Blockchain technology has come under fire as sceptics debate whether it can actually improve the world of payments, particularly for international transfers. It’s a business where the parties involved need to reach a consensus to route the payments, perform currency conversions and also deploy and manage liquidity in different jurisdictions while being under diverse regulatory constraint.
One of the biggest advantages of blockchain technology is its ability to tackle the high complexity of payment networks. This is due to the fragmentation of the financial industry which makes it difficult for individual banks to deal with all other banks on the planet. For instance, when a bank receives payment instructions from a client, it needs to find a correspondent bank that is willing to accept the client’s funds and terminate the payment locally at the receiving bank. In order for this to happen, the correspondent bank must possess a nostro or vostro account with the receiving bank with enough pre-funded liquidity to complete the payment for the client. To make things more difficult, it may be necessary to add extra banks into the loop as well, causing further delays and complications.
Because all parties involved possess different ledgers, they don’t share a single document that tells the truth with the transactions involved. This means that all ledgers must be coordinated and this can be both slow and prone to errors. In addition, a currency conversion is required at either end and different parties have to manage liquidity levels at nostro vostro accounts, and this also involves settling against central bank accounts.
Where does blockchain come in?
Blockchains have the ability to provide a single ledger instead of requiring every party to manage their own. A smart contact-enabled blockchain can provide a single transactional engine where everything can be managed correctly. With smart contacts, parties can register tokenized funds and payments, but they can also set the rules applying to all aspects of the end-to-end payments processes.
This eliminates any chance of errors or misunderstandings happening and it boosts transparency and auditability, making it far easier and safer to work with. This ultimately reduces the risk of fraud and cybercrime, making it safer for all parties involved. Another advantage is that it removes any chance of the ledger being tampered with.
Tokens are another advantage. They act as a store of value within the same ledger where payments, bank balances and nostro balances are stored and it’s a revolutionary solution that can improve global payments. The tokens are used to exchange liquidity between providers and market makers in real time across the globe.
These advances show a promising and viable alternative that helps to improve liquidity management for commercial banks and market makers. It promises to provide much greater liquidity velocity and transparency which could potentially enable a significant reduction in liquidity levels within the whole financial system. As these alternatives grow and mature, they could become a key enabler of the decentralized, tokenized economy that many are excited to see and become a part of.