How Boeing, Toyota, Caterpillar, and other OEMs can double their current net profit by using smart contracts to become unmanned “virtual companies”, with or without cryptocurrency: Part 8

How would cryptocurrencies help with managing a highly globalized supply chain and who are the top global payments contenders?

With such massive, multi-tiered, and highly globalized supplier ecosystems, it is astounding that OEMs continue to put up with the inconveniences of traditional money. Slow, expensive, manual, and outdated. The high middleman fees aren’t even the worst part. The time delays and need for manual human involvement are.

To quote fintech startup Revolut:

“Back in the ’80s, the quickest way to send money from London to New York was to physically take cash with you on a plane, just like in the movies. Surprisingly, this still holds true today”

To quote a Capgemini paper on smart contracts:

“[Most] existing commercial contracts [conducted in traditional money] unfit for the world of [highly globalized] real-time commerce”

In business, time is money. Agility is everything. Companies that don’t embrace faster alternatives will not be able to compete. OEMs are bleeding billions to inefficient global payments and need to upgrade.

What are the options? There are a few different competing approaches:

1. Accept a marginal improvement on top of the existing correspondent banking system in the form of SWIFT GPI (Global Payments Innovation)

Yes, the incumbent is fighting hard to keep up with the times: https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi. With GPI, SWIFT can settle 50% of international transfers within 30 minutes. Not quite cryptocurrency-speeds, but certainly leaps and bounds better than before.

Ripple spokeswoman Emi Yoshikawa has downplayed this development:

“Swift was built 40 or 50 years ago, before the internet was created. So their architecture is very old. They realise that this is a big problem and they consider us a big competitor. They’re also trying to make a big improvement based on the existing architecture, called Swift gpi. We consider it just a marginal improvement of their existing architecture”

It can be integrated with smart contracts via Chain Link API calls (more discussion in part 9), but the GPI tracker API specification does not seem to be publicly available. This is unlike Stellar and Ripple (discussed below), which publicly publish SDKs (software development kits) for 3rd party developers to plug-and-play with their APIs.

2. Significant improvement on top of the existing correspondent banking system in the form of global acceptance of open banking APIs in the spirit of PSD2

Open APIs are one of the biggest revolutions in the history of banking itself. Cryptocurrency enthusiasts often portray traditional banks as dinosaurs, but this isn’t completely true. Open APIs are a tremendous innovation.

Europe has already mandated open APIs for all banks in the form of PSD2. This will allow cheaper and faster transactions. The idea is for a German and a Spaniard to be able to send cross-borders payments to each other as though both were in the same country (PSD1 got us partially there with SEPA).

In some regards, open APIs provide many of the same “cutting out the middleman” advantages as cryptocurrency. It greatly shrinks the perceived efficiency advantage that cryptocurrency has over traditional banking. Consider the following anecdote from Rowland Manthorpe of Wired:

“The current payment system is very complicated. At present, when you buy your nephew a Minions doll on Amazon, the retailer contacts an acquirer, such as WorldPay or Global Payments, which gets in touch with Visa or MasterCard to take the payment from your account. Cue much fumbling around with cards and passwords.

By opening up banks’ data, Open Banking makes it possible to pay directly from a bank account — which should be both quicker and (since the various middlemen each charge for their service) cheaper. The bank authenticates the purchase without involving other organizations”

Open banking APIs (despite their name) will also actually require higher user authentication standards and therefore be more secure than the old system.

But more importantly than anything else, open banking forces banks to share their accounts data (with anyone approved by the account holder via the rigorous authentication). Banks cannot hoard and monopolize that anymore. They’re forced to “front end” their data by making it available to API calls. Banking has been democratized and everyone can take a bite of the cake. Approved third parties can directly trigger payments without going through a payment provider. Some industry experts have dubbed this the era of “banking without banks”.

Of course, PSD2 is only useful within Europe. Highly globalized OEMs will only really reap the benefits if the whole world goes to this system. Are there enough other incentives for banks on other continents to be okay with losing their monopoly?

The answer is yes. In America, many banks are finding open APIs to be a profitable path. Japan is quietly moving forward with its own PSD2-style revolution: https://www.finextra.com/blogposting/15120/japan-is-open-banking-its-arms-to-a-fintech-revolution.

It allows third party developers to create novel revenue streams and customer experiences. It allows banks to stay one step ahead of mobile payments and fintech startups. It’s the only way banks can stay relevant in an app-centric economy.

According to the 2018 Global Payments Insight Survey, 87% of banks planned to move forward with open APIs (though we’re not quite there yet today). These advances can be integrated with smart contracts via Chain Link (more discussion in part 9).

