Cross border payments using blockchain technology with The Proof of Trust
The current system
Settling payments between banks in a single country can be a complicated and time-consuming process. When settling interbank transactions or purchase of goods, both central and commercial banks play important roles1. Commercial banks would need to settle transactions between economic agents, either individuals or businesses, by transferring balances between accounts and other banks. The central bank plays an important role in this process. Transactions between accounts that are not in the same commercial bank will need to be conducted through a third party, where the banks or their delegates have funds on the same ledger. It is possible for a different commercial or central bank to act as such an intermediary, it is even possible for a non-bank to operate in such a way. The frequency of settlement and the delay between the initiation of the settlement and the final step where the transfer is irrevocable is the difference between a real-time and a deferred system.
When considering cross border payments, there are understandably additional complications. This reflects the multiple requirements of correspondent banking networks. First and foremost, foreign banks must have an account with a bank in the country in which they are active. Institutions are therefore required to reach consensus in routing payments, performing currency conversions, and deploying and managing liquidity in different jurisdictions, while operating under different regulatory constraints.
Investment in blockchain
The latest headlines in the world of blockchain suggest investment in the technology could rise by 90% this year from $1.5 bn to $2.9 bn [1]. This huge rise is, in no small part, due to huge interest in how a blockchain and smart contracts could facilitate cross border payments, making them faster and requiring fewer intermediaries. According to Michelle Bullock of Reserve Bank of Australia [2], “Cross-border payments are widely regarded as an area in which significant efficiency gains exist. Current processes are slow and costly, involving significant compliance burden and a number of different financial institutions in different jurisdictions. New technologies and new business models could be used to address some of these frictions.” The new technologies she discusses are of course that of blockchain and specifically smart contracts, which are able to remove the tedious elongated process involved with cross-border payments.
Across all sectors blockchain research and development has been gaining pace and we are now at a time that working blockchain solutions are being implemented. Respected market watcher IDC wrote that, “Blockchain is maturing rapidly, and we have reached an inflection point where implementations are moving quickly beyond the pilot and proof of concept phase [3].” In other words, now is the time for banks to being utilising the technology in earnest.
Central Bank Digital Currencies
In order to facilitate cross-border payments, one of the most important areas for development appears to be that of Central Bank Digital Currencies (CBDCs). A digital currency shares many similarities with the cryptocurrencies with which we are all familiar (Bitcoin, Ethereum, Litecoin etc), but with subtle important differences. Bitcoin, for example, is not yet a universally accepted means of payment, and so remains unavailable as a medium of exchange. Also, the usability of a cryptocurrency diminishes as it becomes a speculative vehicle with volatile purchasing power. CBDCs denominated in an established currency could resolve these problems. The stability of the CBDC is paramount, and one thing that could help to provide this is a monetary policy framework that could be applied to the CBDC, permitting stability over time in terms of a broad consumer price index [4]. More than 40 central banks worldwide are experimenting with CBDCs [5] and as recently as the 28thof May 2019, a European Central Bank (ECB) official has come out in support of the idea. Vitas Vasiliauskas of the ECB says “A token would be a bearer asset, meaning that during the transaction the sender would transfer value to the receiver, without intermediaries. This is something fundamentally different from the current system in which the central bank debits and credits the accounts without transferring actual values [6].” It is possible to infer from this statement that a digital currency relates heavily to blockchain technology, despite this not being explicitly stated. Blockchain was however indubitably involved in what was the first transaction of its kind between Bank of Canada (BoC) and the Monetary Authority of Singapore (MAS). This month (May 2019, time of writing) saw the first cross-border payments using blockchain technology between two central banks, using CBDCs [7].
The blockchain projects of BoC (Jasper), and MAS (Ubin), were developed on two different platforms: Cora (Accenture) and Quorum (JPMorgan). Thanks to the technical support from the two enormous blockchain platforms developed by Accenture and Quorum, the two central banks were able to demonstrate that Payment vs Payment (PVP) settlement was possible without the use of any intermediaries. Through use of Hashed Time Lock Contracts (HTLC), a type of smart contract that returns funds to sender if conditions are not met within a certain time frame, assets are locked or restricted until conditions are not met in full, at which point they are transferred in their entirety to the desired wallet address, see Figure 1. for an overview of this. A monumental step for blockchain technology in the financial sector, this successful experiment proved that settlements could be made across different countries with different currencies and regulations across different blockchain platforms.
