Necessity is the Mother of Invention
NOTE: This Medium article is in draft mode, and will be further refined upon receiving feedback from the Chynge Community. https://medium.com/@chynge/true-blue-digital-payments-20b4461aaeab
This Medium article is linked to https://medium.com/@chynge/chynge-stablecoins-e23dc383f68a
I. Introduction
Money wants to be free, and the Chynge vision of payments is IFS: instant, free, and safe. Payments that are instant and free run on blockchain and crypto. Chynge shall utilize a combination of three items, namely utility tokens, stable coins pegged to global currencies, and the Stellar blockchain to digitize cross-border payments.
Chynge Central, the flagship Chynge solution, utilizes blockchain to track transactions for the delivery of money from the Sender to the Recipient to ensure data integrity and transaction security at high speed and low costs as pricing races towards zero.
The Chynge blockchain is configured as a private, decentralized protocol to preserve customer and data privacy, and to maintain the immutability of the recording of the sub-transactions of a cross-border payment including the last mile delivery for financial inclusion of the unbanked and underbanked customers.
As cross-border payments transact on the Chynge blockchain, there will be less reliance on slow and expensive banking services which shall be a boon to the unbanked and underbanked population who shall benefit from significantly better financial services.
The Chynge blockchain is based on the Stellar protocol which is optimized for cross-border payments. In addition, the Stellar protocol is the only blockchain that is Shariah compliant as certified by the Shariah Review Board (SRB) of Bahrain. This allows Chynge to differentiate and offer Islamic financial services in Muslim countries particularly in Asia and the Middle East.
II. Payments on Blockchain as Envisioned by Chynge
The typical steps for cross-border payments on blockchain:
Step 1: Sender sends money to Chynge;
Step 2: Chynge consolidates payments by destination country and buys foreign exchange at wholesale rates from Banks;
Step 3: Chynge sends money via Bank Rails to Bank or Agent Partner in the receiving country; and
Step 4: Chynge or Partner sends money to Recipient and delivers via one of these methods: Bank Account, Mobile Wallet, or Cash Pick-up at Agent in support of financial inclusion.
Each of these four (4) steps as described above shall be written to the Chynge blockchain on the Stellar protocol.
III. Digital Money for Digital Payments
The use of digital money solves the inherent problems in cross-border payments including high costs and slow speed of delivery.
The steps for cross-border payments with digital money and blockchain:
Step 1: Sender sends money to Chynge;
Steps 2 and 3: In the Chynge Clearing Center (C³, say c-cube), convert the Send Currency to stable coin and then re-convert the stable coin to the Receiving Currency via the Chynge payment utility token (details follow below in the Chynge Clearing Center);
Step 4: Chynge or Partner sends money to Recipient and delivers via one of these methods: Bank Account, Mobile Wallet, or Cash Pick-up at Agent in support of financial inclusion.
Likewise, each of these four (4) steps as described above shall be written to the Chynge blockchain on the Stellar protocol, and complemented with Chynge utility token CLPX and Chynge Coins pegged to global currencies.
IV. Chynge Clearing Center (C³)
The Chynge Clearing Center (C³) is the fundamental piece in the overall digital payments process. Without C³, payments must remain on traditional bank rails based on traditional currencies that come with the heavy baggage of traditional payments including high service fees, exorbitant foreign currency rates, hidden fees, and slow delivery times.
The Chynge Clearing Center (C³) serves as an efficient hub to exchange Chynge Coins. The supply and demand for the various Chynge Coins for direct exchanges may not be perfectly matched — for example, there may not be sufficient matches for Singapore Dollar Coins (XSGD) and Indonesian Rupiah Coins (XIDR).
The introduction of the Chynge Token (CLPX) as an intermediary medium of exchange centralizes the supply of Chynge Coins and smoothens the demands for the exchange of all Chynge Coins. Thus, all the Chynge Coins, say XSGD convert to CLPX and then the CLPX convert to the recipient Chynge Coins, say XIDR.
