Blockchain-based payments: a necessary innovation

Why we should be transitioning to new technology

By Martin Hargreaves
28 March 2022

Today, the payments infrastructure across most developed economies works well. New technology and enhancements are regularly deployed to refine it further still. In Northern Europe, the vast majority of monetary transactions are cashless and frictionless.  Here, consumers use digitised bank cards and digital wallets to pay merchants and other individuals. Money is quickly credited to personal bank accounts during domestic transactions, and monies are efficiently batched and paid to business bank accounts. The resulting system is generally fast, user friendly and nearly seamless.

And this system is set to improve further as evolving blockchain technology evolves the nature of money. While most countries likely will retain many of the current features of their existing monetary infrastructures, we can already see changes happening. Consumers are turning to cryptocurrencies for payments – some 25% of US cryptocurrency owners used these to buy groceries according to a 2021 PYMNTs survey. Many governments and institutions are actively exploring Central Bank Digital Currencies (CBDCs) and stablecoin use. Today, some 90 countries, including the US and UK, are considering CBDC implementation, while China is currently piloting the idea (Atlantic Council, CBDC Tracker, 25 March 2022). 

Moving beyond traditional ledger technology
The reason why so many governments are exploring CBDCs is apparent: while our current payments system delivers significant benefits, it has a serious limitation -- traditional ledger architecture. On ledgers, monetary transactions are represented rather than actualised. Transactions need to be finalised between banks in a central ledger, operated by the central bank. Central clearing houses for each payment system act as an intermediary, and the process is made even more complex with cross-border payments.   

These high-friction transactions can involve multiple time zones, regulations, and payment systems. As a result, these international payments are often delayed, with payments in many countries two to three days to post and are costly; consumers have little transparency over the process (OMFIF, Future of Payments, 2021).   

If you build it, they will come
With those challenges, it’s no wonder that blockchain-based payments are ripe for consideration. They offer the promise of more streamlined, secure and efficient payments using Distributed Ledger Technologies (DLTs). Furthermore, this new infrastructure may help level the playing field to stimulate competition and growth across the paytech sector.

Once a DLT network is established, creating a new payment instrument is something that any system participant can do easily. Banks, institutions or enterprises can swiftly deploy highly secure smart contracts that function as programmable money to be quickly accessed and processed by specific, predetermined parties. The result is like a faster, more efficient BACS infrastructure, but with one key difference: the network only needs to be built once. Participants could continue to innovate and create new services and payment types on it for years to come -- without relying on networks, rails or services such as SWIFT, VISA or Faster Payments to centralise or aggregate transactions.

Clear and present opportunities for the future
There several use cases that illustrate the potential benefits of blockchain-based infrastructure. For example, fiat-backed stablecoin or programmable money could be used for interbank payments and settlement with ATM networks to make money movement more efficient. And remittance solutions are currently being rolled out based on stablecoin to rapidly move money across borders at a lower cost to increase financial inclusion. 

Quant is developing wholesale stablecoin solutions with enterprise banking account management and payments controls. These services will enable banks, credit unions and other financial institutions to ‘plug in’ to a DLT with consumer and business accounts that meet regulatory and compliance requirements.

Blockchain-based payments today
These use cases are fast becoming a reality. One such project is LACChain, a public-private alliance led by the Inter-American Development Bank, to develop a pan-regional blockchain to foster financial inclusion, sustainability and create new efficiencies through digitisation.

Quant is working with LACChain to facilitate cross-border payments in the Latin American and Caribbean region using tokenised currency. The LACChain distributed ledger network will enable various new solutions for international remittances and interbank payments.  Although it’s relatively nascent, LACChain is already having a demonstrable positive social impact. The consortium has developed a roadmap that will ultimately lead to the interconnection of regional DLT ecosystems (Singapore Fintech Festival, Lacchain Update, A. Vegezzi, June 2021). 

With this, blockchain-based payments offer developing and emerging markets the potential to ‘leapfrog’ traditional payments architecture. Moreover, by using blockchain and smart contracts, these economies can drive consumer demand and adoption to set the pace for the G7 economies to follow.  

With all the benefits DLTs bring, it seems to be just a matter of time before blockchain payments become ubiquitous. It is the technology of the near future. But it is here now.

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