Faisal Khan, Banking & Payments Consultant, considers that crypto and Distributed Ledger Technology are our best hope to solving the archaic payments landscape. Let’s see why.
In our previous instalment, Faisal Khan shared with our readers an overview of the fragmented world of cross-border payments. Today he presents some solutions to solve this fragmentation.
Today, we can send a picture of our cat without fail. Using an app such as WhatsApp, the feline image makes its way across the world, in a fraction of a second. No complications. It just works. You can send an SMS from one phone in the world to another. And it always works. But you cannot send USD 6.42 from Chicago to Manila, in real-time, for a fraction of a fee (say 2% of USD 6.42). Such a transfer system just does not exist today.
The reason why so many payment systems are disconnected from each other is because there are no universal payment standards (read: protocol).
Interoperability within the payment networks can only be solved if there exists a universal standard. We have one for the web, the telecommunication industry, and SMS. However, we don’t have it for money. The real problem is not about devising a solution, but more a political one. Which country gets to make the standard? And which countries will adopt it? How can the standard be used to control money flow, provide access to banking, be used for implementing sanctions, or preferential treatment?
Having a uniform standard allows equal access to all countries.
Email before the introduction of SMTP was fragmented and operated in pockets of closed networks. Today, it is seamless. No country is left out. The same can happen with a worldwide payment protocol. No country will be left out. However, it would put up a serious challenge to the political arm-twisting that a lot of powerful countries are able to do.
Cryptocurrency to the rescue
Cryptocurrency along with Distributed Ledger Technology (DLT) and Inter-Ledger Protocol (ILP) is perhaps our best hope to solving the archaic payments landscape and bringing it to the 21st century.
For the first time, challenges to incumbents like SWIFT, VISA, SEPA, ACH, etc. are coming out to prove they have better solutions. The new payment protocols and tokens used to assist in the trade, are more attuned to the financial needs of today’s society, and constantly provide a development layer on top to innovate. Static messaging and payment protocols like SWIFT or ACH, etc. have very limited functionality. They can only address a certain type of payment transaction set and flows. The newer payment protocols essentially behave like an operating system, ever evolving, and allowing you, the end institution, to develop apps on top of this protocol for execution.
Monetary value can now be electronically de-tethered from the originating money ledger and be sent across the world and be tethered to a beneficiary money ledger.
Satoshi Nakamoto’s paper not only gave us a solution to this problem by eliminating the middleman and centralization, but it also acted as a catalyst to accelerate our ingenuity to come out with more clearer solutions (read: faster, nimble, comfortable, reliable, etc.) to the needs we have today. To shatter the utopian dream, there isn’t going to be a singular solution. Unfortunately, if history has taught us anything, when it comes to money, and especially fiat money, we would like to be in control and control others.
So, what will we have if no singular protocol? We will have a fused emergence of payment systems & protocols within defined perimeters. Such examples of systems could be geographically restricted (SEPA, GCC, SAARC, North America, etc.), or vertically defined, like payments for the publishing industry, music industry, letter of credit, travel industry, freelancers, auction sites offering escrow, etc. Our unique trading solutions will require more hand-in-glove fit. The only way this is going to happen, in my opinion, is by having smaller players come in and stitch the fragmented payments space. The only tool they will have is the cryptocurrency, DLT and protocols that allow various DLTs to talk to each other.
We have cross-border data communication, where anyone can talk to anyone. However, for cross-border payments, where anyone can pay to anyone, the channels are very much limited. Minimum threshold to conduct payments is a barrier. Most cross border P2P payments have a floor of USD 100 and this has got to change.
Near real-time movement of money is something mostly the crypto community is benefitting from. For the general public at large, real-time payments internationally are still not doable. More real-time cross-border payments will have a direct positive impact on the GDP, and people will be able to offer more products and services, as access to markets (for payments) just opened up in a non-discriminatory manner.
Many will argue that the current coins and tokens don’t have the necessary fingerprints of what it means to be a currency or a payment. Well that’s akin to looking at the characteristics of a horse and buggy and applying that to electric, self-driving cars. Even so, the crypto community is very young. Only 10 years old. How old is banking? How old is the concept of money? How old is wire-transfer? Etc.
There will be a lot more misses than hits, for sure. Eventually, via various development cycles, we will eventually have enough adoption (read: traction) of these cryptocurrencies, DLTs and ILPs that they would become mainstream, the norm. The new technology holds a lot of promise. What we are witnessing is nothing short of extra ordinary. Conventional wisdom is being challenged. Incumbents are rethinking. New entrants are paving way.
The internet of value is no longer a pipe. It is being built today, various companies have published their blueprints to showcase how they will solve some of the challenges around payments today, and I encourage you to broaden your mind and use it. It is the future.
About Faisal Khan
Faisal is the CEO of a consulting boutique that provides banking & payments consultancy to both incumbents and startups. He has vast experience in cross-border payments, digital banking, and mobile payments/commerce.