How Blockchain Can Finally Fulfill Its Promise in Global Payments

There has been much debate about the potential benefits of blockchain technology to improve the world of payments - particularly international payments.

One of the main issues blockchain can tackle is the high complexity of payments networks, due to the fragmentation of the financial industry itself, which makes it impractical for individual banks to deal directly with all other banks on the planet.

In order to do so, the correspondent bank needs to have a nostro or vostro account with the receiving bank, ideally with enough pre-funded liquidity to complete the payment on the client's behalf.

A true, smart contract-enabled blockchain provides a single ledger and transactional engine where balances can be maintained and transacted upon and where payments can live as single, common digital objects that make messaging and reconciliation unnecessary.

By using smart contracts, different parties can not only register tokenized funds and payments, but they can also set in stone the rules applying to all aspects of the end-to-end payments processes, eliminating errors and misunderstandings, increasing transparency and auditability, and reducing fraud and cyber risk.

Now, most of the decentralised solutions being proposed these days often focus on improving payments processes either by digitizing the messaging layer described above or, even better, eliminating it by creating single, digital representations of payments that can enforce transactions on proprietary ledgers, connected to one another with some sort of inter-ledger protocol.

A key issue arises when one tries to scale such systems, particularly when large payments issued by corporate clients are at stake: management of liquidity.

Fast payments rely on pre-funded nostro accounts, so the correspondent bank has the cash at hand to terminate the payment, thus eliminating any settlement risk.

With these tokens and the use of smart contracts, participants can even post unused liquidity in certain geographies as collateral to borrow liquidity in places where it is more urgently needed, in real time.

Either way, these initiatives show a viable approach to improving liquidity management for commercial banks and market makers, with the promise of providing much greater liquidity velocity and transparency, with the potential result of enabling a significant reduction in liquidity levels within the whole financial system.