R3 and 22 of its member banks have developed a new international payments solution that leverages distributed ledger technology (DLT).
A protoype of the solution – which is being built on R3’s Corda platform – is due to be released by the end of 2017.
In a release issued today, R3 notes that domestic payment systems have advanced in many countries to the point of providing real-time funds transfer for customers, highlighting by contrast the extremely inefficient, expensive and slow experience businesses encounter with international payments.
R3 claims that this new solution will improve world trade efficiencies by facilitating instant international payments, offering a direct alternative to current systems that can take days to complete an international payment, costing businesses millions, slowing down trade, increasing settlement and fraud risks and causing a liquidity drain for banks.
The solution works by creating a representation of fiat currencies on ledger that can then be easily moved between financial institutions on the network.
“The key to the design of this solution is a focus on fiat currency and leveraging the Corda network,” Adam Furgal, head of incubator and accelerator at R3, tells Profit & Loss.
Unlike some other DLT-based payments solutions, there is no native asset on the Corda platform and R3 does not issue any cryptocurrency of its own to be used as an intermediary bridging currency for the payments.
“We’re not getting into the game of issuing our own currency, our solution will use commercial bank representations of fiat currency. So the partner banks will work either independently in their currency zone or collaboratively as currency issuers, in a way not dissimilar to the current system of commercial bank issued cash,” says Furgal.
Banks involved in the initiative include Barclays, BBVA, CIBC, Commerzbank, DNB, HSBC, Intesa, KBC, KB Kookmin Bank, KEB Hana Bank, Natixis, Shinhan Bank, TD Bank, U.S. Bank and Woori Bank.
Furgal explains that when designing this new payments solution the number one concern from the banks involved was ensuring the certainty and reliability of transactions. A close second concern, he adds, was ensuring that this solution would increase efficiency and reduce internal operational costs for cross-border transactions.
“Essential to the core construct of the model and architecture that we’re using is coupling together the message – saying that my customer would like to pay your customer – with the transfer of value, with the representation of the asset. So we’re moving from a model where we’re trading messages and then reconciling them potentially days later to a model where we transfer a message and a representation of value in near real-time on a point-to-point basis. This drives a lot of efficiencies,” says Furgal.
Also key to the design of the new payments solution, according to Furgal, is that it is designed to enable interaction with central bank digital currencies if and when they are rolled out.
“Instead of interacting with a tokenised representation of commercial bank fiat currency, you could use a tokenised version of the central bank digital currency and so we’re bringing together those architectural roadmaps. Our core belief is that there’s a really significant customer benefit and a really significant business case for working in parallel to and in conjunction with those central bank efforts and learning from them and involving the regulators,” says Furgal.
The concept of building a solution that can accommodate future central bank issued digital currencies was also highlighted by Frederic Dalibard, head of digital for corporate and investment banking at Natixis, as one advantage of this R3-led initiative.
“Natixis believes in the potential of distributed ledger technology for cross-border payments and is exploring several initiatives in that space. In our view, R3’s proposal is very promising, because it is built on the right approach, relies on Corda, and sets the project on a path which is relevant – notably by anticipating right out of the gate how the proposed architecture could be adapted when central bank digital currencies appear,” he says.
Although the prototype solution is being developed in conjunction with 22 banks in the R3 consortium, Furgal reveals that there are varying levels of involvement in the project and insists that the longer-term goal is to open out this solution to a very wide range of market participants.
“The way we’ve structured the programme is that we have a group of core banks who are investing a little bit more in terms of people and money, there are about six to eight of these core banks. Then we have a second group of participant banks, who are acting as ongoing advisors and providing feedback on the solution. But ultimately we’re making this as low friction and easy to join as possible because we view it as a significant industry utility that will be open to thousands of banks across most, if not all, currency zones. It can’t just be one or two banks working on one or two corridors or customer segments,” he says.