The Chynge Clearing Center shall reside in ChyngeX.io, a private company incorporated in Singapore, that serves as a decentralized digital assets exchange dedicated to Chynge digital assets such as Chynge Coins and Chynge Tokens.
Although the Chynge Clearing Center will exchange Chynge Coins and the Chynge Token CLPX for a start, the Chynge Clearing Center may be easily extended to support other digital assets including Bitcoin, Ethereum, Stellar Lumen, Ripple, alt-coins, security tokens, and others.
The ChyngeX.io may start with Stellar Lumen as one of the other selected crypto assets, and this serves as a launching pad to exchange to other crypto assets such as Bitcoin (BTC) and Ethereum (ETH).
The Chynge Token CLPX is a utility token to perform a cross-border payment transaction, and serves as a medium of exchange between two Chynge Coins. The price of a CLPX may fluctuate in ChyngeX.io and other exchanges based on supply-and-demand or market sentiment.
The Chynge Coins are stable coins and by definition, their prices do not fluctuate with respect to the currency it represents. Each Chynge Coin shall be pegged to a corresponding global currency and that value shall remain at the unit value of that currency. For example, an XUSD Chynge Coin shall always be priced at One United States Dollar (USD) and a XJPY Chynge Coin shall always be priced at One Japanese Yen (JPY).
There may be slight variation in pricing from parity due to liquidity demands for that global currency from the Chynge Coin of that global currency. For instance, when there is a higher demand for the XUSD Chynge Coin, then the price of that XUSD may be slightly higher than One United States Dollar (USD). Conversely, when there is a lower demand for the XUSD Chynge Coin, then the price of that XUSD may be slightly lower than One United States Dollar (USD).
V. Chynge Coins in a Closed Loop Ecosystem
Chynge Coins can exchange only and only with the Chynge Token CLPX. Chynge Coins cannot exchange directly with other Chynge Coins. Chynge Coins cannot exchange directly with other digital assets including but not limited to cryptocurrencies such as Bitcoin and Ethereum, alt-coins, stable coins, and security-backed tokens.
The Chynge Coins exist in C³ which is a closed loop Chynge ecosystem that allow the Chynge Coins to exchange only with Chynge Token CLPX as an intermediary between two Chynge Coins. When Chynge Coins trade in other digital exchanges this constraint of exchanging only with Chynge Token CLPX shall remain in effect.
The Chynge Coins are not, and shall not be legal tender.
VI. Financial Services Industry (FSI) Best Practices for Trust, Safety and Security
The main trust issue with Chynge Coins is that the Chynge Community must believe and trust unfailingly that each Chynge Coin shall hold its prescribed value. This is achieved by pegging it to at least the equivalent value of the underlying global currency. Without such a financial backing and hence, an underlying trust, there may be a run on ChyngeX.io or other digital assets exchanges where a flood of Chynge Coin holders abruptly exchange their Chynge Coins back to the underlying global currency.
However, the Chynge Coin shall be fully backed by the underlying currency, thus a full run on the Chynge Coin shall be fully redeemable, and the price of the Chynge Coin shall hold par to the underlying currency up to the last Chynge Coin.
To instill trust in the Chynge Community, there shall be three (3) main Chynge wallets for open, transparent and public verification by the Chynge Community. The three Chynge wallets are:
- Chynge Issuer Wallet
This Chynge Issuer Wallet issues all the Chynge Coins and Chynge Tokens CLPX in the digital universe. After the Chynge Issuer Wallet distributes all the Coins and Tokens to the Chynge Distribution Wallet, the Chynge Issuer Wallet is then locked.
When locked, the Chynge Issuer Wallet cannot issue any new Chynge Coins or Chynge Tokens CLPX.
2. Chynge Distribution Wallet
This Chynge Distribution Wallet receives all the Chynge Coins from the Chynge Issuer Wallet. A small proportion of the Chynge Coins from the Chynge Distribution Wallet is sent to the Chynge Transaction Wallet. The Chynge Distribution Wallet acts as a storage safe of the Chynge Coins that are not in immediate general circulation.
