Tokenization Use Case: Cheques

Upgrading cheque payments with an auxiliary use of tokens is the path of tolerable compliance hurdles.

Revitalizing Checks Amidst Fintech Revolution

Neither consumers nor merchants perform on the stage of the payments business. For a long time now, these parties have not been capable of making a normal, price based, free market choice of a payment instrument. The centralized nature of payment networks forces consumers and merchants to blindly accept unreasonably high fees.

Moreover, consumers are made to believe that payments are almost free while in reality, everybody pays for it in full in the form of increased prices for all goods and services.

The payment friction accounts to several percents of GDP — more than police cost for many societies — so the abnormality could not go unnoticed. However, it is easy to excuse the ultra-conservatism in finance, so the incumbent industry has managed to survive through many anti-monopoly cases over the decades.

Crypto community members commonly criticize banks and their disproportionate amount of financial power. Banks rightfully object that they are not to blame for payments being over-centralized and overpriced. Payments used to be fairly decentralized. It was bank’s payment-based relative revenues that started to decline in the mid-20th century. It is not too radical to add that — feigning fair partnership — it was payment networks who began poisoning the relations between banks and their customers by charging monopoly-like fees.

We do not agree with those experts who hurry to predict the “end of the banking era”, for whatever reason. We suppose that, short of unforeseen fundamental changes capable of overthrowing the existing political system, banks will outlive most current technologies and remain strong at both the start and the end of the service cycle. They retain large amounts of customers’ trust, which is built on real relationships, not just a blind acceptance of “terms of use”.

Despite their strength, to stay afloat in payments, banks need to adapt. These days, they are being bombarded with blockchain related innovation offers. Those are mostly too radical, expensive, and far-fetched.

One big misconception that often accompanies blockchain technologists is a too frivolous take on fiat money.

One type of fiat money is very different from another. Dollars sent over FedLine, ACH or with checks are different dollars. Fiat money constitutes whatever corresponds to the exact wording of a particular defining regulation, nothing else.

It takes decades to change cornerstone financial regulations and the culture of money use. Changes to the complex pipelines that make payments possible rarely occur. Central banks are researching the idea of digital money but they either will not actually go there in the foreseeable future or will take very limited steps. There will be no help or positive interference from regulators and government any time soon. Many, if not all, blockchain-related projects today either ignore or seriously understate these considerations.

No wonder banks feel disoriented.

They get mixed signals from technical experts. Their payment revenues became less satisfying. The relations with payment networks do not look that great any longer. Even if it was a fair deal sharing interchange fees all these decades, the large networks have obviously failed to answer the challenges of the modern times. When you first read the Bitcoin white paper, the question arises: “apparently, this is not a rocket science; what has R&D at VISA been doing with all that financing for so many years?”

Besides, the monstrous concentration of power the payment networks have introduced to the market is really painful. Banks lose much of their brand awareness and customer loyalty to card companies.

Now banks can rely on themselves again. Banks have got everything they need to upgrade the payment infrastructure without making large investments and building a new dependence. Tokenized cheques are delivering an immediately useful and down-to-earth solution which takes minimum efforts to implement.

Why not revitalize good old cheques with a tech-injection — crypto tokens?

Banks and credit unions will regain the power and remain the key, both legally and operationally. When compared to other “fiat money over blockchain” projects, tokenizing cheques has several strong advantages. The most important ones are tolerable compliance hurdles and minimum needed interference with the existing infrastructure.

Much of the new is a well-forgotten old.
Tokenized cheques are balanced and timely hybrid of the great tradition and latest technology, they allow banks to increase profits by using blockchain and mobile technologies and also by reducing strategic dependence on the oligopoly of payment networks and other middlemen.

We can and should exploit the “backward regulatory compatibility”. Metadata — that reflects acts of signing, endorsement, etc. — is partly stored on-chain and partly linked to distributed storages. The document integrity — when split to on-chain and off-chain parts — can be verified with 100% accuracy at next to zero costs. Regulation CC already defines the basic framework architecture—just replace scanned images with {tokens+metadata}. As the regulation implies, should something go wrong, a truncated or paper check can be recreated, at any moment.

Each tokenized cheque can be imagined as a normal paper check but traveling for free with a free wireless microchip embedded. That chip is connected — in an imaginary sense, of course — to the Internet, also free of charge, in a 100% secure mode. Monitoring status of cheques along the way — from signing to endorsement and further on — certainly is a valuable addition to the issuing bank’s toolset. The legit juggling of fees can now be adjusted on-the-fly. Tokens create an alternative data layer, while processing framework stays incumbent.

When a bank intends to issue a checkbook for its customer [in the original paper form], a customer can be offered a less expensive smartphone version instead. The bank has no direct control over the open source application and doesn’t need that control — once the application is installed, the bank can load cheques into it. To remotely load tokenized cheques, the bank needs to receive the blockchain address through its authorized communication channels such as an e-banking dashboard.