3. Directly use a smart contract-compatible cryptocurrency (i.e. Ethereum) with no fiats involved

All cryptocurrencies are already ready-made for global payments. They’re already inherently trans-border. Anyone with Internet access and an electronic wallet can send money to anyone (with the same).

If no fiats are involved, then all smart contract transaction steps can be handled directly within the blockchain itself. This is by far the most streamlined, simple, and desirable outcome.

The problem is that no cryptocurrency is stable against the US dollar (the world’s true global currency). It is true that in some BCCs (best cost countries) and LCCs (low cost countries), the locals prefer bitcoin as a superior alternative to the local currency. But that’s only some countries. Besides, bitcoin has very limited smart contract capability so it’s not even that relevant to this discussion.

In Africa, there are vague rumblings that M-Pesa users are making the switch to Cardano (even though it’s not exactly stable): https://www.cryptoglobalist.com/2018/08/28/the-battle-for-africa-can-cardano-ada-overpower-the-worlds-first-mobile-money-payment-system/. M-Pesa is itself a great story of African entrepreneurship: https://www.cnn.com/2017/02/21/africa/mpesa-10th-anniversary/index.html. But since it doesn’t use blockchain, it still struggles with centralization problems. The only service providers are Safaricom and Vodacom.

M-Pesa vs Cardano is a fascinating discussion from a global payments perspective. But at the end of the day, it’s not a relevant discussion for this whitepaper. The aerospace industry, automotive industry, and other OEMs make very little use of downstream suppliers in Africa.

All in all, a smart contract-compatible stablecoin is needed. For the majority of use cases, unstable coins are too inconvenient for actual enterprise use.

The quest for a smart contract-compatible stablecoin (the holy grail of the cryptocurrency world), has proven elusive so far. But who knows, maybe Ethereum (or Cardano or Qtum) will stabilize enough in the future for businesses to feel confident using them without any fiat involvement whatsoever.

If that never happens, then a fiat-crypto hybrid is needed. While blockchain purists may balk, this is still a significant improvement over the current state of things. In other words, cryptocurrency substituting the current role of SWIFT as opposed to outright displacing fiat: Local currency → SWIFT → Local currency. Which leads us to the next three scenarios:

4. Real-time Ethereum exchanging

If we want to stick with Ethereum, then it looks something like this: Local currency → Ether → Local currency. Given that Ethereum fluctuates, the whole process needs to happen in real time. Hopefully within a few minutes.

Vitalik Buterin and the official Ethereum development team have never dipped their toes into hybrid fiat-crypto global payments. Nonetheless, a few groups are developing ways to bridge Ethereum with local fiat currencies:

1) Request Network (partnered with Chain Link): https://request.network/#/, https://medium.com/@cryptogrinders/ethereum-in-everyday-life-part-3-request-network-d795f1c131c0

2) Open Law (uses Chain Link as the oracle that pulls the real time exchange rate): https://www.artificiallawyer.com/2018/09/03/chainlink-solving-the-smart-contract-fiat-money-problem/

3) Local Ethereum: https://blog.localethereum.com/how-our-escrow-smart-contract-works/, https://localethereum.com/faq

4) Bart Cant’s Fiat Relay: https://github.com/bartcant/FiatRelay

5. Ripple

Of the cryptocurrencies seeking to displace SWIFT, Ripple is by far the boldest. Their motto gets straight to the point: “One frictionless experience to send money globally”.

They have openly stated the intent to replace SWIFT, not partner with it (though recent rumblings involving Bill and Melinda Gates-backed Mojaloop possibly suggest otherwise). Even the World Trade Organization has acknowledged that they have the potential to transform global commerce: https://www.wto.org/english/res_e/publications_e/world_trade_report18_e_under_embargo.pdf. The dream is Local currency → Ripple → Local currency at a cost 40–70% lower than SWIFT: https://ripplecoinnews.com/everything-you-need-to-know-about-ripple-xrapid.

To realize that dream, Ripple has partnered with many banks and financial services around the world. It’s hard to keep track of all their partnerships since they have so many: https://en.wikipedia.org/wiki/Ripple_(payment_protocol)#Partnerships. All the biggest names from Bank of America to Western Union. I personally find Money Gram (https://ripple.com/insights/moneygram-use-xrp-faster-international-payments/) and Banco Santander OnePay FX (https://medium.com/cryptocurrency-financial/ripple-xrp-partnering-with-spains-largest-bank-bbc5b936496f, https://globalcoinreport.com/santander-ripple-extending-onepayfx-to-more-segments-customers-countries/) to be the most interesting.

