Replace the SWIFT system? I understand the blockchain cross-border settlement system

Fintech, a financial technology company, combines finance and technology to advance innovation initiatives that are transforming the current financial system around the world.

At the world's top financial summit in Money 20/20 in Singapore, IBM's blockchain and digital currency director Jesse Land told reporters that “cross-border remittances are a major challenge for the financial industry” and are explained in an easy-to-understand way. How to use the blockchain to solve the problem of international remittances.

Transnational remittance problem

There are various problems in the financial industry. One of the issues that deserves attention is the inefficiency of “transnational remittances”. So what are the problems with the current remittance method?

First, explain the “Exchange Agreement” remittance method adopted by cross-border remittances. For example, I have a bank account at Bank X in the US, and Mr. A has an account with Bank Y in Japan. Let's take a look at the situation I want to send money to Mr. A.

When I submitted the transfer to Mr. A, Bank of America X deducted the amount of the remittance from my account and transferred the money to the Y bank account of Bank of America X Bank. After that, Y Bank of Japan deducted the same amount from the Bank X account of Y Bank of Japan and transferred it to Mr. A’s account in Japan.

This is a very simplified explanation, which is not the case. International money transfer is achieved through this mechanism of signing contracts. If you only ask this, you may not know where the problem is. Let's take a closer look at this mechanism.

Remittance speed

In the foreign exchange agreement, information about "who" and "who" and "how much" is indispensable, and the information required for these payments is referred to as "text". The message was exchanged through a bank settlement system called the Global Interbank Financial Telecommunication Association (SWIFT), an ancient system that has been in use for about 50 years.

When an international remittance is made, a message containing "who", "who" and "how much" is sent. After approval, both the US X Bank and the Japanese Y Bank performed the necessary processing, and the processed content was recorded in the bank's ledger. After a series of processing, the text was sent using swift. A final confirmation is then made to avoid errors, and the transaction takes three to four days to complete.

Remittance fee

Well, it is a relatively simple mechanism to get here. The problem is when the two multinational banks have no cooperation.

Then this time I said that my bank is the Z Bank of the United States. I will transfer the money from the US Z Bank to the account of Mr. A of Japan Y Bank. The US Z Bank will use the swift system to send a message to Japan Y Bank. So, Y Bank of Japan said to Z Bank of the United States: "Our exchange agreement is the Bank of America X. Please send money there."

In this case, there are other banks intervening between the two banks, so the process can become very complicated and can become more complicated. Because according to the cooperation between banks, there may be three to four banks with remittances between the two banks. It is actually very common to have remittances with multiple intermediate points.

What happens at such an intermediate point? That is to charge a fee. The problem here is that the swift message does not include how much to charge along the way. For example, if you want to send $1 million to each other, you don't know how much extra you have to pay to deliver $1 million.

In addition, during the flow of money, you don't know where the money is now and what state it is in. In addition, processing time will increase further as each point takes longer. Then, after a few days, I finally sent the money to the remittance object.

In the above example, we discussed international remittances between two people. When trading between companies, there are many stakeholders and the interaction becomes more complicated. This is the current universal international remittance method, which is very inefficient.

Inefficient transfer

For about 50 years, as banks have increased and decreased, the swift system has grown enormous. There are also banks that have long maintained agency relationships with many other banks, such banks are generally large banks. The number of relational banks in small banks is relatively small, so there is no large bank between remittance routes that cannot be transferred. And even if the money is remitted, the path of settlement will become longer.

Similarly, in the swift system, it is necessary to follow the clearing path. In order to follow the settlement route, a foreign exchange agreement must be signed. Therefore, in international remittances, the Exchange Agreement and the swift system have always been an inefficient settlement mechanism. If you can unify these two mechanisms and connect to all the banks around the world, you don't need intermediate points and fees for remittances.

Blockchain settlement system

As a result, IBM created a cross-border settlement system based on blockchain technology called IBM Blockchain World Wire, which integrates message exchange and digital asset exchange on a blockchain network, using the numbers held by banks. Assets are exchanged for currency. For example, Bank of America X Bank is preparing to send money to Y Bank of Japan. IBM Blockchain World Wire simultaneously sends X Bank information and cryptocurrencies to the Y bank account on the blockchain network for near real-time clearing and settlement.

Another advantage of IBM Blockchain World Wire is to promote financial inclusion (providing solutions for poor people to improve formal financial transactions). Now, many people on the planet live in an unstable government and an unstable economy. There are no banks in many places, and people here don't have bank accounts, so they can't trade through banks. However, even if mobile phones in these regions are already popular, they can use mobile phones to conduct transactions without the need for physical banking and bank accounts.

As long as the formal financial institutions regulated by the government can join the IBM Blockchain World Wire, various financial institutions can enter the field of traditional banks to cause competition, and consumers can enjoy better services if there is competition.

Translation|U News Team

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