The fact still remains that 25% of all smart contracts contain critical bugs, according to a report published in Bitcoin.com [8]. The report states debugging deployment suites and professional decompilers are useful in identifying errors, yet they are by no means comprehensive and reliable enough to rely on alone. Whilst not infallible, the best way to avoid critical errors in smart contracts is through a thorough a thorough auditing process. Professional auditing company, Hosho have audited smart contracts that have amounted to $1 bn in transactions. They claim that 60% of contracts have at least one security issue, and that 1 in 4 have bugs that would prove critical.
In high stakes situations, all parties involved in a transaction must be certain that funds will be transferred to the correct location and that personal records are not put at risk. If smart contracts containing bugs are submitted to a blockchain they are permanently and immutably logged, therefore it is in the interest of all individuals that a smart contract is flawlessly designed before it is to be used in a national tax system. The Proof of Trust (PoT) has the only patented protocol that is specifically designed to act as an assurance layer, preventing invalid or insecure smart contracts from being executed. Once a smart contract has been designed to correctly facilitate a transaction, that contract can be audited through the Delegate and SuperDelegate layers. Supposing that the initial contract had a 5% chance of containing a fatal error, the auditing process would reduce the probability that the finalised contract contains an error to less than 1 in half a billion. Whilst the initial contract would be considered too risky to be deployed, after auditing from carefully chosen, highly skilled individuals the risk of an invalid contract execution is negligible. With employed the benefits of blockchain can truly be revealed. For a more detail on The PoT protocol, please refer to the whitepaper found at theproofoftrust.com.
Conclusion
In summary, banks need an easy, cheaper and more efficient way of completing cross border transactions. The words of Scott Hendry echo the sentiments of Michelle Bullock, as he states that “The world of cross-border payments is complicated and expensive: our exploratory journey into the use of DLT [distributed ledger technology] to try to reduce some of the costs and improve traceability of these payments has yielded many lessons [5].” However, more banks are needed to take the steps of BoC and MAS, in order to ensure that these projects become the primary means for international exchange. As blockchain and smart contracts play more of a central role, the security procedures will need to be enhanced, which is where The PoT would feature prominently.
References
1. Blockdata. “Breaking down the Forbes Blockchain 50.” Medium, Blockdata, 24 Apr. 2019, medium.com/blockdata/breaking-down-the-forbes-blockchain-50–2f44e9902537.
2. IMB and OFIF (2018) Central Bank Digital Currencies , Accessed at https://www.omfif.org/analysis/reports/reports/central-bank-digital-currencies/:.
3. Flood, Gary. “IDC: 2019 Could See a 90% Jump in Global Blockchain Investment.” THINK Digital Partners, 5 Mar. 2019, www.thinkdigitalpartners.com/news/2019/03/05/idc-2019-see-90-jump-global-blockchain-investment/.
4. Bordo, Michael, and Andrew Levin. “The Benefits of Central Bank Digital Currency.” The Benefits of Central Bank Digital Currency | VOX, CEPR Policy Portal, Sept. 2017, voxeu.org/article/benefits-central-bank-digital-currency.
5. Powers, Benjamin. “Central Banks Are More Interested in Blockchain Than You May Think.” BREAKERMAG, 8 Apr. 2019, breakermag.com/central-banks-are-more-interested-in-blockchain-than-you-may-think/.
6. Khatri, Yogita. “ECB Official Says Wholesale Central Bank Digital Currency a ‘Viable Option’.” CoinDesk, CoinDesk, 28 May 2019, www.coindesk.com/ecb-official-says-wholesale-central-bank-digital-currency-a-viable-option.
7. Bank of Canada & Monetary Authority of Singapore (2019) Enabling Cross-Border High Value Transfer Using Distributed Ledger Technologies, Accessed at http://www.mas.gov.sg/~/media/ProjectUbin/Jasper%20Ubin%20Design%20Paper.pdf:
8. Sedgwick, Kai. “25% Of All Smart Contracts Contain Critical Bugs.” Bitcoin News, 29 Aug. 2018, news.bitcoin.com/25-of-all-smart-contracts-contain-critical-bugs/.