While Ripple is not known for being a smart contracts powerhouse in cryptocurrency circles, it does in fact have a smart contracts platform (Codius). But I personally believe it isn’t suitable for enterprise use. Their approach involves ditching blockchain altogether for the sake of faster transaction speed and interoperability (which they perceive to be the main barriers to adoption): https://codius.org/docs/overview/why-codius, https://medium.com/coil/codius-smart-contracts-made-from-containers-b3b16c3e3890.

For security reasons, blockchains are intrinsically crucial to the viability of smart contracts.

Think about it this way, if-then conditions are as old as computer programming itself. Automated electronic billing has been around for a long time too. In other words, the possibility of “conditional money” is nothing new. Nick Szabo came up with the idea for smart contracts long before blockchain existed. After all, 90s database systems already had “self-executing” components (e.g., triggers, stored procedures).

But without a blockchain, database systems cannot enforce immutability — anyone with administrator rights can undo any transaction, purge transaction logs, etc. and make it as if it never happened.

Blockchain, with its secure, decentralized, and universal ledger, is what made smart contracts viable. Without the immutability of a blockchain, I fail to see why companies would trust a smart contract with billions of dollars. Furthermore, all the state laws that confer legally binding status upon smart contracts have been worded in terms of blockchain (see part 17).

Codius smart contracts are hosted by “pods”; hardware machines dedicated to hosting (volunteered by folks around the world who serve as the rough equivalent of miners in this ecosystem). Contracts can run on single hosts or be distributed on multiple hosts. But overall, the level of decentralized security is nowhere near a blockchain’s. Nor does it provide “true” immutability.

For a fascinating discussion of why it’s very hard to safely store data in a distributed manner without relying on blockchain, please read: https://medium.com/@mycoralhealth/why-blockchains-dont-suck-and-the-perils-of-distributed-databases-1a522cc7cfe1.

6. IBM World Wire (partnered with Stellar)

IBM and Stellar represent the third main faction. SWIFT might be the incumbent. And Ripple might have far more bank partnerships. But 90% of the world’s credit card transactions are processed on IBM mainframes. In this regard, they have an advantage.

Two financial institutions transacting together agree to use a stable coin, central bank digital currency or other digital asset (any of which would run on the Stellar protocol) as the bridge asset between any two fiat currencies. The digital asset facilitates the trade and supplies important settlement instructions. The institutions use their existing payment systems — seamlessly connected to World Wire’s APIs — to convert the first fiat currency into the digital asset. World Wire then simultaneously converts the digital asset into the second fiat currency, completing the transaction. All transaction details are recorded onto an immutable blockchain for clearing.

How does this work despite the instability of Stellar? Transactions themselves are not being handled by Stellar itself, they’re handled by a USD-pegged stablecoin. Everything just happens to run on the Stellar protocol. In other words, Stellar is valuable as currency to run the network and not directly as a currency itself.

Stellar is not Turing-complete and thereby offers simpler, more streamlined smart contracts than Ethereum. For low and medium complexity use cases, this is advantageous. But for high complexity cases (such as digitizing the entirety of an OEM’s operations), the full expressiveness of Solidity is probably still needed.

7. Traxpay

I always find it exceedingly odd that the Vitalik Buterin and the official Ethereum development team have never directly dipped their toes into the (fiat-crypto hybrid) global payments market. Perhaps they have full faith that Ethereum will stabilize in the near future.

After all, the B2B market is much larger than the B2C market. This is generally true regardless of industry (see appendix D towards the bottom of part 20 for further discussion of this tangential topic). You can’t really talk about B2B without talking about global payments. A buried, tentative conclusion: If smart contracts ever take off, it will do so in the B2B sphere.

That being said, the importance of global B2B transactions and smart contracts are not lost on fintech startup Traxpay. CEO John Bruggeman has described the B2B payments world as “Four times massive” (https://www.pymnts.com/news/2014/how-to-disrupt-b2b-payments-with-one-word-traxpay/). Traxpay seeks to disrupt the letters of credit market ($20 trillion/year) with a low-cost alternative; conditional payments (aka simple smart contracts) that run on the Ethereum network (https://www.traxpay.com/traxpay-conditional-payments/). Also features straight-through processing and support for over 100 local currencies. Despite its impressive value proposition, this is a distant contender to all the others.

8. Veem

Veem is the most prominent traditional payments provider that has recently adopted cryptocurrency. Their usual model is:

Local currency → Bitcoin →Local currency

Partnerships with either Stellar or Ripple in the near future would probably be a reasonable inference. Given that they primarily use bitcoin, smart contracts are out of the question.

Overall probably not the strongest contender since the role of the payment provider has become increasingly unclear in the wake of PSD2.

Continue to part 9….