[Part 2] Application Example of REMIIT RSC : Connecting Funding and Remittance using the Blockchain Ledger Technology
by Logan Hong (CTO)
In the previous post, we looked at the implications and limitations of the separation of funding and remittances, including pre-funding. In this post, we will explore details on how the REMIIT team is using the blockchain ledger technology to overcome the limitations of the remittance methods currently used by the MTOs.
As we saw in the previous post, in the situation where funding and remittance are separated, each country’s regulatory authority experiences difficulty to check the transactions after the problems of MTO remittance transaction occurs. The bank only reports to the regulatory authority the transaction made by the bank which is the funding detail from MTO to MTO which abides by the rules of the International Bank Transfer Association to the regulatory authority while the MTO only reports to the regulatory authority the details of the individual customer transactions. Thus the authorities are required to go through the process of examining each transaction one by one. In addition, if the record is manipulated or mistakenly missed, the difficulty becomes greater. The blockchain ledger technology is not forgeable nor manipulatable as it is known, and once the chain is created it can not be modified. Therefore, you can resolve the above-mentioned problems by recording information related to remittances (ie, the relationship between the deposit record and the actual remittance), and providing the records on request of the banks and the regulatory authorities if necessary. The diagram of the ecosystem structure is shown below.
Looking at this diagram, the contract between the MTOs is first recorded as a smart contract on the blockchain. All the transaction history between the two partners are recorded in the smart contract by consensus (sign) between the partners. However, the other intermediaries (e.g. Banks) involved in the process will be signed by the particular participants where necessary within the process. Of course, the process may be simplified for convenience and speed of transfer in situations where the commercial services are in place.
If funds are transferred for pre-funding, the funding details with the signature of the participating bank is recorded in the smart contract. Whenever an individual remittance transaction occurs using the pre-funded money, the remittance history with the signature of the sender and the recipient is recorded in the smart contract and deducts the pre-funded amount based on this.
If a problem arises in the future, it is easy for any regulatory authority to connect the remittance transaction and which funding transaction it came from. Furthermore, as it is uploaded on the blockchain, this record can be trusted.
With this technology, most of the banks described in the previous post can resolve the difficult problem of providing funding MTOs, and based on this, MTOs can use the existing method in a safer environment.
The diagram below illustrates the flow of recording the funding and remittance described above in detail.
- The MTO on the sending side proposes a remittance contract to the MTO on the receiving side. If both the MTOs agree to the contract, the sending MTO will complete the contract with the details of the transfer and post it on the blockchain ledger. The receiving MTO approves the contract on the blockchain ledger, which is recorded on the public blockchain.
- In the case of pre-funding, the sending MTO, which uses the SWIFT network from the bank, sends the contract and amount to the receiving MTO, and the money transferring company records funding information and details on the blockchain ledger. The sending MTO will approve this contract, which is then recorded on the blockchain ledger. The sending and receiving banks involved in the remittance process may also sign and authorize this agreement if necessary.
- A customer who wants to send money will go to a sending MTO and request a remittance. In this process, the customer undergoes KYC/AML verification.
- The sending MTO requests to the receiving MTO through the message channel, and the MTO that receives the request gives the amount to the recipient. In this process, the recipient undergoes KYC/AML verification.
- After the money is sent, the MTOs record the relevant details, readjust the balance, and upload it on the blockchain ledger. If necessary, sending and receiving customers can also confirm their transactions and participate in the approvals. This process prevents errors and ensures the authenticity of the ledger record.
- The contract is terminated when the contract term ends or the deposit amount is exhausted. In this case, if the balance remains, it is carried over to the next contract.
The following diagram specifically shows the process of auditing the transaction details.
- Viewing funding details connected to the specific remittance transaction :
Problems (such as money laundering or terrorist financing) can occur in one or more transactions in remittance within the pre-funded funds. In this case, the regulatory authority can request details about the funding history linked to the specific remittance transaction and confirm it with the blockchain ledger. In this case, the procedure is as follows: The regulatory authority recognizes the occurrence of the problem; Requests a detail query to the REMIIT system; The REMIIT provides the corresponding transfer details and contracts requested; The regulatory authority that provided this information could use this information to verify the details of the problem.
- Viewing specific remittance transaction details connected with funding :
There may be a case where the details of the remittance transaction is unknown, but a problem exists at the funding stage. In this case, the regulatory authority may request to see the transaction details linked to the specific funding transaction, and the procedure is as follows: The regulatory authority recognizes that there is a problem with the specific funding itself; sends information and remittance details related to the funding to the REMIIT system; Request to view the transaction history; REMIIT submits the relevant funding contract information and remittance list; The regulatory authorities that receive contract information and remittance lists can use this information to confirm specific details.
It is difficult to use cryptocurrency directly for remittances due to government regulations. The REMIIT Team is trying various ways to benefit from the cost and performance by using existing remittance methods however using the blockchain ledger technology. In particular, it is an area where we can try to overcome the limitations that exist in the supervision of remittance, especially by using the blockchain technology. REMIIT wanted to prove this through the RSC MVP and is in the process of applying it to the commercial systems through the application of related sandboxes and patents.
In the final post, I want to wrap up this series, dealing with some issues that arise during the implementation.