The Chynge Distribution Wallet cannot issue new Chynge Coins or Chynge Tokens CLPX.
3. Chynge Transaction Wallet
The Chynge Transactional Wallet directly transacts with the Chynge Community and distributes Chynge Coins to buyers of Chynge Coins, and also receives Chynge Coins when the Chynge Community redeems their Chynge Coins, and returns the Chynge Coins to Chynge.
The Chynge Transaction Wallet cannot issue new Chynge Coins or Chynge Tokens CLPX.
4. Chynge Bank Accounts
In addition to the Chynge Wallets as described above, Chynge shall dedicate bank accounts to manage the various currencies from the Chynge Community upon the distribution of Chynge Coins to the Chynge Community. These bank accounts shall be segregated from the operational bank accounts of Chynge so that there is no co-mingling of funds from the Chynge Coins and the funds earmarked for the business operations of Chynge.
This prevents non-intentional spending of funds from Chynge Coins on the operational expenses of Chynge. The segregation of Customer funds is the industry best practice for the governance and management of Customer funds.
To ensure that the Chynge Coins are backed by currency, the Chynge Balance Test (CBT) must hold true:
The Chynge Community may at any time scan the Chynge Issuer Wallet, Chynge Distribution Wallet and Chynge Transaction Wallet via their respective Stellar addresses, so as to verify the contents of the wallets.
The auditors for Chynge shall audit the Bank Accounts and publish the audited monthly balances of the Bank Accounts for the Chynge Community to view.
Chynge shall publish unaudited daily balances of the Bank Accounts to complement the audited monthly balances.
The trust for the Chynge Coins by the Chynge Community shall be reinforced when the Chynge Community reconciles the balances of the Wallets and the Bank Accounts, and then apply the Chynge Balance Test (CBT) to ensure that the CBT holds true.
When banks publish their Open Banking API set, Chynge shall publish daily or real-time balances for the Chynge Community to inspect and test the CBT.
The unaudited daily balances and the audited monthly balances of the Bank Accounts shall be published when at least one of the currencies reaches a threshold of the equivalent of USD 10M (United States Dollars Ten Million only) or all the currencies reaches a cumulative threshold of the equivalent of USD 50M (United States Dollars Fifty Million only). The audits shall be performed and certified by a public accountant registered in Singapore and that is part of a global network of auditors.
VII. Corporate Governance
In addition to the Chynge Balance Test (CBT), the governance of the Chynge Wallets and Bank Accounts are instrumental for the overall trust, accountability and security of the Chynge Coins. The Chynge Wallets shall each be configured for multiple signatures with the availability of at least four (4) signatories.
The multiple signatories allow redundancy and failover in the event that a signatory is unavailable due to absence, health or death.
1. Signatories
When adding or removing signatories to the Chynge Wallets, a minimum of three (3) signatories are required.
2. Chynge Issuer Wallet
The exception to signatory requirements is the Chynge Issuer Wallet which is locked and cannot issue any new Chynge Tokens or Chynge Coins. The Chynge Issuer Wallet also cannot transact either directly or indirectly with the Chynge Community. No signatory conditions can change the state of the Chynge Issuer Wallet.
3. Chynge Distribution Wallet
When moving Chynge Coins from the Distribution Wallet to the Transaction Wallet, a minimum of two (2) signatories are required.
Chynge Coins shall not be moved from the Distribution Wallet to the Issuer Wallet or moved directly from the Distribution Wallet to the wallets of the Chynge Community.
4. Chynge Transaction Wallet
When moving Chynge Coins from the Transaction Wallet to the wallets of the Chynge Community or from the Transaction Wallet to the Distribution Wallet, any one (1) of the signatories shall suffice.
5. Chynge Bank Accounts
Similarly, there will be governance in the management of funds in the Bank Accounts that hold funds that reconcile with the Chynge Wallets. This governance includes multiple signatories before debits are made from these Bank Accounts based on tiers of transaction amounts.
