FX International Payments
By Phillip Silitschanu
Thus far, the industry that seems poised to see the greatest change is financial services and capital markets. Here, we have already seen blockchain utilized as the underlying technology for digital currencies such as Bitcoin and Ethereum and their associated “smart contracts” capability. These so-called cryptocurrencies are, in essence, electronic peer-to-peer payment systems (with cross-border potential) that simplify and secure money transfers between people, between businesses, or between people and businesses. For now, they have been little more than experiments. But they appear ready to change from experiments conducted in the realm of computer scientists and nerds to mainstream tools in various industries. Especially for financial services’ money transfers, developments in blockchain are reaching critical mass and could be upon us sooner than anyone realizes.1
Digital currencies like Bitcoin can ease currency transfers for a business who wishes to transfer money from their country to a recipient in another country (or vice versa). Making international money transfers could potentially be accomplished using blockchain-based currencies, directly from sender to recipient. This may still be a few years away, and international currency transfer services are still a useful option for businesses seeking to make cross-border payments.
It is worth noting that as recently as 10 years ago, if you wanted to watch a movie at home you’d leave your house, go to the local video store, rent a movie, bring it home, then return it after watching. In the span of just five years, the entire movie rental industry was transformed from a brick-and-mortar business model with thousands of locations and physical DVDs to rent, to a mail order DVD model – and then almost overnight to a digital streaming business model. Today, it is virtually impossible to find a video store to physically rent a DVD because it has become much easier to simply stream a movie from the comfort of your home. This sudden revolutionary change in the home media industry was brought about by the development of distributed data.
Well, blockchain is also a form of distributed data. But the data it distributes is about monetary value, and money transfer between peers. When properly developed and applied to the financial services industry, blockchain has the potential to bring about similar, sudden, and revolutionary change as we have seen in home movies.
The potential for change in the financial services industry is seismic; it may mean a complete transformation, especially in regards to the clearing and settlement of securities. Today, a security (for example a share of stock), is simply an agreement among numerous databases. Put simply: if you own one share of “XYZ Corporation”, you don’t actually own a physical, tangible, paper, stock certificate; you own what your broker’s computer database states you own, and your broker can assure you that you own that share because other entities’ databases all agree that you own that one share of XYZ Corporation. The broker has a database, the transfer agent has a database, the clearing and settlement firm has a database, the trading firm has a database, and on and on. Essentially, there is an entire, multi-billion-dollar industry built up around the maintaining and reconciling of securities databases, spread across thousands of firms, employing millions of people. All this so that you can be assured that your ownership of the one share of XYZ Corporation is properly recorded and reflected. And we’ve already discussed the impact blockchain can have when it comes to distributed databases.
Blockchain, in its various forms, promises to revolutionise the way securities ownership is recorded. It can transform securities from a nebulous share of ownership into a unique, distinct, one-of-a-kind mathematical formula, in digital form. The encrypted results of blockchain’s mathematical formula will be able to reflect the entire history of ownership of that share. Every time that the share of XYZ Corporation changes hands, that transaction, and the new owner, is recorded directly in the chain of information created by blockchain’s mathematical formula, creating a unique blockchain. In this way, the fact that you and you alone own that particular share of XYZ Corporation is indelibly recorded in that share itself. Anyone, such as a broker, or asset manager, custodian bank, etc., could, with the right software, easily “see” that you are the owner of that share. No longer would they have to check their own database, and reconcile that database with every other database, in order to be sure of who is the owner of each share.
Blockchain-based payment systems can, likewise, provide a similar level of assurance to money transfers, whether between consumers, businesses, or consumers to businesses.
No matter what, it would appear that blockchain is here to stay, in some form or another. It remains to be seen what form blockchain will take and who will lead the revolution. Until then, the methods and services currently in place (i.e., international currency transfer services to transfer funds) will continue to be the reliable way to conduct business in the financial services space.
Phillip Silitschanu is the founder of Lightship Strategies Consulting LLC, and CustomWhitePapers.com. Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Long Only Strategies. He has also been quoted in the U.S. Financial Times, The Wall Street Journal, Barron's, BusinessWeek, CNBC, and numerous other publications. Phillip holds a B.S. in finance from Boston University, a J.D. in law from Stetson University College of Law, and an M.B.A. from Babson College.
1. "Bitcoin Exchange Bitfinex Adds Ether Trading Amid Increasing Demand", Coindesk; http://www.coindesk.com/ethereum-bitfinex-ether-trading/