initiatives in the right direction
The financial industry is quite fragmented.This makes it impractical for individual banks to deal with all other banks on Earth. In a sarcastic twist of fate, this shows that even banks don’t want to deal with their own systems.
If developed and used correctly, a smart contract-enabled blockchain will provide a single ledger and transactional engine to maintain and transaction balances, while having payments as single, common digital objects which make reconciliation and messaging unneeded.
One of the greatest benefits is that with the usage of smart contracts the participating parties can set in stone the rules of their agreements. That way there will be smart contacts for everyone, errors and misunderstandings will be eliminated.
The risk of hacking and fraud will be greatly reduced, while also providing the parties with transparency and audibility. With the same computational engine, the chance of tampering or foreign influence will be completely eliminated.
Something, which is often discussed these days are the decentralized solutions, which focus on improving payments. By digitizing the messaging layer or eliminating it, thus creating a single digital representation of payment, which can enforce transactions on connected proprietary ledgers.
Considering the state of today’s message-driven processes, this is definitely a huge improvement. This all sounds great on paper, however an issue can arise when the scale of payments comes into play.
Overnight payments rely on pre-funded nostro accounts. That way the correspondent bank has enough cash available to terminate the payment, which will eliminate the settlement risk. These accounts however, need to be rebalanced over the course of the work day.
As a result large sums of money need to be moved through central banks. This process can be very slow and is prone to errors. Blockchains promise to offer real-time transactions, finalized within seconds.
International payments will probably be unrecognizable 20 years into the future
Another great solution, which can be used to exchange liquidity between liquidity providers and makers globally in real time are tokens. Tokens can be used to implement token-based secondary markets for liquidity exchange, which will enable liquidity providers to trade with far less friction and improved transparency.
This will also reduce the levels of liquidity stored in nostro accounts in different places due to the higher capital velocity.
The token creation requires them to be as universal as possible. Capability to support the liquidity in the currency markets today, which is somewhere around $7 trillion a day, is no easy task. Banking institutions from all over the world are working towards producing tokenized, digital central bank money.
The Utility Settlement Coin project (UBS, Deutsche Bank and many others) are doing this through intermediate vehicles. They hold the backing funds on a real-time gross settlement (RTGS) account.
The financial system is currently facing the test of time. Many of the processes are slow and outdated, even the ones used at the highest levels. Adaptation, simplification and most of all time saving are key for shaping future technology.
Blockchain technology can become that strong and reliable pillar the financial future needs. International and cross-border payments are the primary mission of Ripple one of the best cryptocurrencies by market cap. Ripple aims to remove international banking taxes by providing a tokenized economy for the banking system.
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Tags:#internationalBanksBlockchain TechnologyDeutsche Bankliquidity exchangenostro accountspaymentSystemTokenizationUBS