As required by Stellar wallets, a trustline is to be established for each Chynge Coin to be held in the holder’s wallet of the Chynge Community.
VIII. Portfolio of Chynge Coins
The portfolio of Chynge Coins shall include the 160 global currencies, three (3) precious metals, and two (2) Islamic coins. The list of the Chynge Coins can be found at https://medium.com/@chynge/chynge-stablecoins-e23dc383f68a.
IX. Business Model
The business model of the Chynge Coin is based on a Service Fee that is payable when converting between the Chynge Coin and the underlying global currency. The Service Fee shall vary based on the available liquidity, export controls imposed on the currency by the local regulators or central bank, and overall demand for that currency or corresponding Chynge Coin by the Chynge Community.
The introduction of the Chynge Coins to the existing Chynge Token CLPX and Chynge token economy would upgrade the Chynge payment system from merely being a sum of assets or utility, to include a medium of exchange.
This medium of exchange reflects the best industry practice of a central exchange house such as the Automated Clearing House (ACH), and will increase the liquidity of Chynge transactions, lower the costs, and increase the speed of transactions.
X. Regulatory Compliance
A robust financial security policy shall be in place to support cross-border digital payments that are safe from financial crimes.
Customer due diligence (CDD) that meet, if not exceed the standards of the banking industry shall be performed on customers who conduct money transfer transactions with Chynge with particular attention on money laundering (ML) and terrorism financing (TF).
Know-Your-Customer (KYC) shall be conducted at various levels such as Simplified CDD, Standard CDD, and Enhanced CDD based on the risk profile of the customer, and shall include screening against the required sanction lists from the United Nations (UN), the United States Department of Treasury, and other jurisdictions.
Recipients of funds shall be subjected to Know-Your-Beneficiary (KYB) including sanction screening.
Sanction countries shall be excluded from Chynge transactions as a Sender and as a Beneficiary. Companies in addition to individuals that appear in sanction lists shall not be permitted to transact with Chynge too.
Source of Funds and Use of Funds shall include documentary support from the Customer or the Beneficiary. There are best industry practices in place for the transaction monitoring of funds, and these practices shall be implemented.
Best practices for transaction monitoring include business rules with thresholds that may be fixed or may be self-adjusting and self-learning in real time based on artificial intelligence (AI), machine learning, and predictive modeling.
Chain analysis, if any, for Source of Crypto and Use of Crypto is easily documented because the blockchain transactions of Chynge digital payments comprising Chynge Coins can only be performed and recorded in the Chynge Clearing Center (C³) closed-loop ecosystem (Section V above).
XI. Know-Your-Crypto
The new variable for compliance in Chynge digital payments is the transaction monitoring of digital assets, in particular ensuring that the Chynge Token CLPX under our custody is not contaminated by cryptos obtained from criminal activity. One safeguard that is frequently used in the industry is “chain analysis”, in which the recent history of any cryptos used to exchange for Chynge Token CLPX are examined to ensure that they did not come from wallets that are blacklisted or connected to known criminals or criminal typologies such as money laundering (ML) and terrorism financing (TF).
As depicted in Figure 5 above, the Chynge Coins are in a closed-loop system and the risks for financial crimes are mitigated in the transaction monitoring of Source-of-Funds.
However, the Chynge Token CLPX is in an open loop where it is interchangeable with public digital assets such as Bitcoin, Ethereum, Stellar Lumen, Ripple, and others. Thus, the issue of Source-of-Crypto arises when the Chynge Token CLPX is exchanged with these public digital assets and returns to Chynge Token CLPX to be converted to Chynge stable coins.
The determination of Source-of-Crypto is to mitigate the risks that the Chynge Token CLPX and its historical transactions were not connected with known criminals and criminal activity.
The critical piece of Source-of-Crypto is the depth of historical transactions that are determined during chain analysis. The ideal state of depth for chain analysis is up to the point of genesis of the Chynge Token CLPX; however, a more practical and reasonable depth is to be accepted by Chynge, the community, financial institutions, and law enforcement.
