Blockchain: Going Dutch

It is 417 years this April since the Dutch arrived in Japan with their black ships. Trade with Japan was opened up and, as they say, the rest is history.  The Dutch are about to make history again.

The first collaborative blockchain application looks set to be rolled out this year.  The deployment is in trade finance and the Dutch are working with a group of banks to bring risk free, fully trusted and secure technology to an area where the incumbent technology is PDFs, paper based, electronic messages and the antiquity of the Letters of Credit.  At last, we will see the first true industrial distributed ledger application in banking. 

Cross Border/International Payments

Blockchain companies are intensely focusing on this area. Here, like trade finance, the underlying technology is historic. The current settlement period for cross currency payment is a standard two days. And the only reason it is two days is because it took one day for the cable to leave the UK with the request for dollars and a second day for the cable to arrive from the USA confirming the transaction.

This is how the $trillion/day FX market started - with underground cables and telegraphic transfers, the technology of the day. Sounds archaic when you put it like this doesn’t it?

The two main approaches presented by the blockchain to bring real time or same day payment between two currencies both needs work:

• Pooling of currency by country
  • A network of banks that hold currencies in a particular currencies are linked by blockchain to provide same day payment between two currencies
    • Fundamental currency risks need resolving, especially when some one does not pay

• Use of cyber currencies as part of the payment journey
  • Instead of working the through the US Dollar, the US Dollar is involved with a minimum of 50% of trades, a cyber currency is used
    • While there is no central bank controlling the cyber currency so movement across the specific cyber currency is instant. The beneficiary of the payment simply wants a fiat currency. Having a cyber currency in the payment flow could raise issues especially with Governments that do not approve of such currencies

While there is a need to bring speed, fair value and payment certainty to cross border payments, the currency payment rails (agreed payment schemes, e.g. Visa) are well established and secure. The goal is to make same day cross border payments a reality with customer convenience. Many FinTech companies are doing this by offering improved services to the customer while riding on the payment rails infrastructure usually sponsored by a bank.

The overriding principle is that blockchain allows different parties to securely interact with the same universal source of truth.

Given the move to full digitalisation of financial transactions, blockchain in all its various forms, could well become part of financial services infrastructure. Like the Dutch in Trade Finance, pick those areas where the incumbent technology clearly cannot support a collaborative and fast paced world.