The financial system has undergone significant changes over the last fifty years. Gone are the years when the exchange took place by transferring a piece of gold, silver, a keg of oil and skin from the ass of a mammoth. At the beginning of the state, the currency was issued in the form of a resource reserve of the state (gold fund, oil, etc.). But, realizing that all the resources of the world are not enough to ensure their ambitions, the treasury began to refuse to bind to natural resources, and now we see the uncontrolled emission of most of the world’s key currencies.
A small disclaimer: I’m not a financier, but a crypto enthusiast and information security specialist. Therefore, the evaluation is biased, captious and has information and entertainment character, based on information obtained from open sources. Also, information may not be relevant to individual organizations in individual countries.
One of the reasons for the emergence of cryptocurrency is the presence of intermediaries between the sender and the recipient. Financial institutions control all the nodes of the transfer of the currency from sending and forwarding to delivery. It would seem that there is nothing wrong with this, because the issue of safe transfer of funds should really be handled by qualified specialists from the relevant organizations. Because the first thing that is put in the forefront is security. There is no point in the speed of transmission, if every second transfer will be lost no one knows where, or is stolen by someone. At the same time, every operation in the bank is protected both technically and legally. And it works all over the world.
As I just said, for the bank speed is not the main thing. But is this true? Micropayments, transactions for millions of dollars, or whatever else — everything must pass with sufficient, relevant speed. The question “why?” Should not even arise, because any major transaction of the company is a matter of the moment. Buying a cup of coffee should not take a day. And so in everything. The current realities of life show that the movement of funds should be so quick that it covers the difference with the real transfer of funds from hand to hand.
Is it possible to achieve this?
First of all, you need to make a clear distinction between the transaction and the transfer. In the banking sector this is significant. Transaction is a debt receipt, processed by the system automatically and almost instantly. Transfer is the real flow of funds from one bank to another.
How does it work? You make a transaction paying for dinner in a restaurant. Money is written off instantly from your account and is credited to the restaurant account. All? No! Then the money will physically send from your bank to the bank that serves the legal expense of the restaurant. Well, when the bank is the same, then it’s a matter of one day. If not, then money can go a few days. And if you are on a trip and paid off in another city / country? Then the money will go for about five days.
You do not think about it, you see that money was written off instantly. But it can even give you a headache.
Let’s look at the movement of fiat in classical financial companies.
When it comes to transferring money, most can remember ways such as Swift, American Express, Western Union, as well as a number of other representations. I will stop at the first.
Without historical details, I will appeal only dry figures about Swift: more than 7,000 financial organizations and banks from 190 countries are included in this system. The transaction speed is from 2 to 15 minutes, depending on the degree of urgency. But the transfer takes up to five days. And, in addition to the speed itself, it is important to consider the cost of such a link. And it varies from the number of issuers between the sender and the recipient. It is necessary to pay for sending, receiving, transaction of the Swift network itself, as well as services of each issuer involved in the transaction.
At the same time, Swift gives security to translations. And this, of course, is a plus. But this is not enough.
All over the world cards with the inscription Visa or MasterCard (Maestro) are distributed. How do they differ from the money transfer companies?
First of all, these companies provide their chips, which organize identification of the owner of the bank card. And also services for conducting transactions.
As in the restaurant example above, you conduct a transaction by entering a pincode on the chip-supporting terminal. After that, the bank system issues a debt receipt, which is sent to the bank of the recipient of funds.
The speed of transactions in the VisaNet network on January 10, 2018 is registered at a rate of 24,000 transactions per second. What does this give us? Large-scale exchange of debt receipts. At the end of the day, the collectors of the whole world begin the transfer of funds between banks to ensure the physical transfer of funds. A reasonable question may arise, what do we care, how does it work physically, if this receipt itself is enough?
First, despite the transaction, the funds will be unavailable before physical arrival to the issuing bank, if you are a legal entity. A day or two seemed to be a short time, and you can wait, but a five-day wait for funds from another country for business can pour into the real problem.
Secondly, even if you are an individual, you too may have problems. There is a type of debit card called an overdraft. This means that you can go into negative on the debit card. If you only received money, then paying them off, you can see the negative balance on your account, which can lead to a stupor. Of course, the money will flow, and you will exit from the minus, but this is only after their physical arrival in the bank. The same situation with translations. If you came to withdraw money from the bank — you may have problems, because the issuing bank of your account can refuse to withdraw (through the cashier). But you will be able to withdraw money through a terminal or another bank, because one more debt receipt will be created.
Speaking of digital assets, the world famous example is PayPal, whose processing speed is about 190 transactions per second, which in reality takes from a few minutes to a day. It is an intermediary service between you and other companies around the world, which for the commission takes over all the functions of re-linking funds, and also provides appropriate guarantees. Next, he uses one of his accounts to send funds to the recipient, and also conducts the necessary iterations on security and insurance. Depending on the contract with the bank that provided the account in the final country of the recipient, the necessary manipulations with money are taking place.
All these methods exist for a reason, and they are really necessary even now, because they give something more than simple dispatch: convenience of use, guarantee of delivery, insurance of the movement of funds. Today, banks and intermediary companies are primarily services that provide convenient services.
In the second part, I will talk about technologies that seek to displace the familiar banking system, but before that a small P.S. in the form of real implementation of unreal money.
There is such a nation of Yap in Micronesia. They have a unique financial system. As money they use Rai stones. And all would be nothing, but only these stones can weigh not one hundred kilograms (the biggest weighs about 4 tons) and they are made from limestone, brought from neighboring islands.
How is the currency exchange? Just all the inhabitants of the islands know who owns which stones. Does the stone own one or more people, and the stones themselves can not even be moved at the same time, because they are all taken into registration.
Once the local sailors, carrying one such stone from the island to the island, landed in a storm. People survived, but Raya’s stone went to the bottom. Back on shore, they told what had happened. Do you think that stone came out of circulation? No! He continued to exist in the system and participate in operations, but remained calmly at the bottom of the sea.
This is an illustrative story in which the financial system can be transparent. And what more, more modern way, wait for the second part.
References to a number of sources:
1. https://goo.gl/mcDw4q — speed of main payment systems for January 2018;
2. https://goo.gl/R2xy4J — wiki page about the people of Yap.
3. https://habr.com/post/411757/ — russian original article.
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