In comparison, the depth of historical transactions for Source-of-Funds for fiat currency is one. At present, regulated financial institutions are required to carry out reasonable checks that funds received from a customer are not from criminal activities; however, there are no required investigations “up the chain” of the customer’s business partners to ensure that none of them attained their funds via criminal means.
Thus, digital money, stable coins and utility tokens are held to a higher standard of proof when the depth of chain analysis for Source-of-Crypto goes beyond one which is the standard for Source-of-Funds. Currently, there is neither a standard for regulatory compliance nor a standard for industry best practice for Source-of-Crypto. A depth range of four to seven levels makes for a good basis and there may be further refinements as we gather experience in this nascent business process to mitigate money laundering and terrorism financing in Source-of-Crypto.
XII. Conversion Restrictions between Money and Chynge Coin
The conversion between Fiat Currency and the Chynge Coin stable coins have three (3) main restrictions: amount, bank transactions, and local transactions.
- Amount Limits: there will be tiers for conversion limits from fiat currency to Chynge Coin and vice-versa from Chynge Coin to fiat currency. The limits will be risk-based and subject to supporting documentation to Source-of-Funds, Use-of-Crypto, Source-of-Crypto (such as XI. Know-Your-Crypto above), and Use-of-Funds. Standard limits may be set at the equivalent of USD 10,000 (United States Dollars Ten Thousand only) per transaction, and subject to USD 30,000 (United States Dollars Thirty Thousand only) equivalent per twelve-month period.
- Bank Transactions Only: When converting fiat currency to Chynge Coins, the transaction has to be bank-to-bank, i.e. from the Customer’s bank account to the Chynge bank account. Conversely, when converting from Chynge Coins back to fiat currency, likewise, it shall only be a bank-to-bank transaction from the Chynge bank account to the Customer’s bank account. In either direction, there shall not be any cash-based transactions.
- Local Transactions Only: Complementary to the bank-to-bank transactions requirements, these shall only be local bank-to-bank transactions, and that the location of the transactions must match the country of the fiat currency. For example, exchanging XMYR (Chynge Coin for Malaysian ringgit) and the Malaysian ringgit fiat currency (MYR), in either direction, must transact in Malaysia only, as depicted in the right-hand side of the figure below. Likewise, exchanging XSGD (Chynge Coin for Singapore dollar) and the Singapore dollar fiat currency (SGD), in either direction, must transact in Singapore only, as depicted in the left-hand side of the figure below.
Thus, when an XMYR Chynge Coin or XSGD Chynge Coin holder requests that their fiat currency equivalents are to be sent to bank accounts that are not in Malaysia or Singapore respectively, those exchange requests shall be rejected.
The Chynge Coins do not directly exchange with each other and they do not directly exchange with digital assets except for the Chynge Token (please refer to Figure 6 above). The Chynge Token acts as a medium of exchange between the Chynge Coins and between the Chynge Coins and other digital assets. In this configuration, the Chynge Coins are not used to pay for other digital assets, thus there is never a requirement for the fiat currency that was used to purchase the Chynge Coins to be debited from the bank accounts where they reside.
The first two conversion restrictions mitigate the risks related to money laundering, terrorism financing, fraud, and other financial crimes. The third restriction, Local Transactions only, eliminates currency flight out of the country.
XIII. Disclaimer
Although the author, Joe Tusin, is the CEO and Founder of Chynge, Joe authored this article in his personal capacity. The analysis and opinions expressed in this article are the author’s own and is a reflection of his understanding of the current state of the payments business, financial markets and technology.
This article is neither endorsed by Chynge Singapore Pte. Ltd. (Company Registration No. 201509072Z) nor contains any legal offers, representations, commitments or solicitations to the general public.
To learn more about Chynge, please visit: http://www.chynge.net
Read the Whitepaper: http://bit.ly/chynge_whitepaper
Join the Chynge community on Telegram: https://t.me/chynge
