Fintech firm R3 and 22 banks from around the world have built a blockchain-based cross-border payments solution that would enable instant transfers of fiat currencies and central bank digital currencies directly on R3’s Corda platform.
Banks involved in the project include Barclays, BBVA, CIBC, Commerzbank, DNB, HSBC, Intesa, KBC, KB Kookmin Bank, KEB Hana Bank, Natixis, Shinhan Bank, TD Bank, US Bank and Woori Bank.
The prototype will be released by the end of 2017. Speaking to GTR, Adam Furgal, head of incubator and accelerator at R3, says the parties expect live pilots to commence towards the end of 2018 and into 2019.
“We have right now six to eight core banks, who are putting in a stronger investment. There is then a second ring of banks who are advisors, providing feedback and review. Ultimately the capability has been designed for a third group, which is the adaptors on the network, which we view as hundreds and thousands of banks and users,” he says, although he could not currently name which banks constitute the core participants in the project.
Furgal expects the solution to be live for broader adoption in 2019. It will be available as a CorDapp (Corda application) for anyone who joins the Corda network.
The Corda platform, which R3 describes as “blockchain inspired”, is the outcome of more than two years of research and development by R3 and its 100+ members. Earlier in the year, the company launched version 1.0 of the platform, pushing blockchain – also referred to as distributed ledger technology (DLT) – one step closer to production.
While R3 is not the first initiative to use blockchain technology for payments, the company claims in a statement that it is the “first to develop a shared infrastructure to facilitate the full payments workflow”.
What this means is that the new capability can easily be integrated with other Corda applications, Furgal explains.
“We view the capabilities as quite holistic, so while this capability initially will be targeted at international payments, it can also be available to the other Corda applications, whether that’s lending, trade finance, capital markets, etc. For example we are doing work with Finastra in the lending space and TradeIX in the open account trade finance space,” he says.
Blockchain technology can provide a quicker, cheaper and more efficient way of settling and clearing international transfers and is therefore increasingly being explored by technology companies and financial institutions across the globe.
IBM, for one, partnered recently with a number of banks to launch a blockchain cross-border payments solution using Stellar’s cryptocurrency lumens as a bridge between fiat currencies.
Another example is BitPesa, an online payment platform, which helps thousands of clients in Kenya, Uganda, Tanzania, Nigeria and the Democratic Republic of Congo make international payments using bitcoin to settle between fiat currencies.
But according to Furgal, the R3 payments solution differs from these initiatives in that it does not involve a bridge or an intermediate cryptocurrency – not one that exists on the market, nor will R3 or its member banks be creating a new coin, token or asset.
“A lot of the competing platforms have created these bridge currencies, but we didn’t see that as a viable solution. They create as many problems – if not more – than they solve,” he says.
Instead, the solution on Corda will create “a representation of fiat currencies” that allows for transfer of value on the ledger instantly, and without the need to reconcile. It is also programmed to enable interaction with central bank-issued digital currencies as they are rolled out in the future.
Furgal explains that it is broadly a similar model, architecturally, to what the crypto-space calls “stable coins”.
A stable coin is a token that keeps a stable value against fiat currencies. GTR has reported on such use cases in the past: for example, fintech startup Populous’ has developed an invoice finance platform using its custom stable tokens, “Pokens”. In doing so, the platform utilises blockchain without making its operations reliant on cryptocurrencies like bitcoin or ether, which are often described as volatile.
An alternative to Swift?
By facilitating instant payments, R3’s new solution could make cross-border trade much more efficient. According to R3, it offers a “direct alternative to current systems”, which “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”.
If successful, R3 would undoubtedly challenge the more traditional payment service providers, such as Swift, the system which has supported cross-border payments for decades. Swift went live with its global payment innovation (gpi) service earlier in the year, guaranteeing payment settlement within a single day, but was criticised for not using blockchain.
Although Swift has indeed been exploring blockchain (specifically for the purpose of nostro account reconciliation), it remains reticent on using the technology to make payments. “It will take time before it is mature and scalable enough for mission critical applications,” Damien Vanderveken, head of research and development at SwiftLab, told GTR on the sidelines of Sibos earlier in October.
Furgal points to the fact that most of the banks involved in R3’s project already use multiple payments schemes, and that the new Corda-based solution therefore “provides more choice to the industry”.
He nevertheless goes on to indicate that, if successful, it could take market share away from Swift in the future.
“Given successful adoption – it will be used by a number of different banks, hopefully large banks and with a large volume – we expect flow to move from existing channels to this,” he ends.