IBM launches blockchain payment & clearing network for banks

IBM launches blockchain payment & clearing network for banks

IBM has brought its Blockchain World Wire (BWW) banking payments network out of beta testing and officially announced it to the world.

Blockchain World Wire uses the Stellar blockchain to clear and settle international payments between banks in “near real-time”, according to IBM, via a mutually agreed digital currency.

Using the new system, two financial institutions transacting together agree to use a stable coin, central bank digital currency, or other digital asset, as the bridge asset between any two fiat currencies (currencies backed by a government as legal tender, rather than by a commodity such as gold). The digital asset facilitates the trade and supplies settlement instructions.

Critically for the banking sector, institutions are able to deploy their existing payment systems – connected to World Wire’s APIs – to convert the first fiat currency into the digital asset. IBM’s system then simultaneously converts that digital asset into the second fiat currency, completing the transaction, which is then immutably recorded on the Stellar blockchain for clearing.

IBM claims that the new system simplifies transactions, reduces dispute resolution and reconciliation times, lowers costs at every stage, reduces capital requirements for cross-border transactions, enables end-to-end transparency, and incurs a single exchange fee between all currencies.

So what’s behind the move?

Internet of Business says

The financial services industry has been in the vanguard of exploring blockchain technology and what IBM terms “programmable money” for some years. In July this year, for example, a number of European banks, including HSBC and Deutsche Bank, adopted their own platform.

But it has also been grappling with the potential existential crisis that any self-regulating peer-to-peer payment network could create within the sector, if it operates without trusted third-party intermediaries – such as banks.

However, given blockchain’s transaction and settlement security, data integrity, record-keeping and (claimed) efficiency features, the traditional payments industry in particular offers promising opportunities for disruption and improvement using the technology.

In other words, if banks adopt blockchain first in an environment of trust, then they can retain first mover advantage by disrupting their own industry from within.

According to IBM figures, cross-border e-commerce is now growing at more than 20 percent a yea – more than double the growth rate for domestic e-commerce (which, admittedly, has had a quarter century to mature). Meanwhile, the payments industry itself is expected to be a $2-trillion-dollar business by 2020, with average annual growth rates of seven percent.

On aggregate, cross-border payments account for roughly 40 percent of global banking revenues. Payment flows amounted to more than $135 trillion during 2016 alone, says IBM. Clearly, this is a sector ripe for disruption.

Stability first

Setting aside the risk and regulatory concerns surrounding virtual currencies and the complexity of some distributed ledger systems, few if any technical barriers have prevented the creation of a real-time global payment network capable of supporting transactions with straight-through processing.

This is why some blockchain experiments, pilots, and beta programmes within the industry are now coming to fruition.

However, early adopters want to see stable, scalable and cost-effective solutions that can be deployed in parallel to “existing financial rails”, in IBM’s phrase, so that migration can be gradual (rather than the risky ‘all or nothing’ proposition that some analysts, and senior bankers such as the Bank of England’s Mark Carney, have warned about).

According to IBM, those financial rails are typically of one of three models: custodian, correspondent, or digital asset. The custodian and correspondent models are used by large foreign exchange settlement firms and messaging networks that support payment instruction routing and clearing. Applying blockchain technology to either of these can offer improvements to existing functionality – but only incremental ones.

For a more transformational application of blockchain, the digital asset model addresses clearing and settlement on a single network, which has wider disruptive potential – hence the official launch of World Wire this week.

However, one problem with the digital asset model is the potential lack of confidence in the asset itself. Ironically, changing that perception could be one role for banks in this fast-emerging future – despite the industry’s clearly stated reservations about digital/crypto currencies.

On 5 September 2018, Goldman Sachs announced that it was dropping plans to open a trading desk for cryptocurrencies.

A fiat blockchain

But there is nothing stopping a central bank from issuing a digital version of its fiat currency, according to IBM, which shares the example of Sweden’s Riksbank experiments with eKrona, and the Bank of Canada’s proof-of-concept CADcoin.

Issuing fiat currency on a blockchain has numerous benefits, claims IBM. The traceability of blockchain helps prevent financial crimes, such as money laundering and corruption, and the efficiency of the system reduces transaction and settlement frictions.

As a result, “the future of programmable money is dawning”, says the company.

That said, the system would not prevent currency manipulation and other problems prior to, or after, the transaction, which suggests that banking fraud could conceivably acquire a veneer of blockchain-enhanced respectability.

Any financial or banking system is prone to manipulation and fraud – witness the many examples of market rigging and fraud, such as the Forex and Libor scandals, involving major banks over the past ten years – and so the rise of blockchain may merely force these activities to become even more creative.

But that would not be IBM’s fault or responsibility. Indeed, the onus is firmly on the banking sector to restore consumer trust in the wake of multiple industry scandals, the 2009-09 financial crash and credit crunch, years of austerity in some countries, and multibillion-dollar banking bailouts.

Another challenge is that some blockchain systems have become so structurally complex that they may become impossible to audit, as Internet of Business has reported recently. Meanwhile, questions remain over whether many or all blockchains are GDPR compliant. The following reports explore both of these complex issues in detail:-

Plus: Blockchain machine learning platform launches

In related news this week, 2015 startup, GNY, has announced the launch of a decentralised machine learning platform on blockchain, which it claims gives organisations of all sizes “the ability to discover new patterns in their data, predict when sales are going to be made, and increase clickthrough rates from customers”.

Through hundreds of machine learning algorithms working in tandem, GNY claims it can solve multiple business problems such as fraud in the insurance industry, and predicting how a user is going to behave in a retail environment.

GNY says its smart APIs have been paired with a universal operating language, and this enables developers to “easily access the power of machine learning”.

Following our successful London event, our US Internet of Insurance conference takes place in Houston, Texas, on 26-27 September. Click the logo for more details.