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IBM and a number of banks have launched a new blockchain-powered solution to clear and settle cross-border payments using cryptocurrency. The move could see cryptocurrencies integrated with IBM’s trade finance blockchain projects at a later stage.
As Sibos, one of the world’s largest finance events, commences today, the tech giant announces it has developed a new cross-border payments solution in collaboration with blockchain startup Stellar and KlickEx, a money transfer operator in the South Pacific region. More than 13 banks are involved in the project.
The aim is to help simplify the way money is transferred across borders. Today, making international payments in multiple currencies can be costly, labourious and error-prone and require multiple intermediaries. By utilising the Hyperledger Fabric blockchain framework and Stellar’s cryptocurrency lumens, IBM says it can reduce the time it takes to transfer funds across borders “from days to seconds” as well as the cost to do so.
Speaking to GTR, Keith Bear, vice-president of global financial markets at IBM, says the payments solution is currently in “an early stage of implementation”. The parties have successfully conducted pilots and the first transactions are now flowing on it. As to when it will go into production, Bear says is still to be “determined through consultation with the banks that we are working with”.
The participating banks include BBVA, Sumitomo Mitsui Financial Group, Mizuho Financial Group, National Australia Bank, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia, Kasikornbank Thailand, RCBC Philippines, TD Bank, Wizdraw HK and “several big names” which have not been named. They will help expand the solution beginning early next year.
The initial focus will be on retail and SME payments in the South Pacific region, but ultimately the solution is designed to augment financial flows worldwide for all payment types and values. In the future, it could also be expanded to enable parties to enter trade agreements, manage trade documentation, secure letters of credit and finalise transaction terms with immediate payments.
“Clearly the ultimate value will come from a high level of adoption, but we are starting off with a low-volume environment around the Pacific Islands, which is a great place to start because it’s – relatively speaking – a neglected payment corridor. It demonstrates what the potential is and how it can work in practice and then we can work out, together with the banks, how to scale from there,” he says.
Settlement instructions are provided via smart contracts on the Hyperledger blockchain platform, but the actual settlement will be carried out via Stellar’s network. Stellar’s custom cryptocurrency lumens will “act as a bridge currency between fiat currencies on each side of the transaction”, Bear explains. The customer doesn’t touch the cryptocurrency themselves.
KlickEx, he adds, will serve as a market maker, buying and selling lumens for the banks to facilitate the process.
This method for settling cross-border payments is already being used or explored by some banks and payment providers. More than 100 financial institutions have to date joined Ripple’s enterprise blockchain network, RippleNet, to settle global payments leveraging blockchain technology. SEB, for one, has processed more than US$180mn in payments for a large corporate customer between Sweden and the US over the network.
Another example is BitPesa, an online payment platform, which helps thousands of clients in Kenya, Uganda, Tanzania, Nigeria and the Democratic Republic of Congo make international payments using bitcoin to settle between fiat currencies.
Cryptocurrencies in trade finance
IBM’s decision to enter the cryptocurrency space may be of particular interest to the many players already working with the tech company on a range of other blockchain projects.
For example, IBM and seven major European banks – the Digital Trade Chain (DTC) consortium – are soon going live with a blockchain trade finance platform for SMEs. The platform will enable buyers and sellers to agree on their transaction in a smart contract, to follow the physical flow of the goods through a track and trace system and to obtain financing.
IBM is also working with UBS and a number of banks on a similar project under the name Batavia. Both powered by Hyperledger’s Fabric, the platforms focus on the digitsation of processes around trade finance, but they use conventional methods for the payment itself.
According to Bear, the fact that the technology is consistent means that the new payments solution is “well-suited” to integrate with its other projects. As such, we could well see other consortia extend their trade finance platforms to involve payments using cryptocurrencies.
“Whilst the immediate implementation is just focused on payments, the potential is certainly to go into other areas as well. The overall design we are taking is certainly extendible to other asset classes,” Bear says.
“This solution is another example, on top of the what’s happening with DTC and Batavia, to potentially provide a better service to SMEs or corporates using trade finance facilities from their banks. Not only by providing more credit facilities, but in this particular example being able to reduce the cost and time of the payment transactions as well.”
IBM notes in a statement that financial institutions in the future will be able to choose the settlement network of their choice. This could involve the likes of Ripple or bitcoin. The solution will also be able to support the exchange of central bank-issued digital tokens.