In the FX context, the interesting aspect of cryptocurrency technology is the public database – also referred to as distributed or public ledger or the block chain.
Rather than being housed by a single financial institution, this database is distributed or decentralized across thousands of servers worldwide with changes to the database ledger resulting from payments sent or received having to be mutually agreed.
Ripple, a real-time digital-currency settlement system, is one of the most prominent examples of a decentralized ledger, says Zil Bareisis, a senior analyst in Celent’s banking practice.
“Ripple has signed up a number of banks as customers, but perhaps its most significant partnership is with global payments service Earthport [which clears and settles payments directly to banked beneficiaries in 65 countries],” he says. “It has not yet positioned itself as a provider of services directly to corporates, but it has the potential to drive down the cost of international transactions.”
Stephan Tual, chief operating officer of block-chain applications platform Ethereum, says the technology also makes it easier to monitor transactions.
“Nothing can be encrypted, so every transaction can be immediately accessed by a regulator,” he says. “This means that any wrongdoing can be detected immediately and reduces the chances of a repeat of an event such as the Libor fixing scandal.”
Celent’s Bareisis accepts the timeframe within which corporates will routinely use block-chain technology services is hard to calculate precisely, referring to the length of time it took for companies to start embracing electronic invoicing as an example of how the corporate world can be slow to adopt new technologies.
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The stability of the solutions and addressing current risks Markus Sander |
However, he believes there will be block-chain propositions available to corporate customers in the “not too distant future”.
The block-chain technology, as a ledger of ownership, can be used to confirm that international transactions have taken place between two parties and that a change of ownership of currency has taken place, explains Simon Hamblin, CEO at Netagio, a Bitcoin, GBP, USD and EUR exchange.
“Currently, the Bitcoin software that sits on top of the block-chain technology confirms that Bitcoins have been transacted,” he says. “The block chain allows for a fiat currency [a currency that a government has declared to be legal tender, but is not backed by a physical commodity] layer to work alongside it, confirming that GBP/GBP transactions, for example, have taken place.”
There is no reason why the technology could not be employed by an intermediary – such as an FX exchange – to enable transactions between two parties exchanging GBP for EUR or any other currency.
However, Hamblin accepts that this is some way off in terms of thinking and development, and notes that currently the transaction confirmation happens for the same currency (Bitcoin) rather than a currency pair.
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Oliver Bussmann, the CIO of UBS, has said that block-chain technology has the potential to trigger massive simplification of banking processes and cost structures, a view shared by Bernd Richter, a partner of Capco, a global business and technology consultancy.
“Block chain creates opportunities in payments, foreign exchange, trading, loans and deposits,” says Richter. “Anything that involves a counterparty and thereby increases complexity [caused by information, process, workflows, calculations, etc] can be moved into a block-chain network.
“Ripple is a great example of putting this technology into application and it is important for banks not to see this as a threat but rather as a catalyst to change and move from their legacy systems towards smart network solutions.”
Many banks have started to optimize their cost base of maintaining a corresponding banking network using solutions such as Earthport, although other solutions targeting the FX space – such as Kantox and TransferWise – have yet to gain critical mass.
Nevertheless, they already have an appealing proposition for corporates that will cut into the FX business cake, according to Richter, who expects to see more non-bank providers utilizing the block-chain concept over the next 36 months.
However, his Capco colleague and senior consultant Markus Sander observes that establishing a fully operational network will require a large number of participants to enable the technology to work properly.
“Fewer participants means higher risk that the network stays synchronized – think of the current technical difficulties of Stellar, a technology developed to facilitate movement of money directly between individuals, companies and financial institutions. The stability of the solutions and addressing current risks will drive acceptance from a corporate perspective.”