There is no account or centrally verified login & password pair created on the mobile application. Each cheque is an authentic blockchain object with some on-chain data and metadata links to the off-chain storage. Cheques can be passed from anyone to anyone, however, to sign it — and, therefore, “activate” it — requires personal authorization. Banks do not watch whether or not cheques get wrongfully authorized, just as it happens with ordinary paper checks.

Why Cheques are Great for Upgrade

Cheque is the Type of Fiat Money that is Best Fit for Blockchain

Blockchains are very popular nowadays, and deservedly so — on-chain value is convenient and operationally affordable. However, one important drawback of implementing fiat-over-blockchain is that any on-chain “assets” are not legally assets yet. There is some progress but the general regulatory vacuum will remain in most significant jurisdictions for years to come. Legalizing on-chain objects via “backups” in the legacy world, “reserves”, is next to impossible unless you are a central bank. Not mentioning the wretchedness of the idea, itself: taking any reserves off circulation is not good for business.

A cheque is great “to put on a blockchain” since it merely represents someone’s solid intention to pay, not more than that. That intention is supported by a bank’s confirmation that the person should be able to pay as he intends. Blockchains are great for transporting such “confirmed intentions” at ease, with almost no fees. One can always be certain that those “intentions” are original. In the case of cheques circulation, there are no reserves the involved technology providers would need to hold to back the value stored on the blockchain. In the case of tokenized cheques, the blockchain is not used in an attempt to hold “money” or legally defined assets; it just handles documents.

A token traveling over blockchain resembles a cheque naturally better than a direct unit of a fiat currency.

Another interesting factor is that cheques payments system is much less centralized compared to cards. Two nodes (banks) can principally settle mutually, without applying to any third party.

There is a common misunderstanding concerning decentralization in payments. Fiat payments cannot be “decentralized” in a manner bitcoin payments are decentralized. The IT-related term describing network aspects of peer-to-peer business models cannot be directly applied to fiat payments.

In fiat money payments — where each “atom” of the system still requires a final authorization by a central bank — the degree of “decentralization” rather refers to the depth of hierarchy in the system. Each level added to the structure requires more expenses. Cheques can be routed inside the system that has only two layers, whereas most other retail payment tools account up to five.

Last but not least: success stories in payments are very rare not only because of legislative pressure. In many cases, the two-sided nature of payments market is the show-stopper. A new provider has to appeal simultaneously to the two audiences — merchants and consumers, who have little mutual interests. Reaching the critical mass on both sides is so hard that many payment systems chose not to appeal or convince but to look for ways to dictate their will to merchants and hide true cost structure from consumers. Tokenized cheques is just an add-on to the existing functioning system and, therefore, can allow itself to grow slowly, bank after bank, state after state.

Checks Remain the Most Natural Tool of Payment

Overall, it might look as a strange idea of ours to pave the bridge over the troubled fintech revolution waters on top of the severely declining instrument. A closer look reveals it is not.

Amazingly, if we reach out to some statistics, cheques are still showing signs of great strength, at least in the world’s largest payments markets such as the USA and UK. For example, cheques still account for roughly one third in the distribution of payments made to major suppliers in the US.

Cheques are considered to be too slow for the modern age, but when was the last time when you, as a payer, really, really, really needed an “immediate” payment? The entire “instant payment” issue turns out to be a narrative switching and marketing bait: payment networks are desperately trying to advertise the speed aspect. In reality, a payer considers the payment done when the cheque is signed and sent. Period.

We believe the illusion of an instant payment settlement is greatly overvalued. For drivers of economic activity — payers — immediate delivery of their money to payees is not exactly the main concern. The real settlement is never immediate anyway. That is an inherent property of all fiat transactions, except paper cash. From a user perspective, a modern cheque payment app is as “instant” as any e-money; should a problematic transaction occurs, all fiat payments are reversible to the same extent, be it cheques or not.

Cheques are often considered expensive. True, but tokenized cheques may be not. Besides, payments market has inelastic demand so there is always some time to adjust pricing in a comfortable tempo.

Consider yet another great advantage: since tokenized cheques require only a light receiving infrastructure — much less compared to a card terminal — many merchants may be attracted to test the new framework.

Last but not least, there is a certain cultural appeal that exists around cheques. A cheque is essentially an invitation to come to a payer’s “vault of wealth”, wherever and whatever that is, to collect the money. There is a considerable “gentleman attitude” value in this legacy type of business relations: you do not have to belong to a specific network (“do you have PayPal?”) to get paid. You do not have to disclose any information about yourself (“what’s your address there?”) to get paid besides your name. The only thing you need to pay is your