While many banks remain cautious about crypto and blockchain, the most appealing use case for these systems may be the most basic: lowering costs.
With that in mind, New York-based Roxe has introduced blockchain for cross-border payments settlements. The purpose is to create Decentralized Finance, or DeFi, liquidity pools to provide the best wholesale foreign exchange rates to banks, businesses, payment companies or individuals.
In general, DeFi is about creating an open market with an intent to transform traditional banking services into decentralized architectures to expand the use of digital money.
"Today's international settlement systems for payments and remittances are too slow, too expensive and too risky," said Josh Li, chief business officer at Roxe. "There are too many disconnected, intermediary banks and payment platforms that create too many delays, increase costs and make payment tracking unreliable."
Roxe provides an instant settlement network to help central banks and exchanges, payments companies and consumers transfer traditional and digital currencies with other Roxe network members in seconds, Li noted.
The network also helps banks to "launch, manage, issue and distribute central bank digital currencies," Li said.
The Roxe Payment Protocol uses an automated market on a smart contract to execute transactions between digital currencies, all designed to provide liquidity for faster, less expensive and more transparent payments. In many ways, it operates the way a merchant point-of-sale terminal might in securing the least expensive interchange rate when choosing a routing option for a transaction.
In this manner, the blockchain is powering a Roxe payment network designed to support U.S. dollars and currencies from the U.K., European Union, Hong Kong, India, Philippines, Mexico, Brazil and others. The Roxe Chain settlement network converts stablecoin tokens (which are bound to the value of a traditional currency such as the U.S. dollar) into these currencies.
At Roxe, "we believe that banks are really starting to embrace blockchain," Li added, citing last year's Office of the Comptroller of the Currency decision to allow national banks to
The OCC guidance was also a gateway for banks to research and review ongoing blockchain developments to assess its potential for financial services in the future. It came at the same time in which blockchain and digital asset providers were deploying new use cases and services, fully understanding that B2B, foreign exchange or simply faster and less expensive money movement was drawing bank and corporate attention.
A starting point
As a means of money movement, blockchain provides an open system that preserves vital information for back-office tasks as well as risk management. It also cuts costs by reducing reliance on companies like correspondent banks that hold that information internally.
"When you think of blockchain and banks, what the banks will do is certainly move money with a distributed ledger and use it for cross-border or foreign exchange," said Cliff Gray, senior analyst with The Strawhecker Group. "Today, banks have their own internal register for both accounts payable and receivable, but they are going to migrate those native type functions to the blockchain, and eventually leverage the blockchain more."
While it may not make sense for banks to deploy blockchain or crypto assets domestically because Same-Day ACH works fine for most B2B payments, it will become increasingly common for banks to use distributed ledgers for cross-border and foreign exchange transactions, Gray said.
"As a few of the bigger banks figure it out, everyone else will understand it because they will see the business model in action," Gray added. "That is what we are on the cusp of, on the verge of banks coming out and requesting it (blockchain deployment)."
Any momentum toward more blockchain adoption would be fueled by new players like Roxe, following in the footsteps of Ripple, one of the first major blockchain providers to attract the interest of banks. Specifically, Ripple's XRP token competes with traditional correspondent banking networks by lowering the cost of moving money across borders.
Open-source, public networks like Stellar rely on blockchain to create, send and trade digital representations of all forms of money. With the Lumen token being its single native currency, Stellar looks to move money through a network of cryptocurrency wallets that operate on the major operating systems.
Celo operates in a similar fashion, using blockchain to connect consumers globally as a way to promote financial stability in regions that need it the most. For Celo, the focus is mostly on mobile DeFi payment apps.
Caution ahead
Even with growing momentum, many banks remain guarded about their embrace of blockchain or cryptocurrency assets for investments or payments. Canada provided an overview of a banking industry taking a more pronounced "wait-and-see" approach to all matters blockchain or crypto.
The top banks in Canada launched the
"Looking at distributed ledgers in which only authorized entities can make payments or perform functions on the system, we found at a very high level that we didn't really see that there was much promise in terms of net benefits" to a bank, Scott Hendry, senior special director overseeing financial technology research at Bank of Canada, noted in 2018.
Still, the door was left open. Those with experience in blockchain realized the banks were not so far removed from the distributed ledger concept that they couldn't make good use of the technology at any time.
"We clearly understand the cryptographic transforms that are being used in blockchain, so that's good that we don't have to relearn that," Peter Tapling, managing director of PTap Advisory, said after the Jasper Project recommendation. "But the new things are the value chain and the consensus model, and we do have to wrap our heads around that."
Bank of Canada declined to talk about any change in its stance on blockchain since the Jasper Project, but pointed to its support of comments Deputy Gov. Timothy Lane made last month about the future of digital currencies in Canada.
"There's no presumption even that a central bank digital currency would be using blockchain technology," Lane said as part of a
Lane stressed that consumer trust in their banks is going to be a vital part of any development of a central bank digital currency in the future.
"That trust is an important thing we're bringing to the table and that, of course, means that we don't have to rely on those environmentally very wasteful methods of mining technologies that we've seen with cryptocurrencies," he said. "That is certainly a major advantage of central bank digital currency relative to any of those crypto products."
No denying change
Taking an approach of deeper research and testing certainly describes how banks tend to, and should, operate in the highly regulated financial services industry and markets.
However, those pushing open networks, more transparency, faster speeds and lower costs look at banks adopting change, especially in developing digital currencies, as the major trigger point needed for pivoting the financial services landscape.
Roxe, for one, says it has figured out a path for banks by providing all of the benefits of blockchain without the risk of transacting directly with cryptocurrency. Specifically, its Roxe Chain operates as a hybrid blockchain "purpose-built for payments," with use of a digital utility token that powers its operation.
Still, when banks embrace digital currencies, the face of payments and money movement will change dramatically, Roxe's Li contends.
It's happening already, Li said, with JPMorgan Chase planning to roll out a bitcoin fund for some of its wealthier clients. "So, going forward, we think the pace at which banks will embrace cryptocurrencies will continue to accelerate."
Late last year,
"Central bank digital currencies will be a major catalyst for making crypto domestic and cross-border payments go mainstream," Li said. "With the right technology, CBDCs can not only make payments much faster and less expensive, but also be more interoperable between payment platforms and various financial institutions."
In that scenario, CBDCs serve as a "critical entry point' for things like DeFi liquidity pools and a more efficient way for participants to earn returns on idle capital and get better wholesale FX rates, Li said.
In turn, blockchain could become as standard in the banking industry as ATM networks, remote deposits, payment cards and checking accounts.
