Blockchain for Cross-border Payments: A Practition’s Perspective

by Lisa Nestor  

It’s an exciting, if not challenging time for banks as they absorb, digest and develop strategies around blockchain technology. Without question, it will change many fundamental operations within the financial industry. One such operation is payments.

At Stellar.org, we have developed a global, open-source blockchain protocol for payments. It was my pleasure to share the details of this protocol at the recent Blockchain for Financial Services conference in Dublin. This time, coupled with my standard description Stellar’s asset issuance capability (think: counterparty-backed digital Euro, Dirham or Yen) and decentralized exchange – I had a further message for my bank colleagues. Stop looking for ways in which blockchain will help you compete technically while maintaining a business as usual strategy.

                                                   

Open-source, internet-level technology lives outside the walls of Wall Street on (London equivalent). Bitcoin – which started the blockchain movement - is a distributed ledger and digital asset specifically designed for peer to peer payments outside of banks. The assumption that banks can leverage this technology to simply move money faster between themselves, I call this the ‘faster car’ theory, is like thinking that giving your kid internet will help them read more. Sure, it will, but it will also do a whole lot more – like connect them to other people and ideas all over the globe. It’s about interaction, connection and openness.

Open-source blockchain platforms can enable a bank to become inter-connected across the financial services marketplace. This may result in owning less of the payment stack, for example less transaction, but for the smart bank, it can also mean touching more transactions. Positioning your institution as a key eco-system enabler in an open platform means more transaction data, more market making and more institutional funds on deposit.

But we still see 95% of banks gravitating to permissioned networks. And to be fair, to date open blockchain networks such as Bitcoin or Ethereum have displayed some worrisome behaviors for banks, like forking. In a world of institutionally issued digital assets (think: digital Chase dollars or the multi-bank utility coin) ledger forks pose huge risks. At Stellar, we’ve solved for this with the Stellar Consensus Protocol (SCP), the first proven implementation of a type of consensus knows as Federated Byzantine Agreement.

SCP, authored by Prof. David Mazieres of Stanford University, eliminates the need for mining – such as in Proof of Work or Proof of Stake. Instead, network users i.e.. financial institutions and service providers host the network validators. When an institution then issues a digital asset inside of Stellar, they appoint a validator (likely their own) as the source of truth for their asset validation and redemption. In this way, even in a worst-case scenario in which there is a network fork, it is clear which side of the fork an institutions asset lives. This eliminates the risk of asset duplication, as we’ve seen with ethereum (ETC vs. ETH) and bitcoin (BTC vs. BCH). This is a critically important problem to solve for public networks. In addition, SCP allows for validators to select a quorum, additionally split into multiple sub-quorum slices, to agree to the legitimacy of their transactions. This acts as their sub-consensus network, giving institutions inherently more autonomy and control to secure their asset transaction environment. This quasi-permissioned trust structure then relies on the transient nature of these networks – much like the correspondent banking network - to achieve overall ledger consensus.

The truth is banks cannot outpace innovation. Technology moves too fast, innovation is simply too good. So, what to do? My message: leverage a global, open-source platform for payments, one that provides a secure and fool-proof environment for asset issuers. Become a transaction enabler, leverage the ecosystem to win.

The author is Director of Partnerships at Stellar.