Do Banks Even Want to Go Blockchain?

On June 18, Carlos Torres, CEO of Spanish bank BBVA, declared that blockchain is “not mature” and faces major challenges. During the past month, blockchain’s effectiveness and maturity were also questioned by players as big as the Bank of Canada (BoC), the Russian Central Bank, and DNB, the Central Bank of the Netherlands.

While blockchain can indeed improve the effectiveness of cross-border payments and cut the costs by eliminating the middleman, it hasn’t yet proven itself as a tool ready for industrial-scale use. What’s more important is that some of the banks might not be happy to give up those juicy margin fees.

Do Banks Even Want to Go Blockchain?

Ripple’s attempts to modify the system

Ripple, a California-based payment network and protocol company, was established in 2012.  Essentially, it focuses on facilitating transfers between major financial corporations.

Ripple is not quite your average cryptocurrency — some argue it’s not a cryptocurrency at all. First of all, it doesn’t champion the dreams of overthrowing the government along with the banking system. Oppositely, it chose to work with mainstream financial players from the very start. As Brad Garlinghouse, CEO of Ripple, told Cointelegraph:

We were from the beginning really looking at how we work with governments, how we work with banks. And I think some in the crypto community have been very much, “How do we destroy the government. How do we circumvent banks?”

Garlinghouse believes that governments aren’t going anywhere, saying, “In my lifetime, I don’t think that’s happening,” so it’s only logical to cooperate with them and work within the existing regulatory framework. That attitude helped Ripple to land crucial partnerships with important players, including, China-based payment services provider Lian-Lian, the Saudi Arabian Monetary Authority, WesternUnion, among others.

Ripple hopes to pioneer the mainstream financial system with xRapid, its tool for easing cross-border fiat transfers between financial institutions. The platform has recently proven to save transaction costs by 40-70 percent by not having to use foreign exchange providers and has increased transaction speed to “just over two minutes.” In comparison, according to McKinsey research, typical international payments take three to five working days to complete.

In May 2018, Ripple reported positive results for its xRapid pilot. The company tested payments between the U.S. and Mexico. And there are other players who have already introduced somewhat similar features publically, having it out for its retail clients.

Santander’s experience

In April, Spanish-based international bank Santander announced the launch of its Ripple-powered, blockchain-based payment network called One Pay FX, becoming the world’s first bank to do so.

One Pay FX is a mobile application for cross-border payments backed by Ripple’s blockchain. It’s based on xCurrent technology — not the above mentioned xRapid — which doesn’t cut out the corresponding bank from the entire process, thus not quite changing the conventional system, but rather modifying it.

In other words, xCurrent uses immutable “interledger” protocol, which “is not a distributed ledger,” as confirmed by David Schwartz, Ripple chief cryptographer. In xCurrent’s case, the network peers do not have access to a shared ledger, which is the basis of major blockchain networks like Ethereum (ETH) or Hyperledger. However, xCurrent technology allegedly allows to “eventually plug” cross-border transactions into distributed ledgers.

Nevertheless, the technology still allows for cutting the costs and time normally required by traditional international funds transfers. It was introduced to Santander account holders in Spain, UK, Brazil and Poland, with the bank promising to add more countries to the list “in the coming months.” Executive chairman Ana Botín stated that “transfers to Europe can be made on the same day” and the bank aims to deliver instant transfers across several markets “by the summer.”

The system has been in the works for about three years, as Santander’s relationship with Ripple started in 2015, when the bank first invested in the California-based startup. The next year, test trials showed that Ripple’s technology concluded transfers in less than a day. The bank’s U.K. operation then made the blockchain-backed mobile payments available to staff.

Santander isn’t the only bank hoping to implement the technology for allegedly faster and cheaper payments. South Korean bank Woori Bank intends to introduce “commercialized” international remittances based on Ripple this year. Its Digital Strategy Department ran initial tests back in January and the results were positive.

Notably, that trial was part of a Japanese-based scheme involving Ripple and SBI Group, with 37 other institutions participating in the test. Of these, along with at least 23 more involved in trying out blockchain remittances, the vast majority are Japanese banks, so Asia appears to be particularly ripe for blockchain solutions to traditional money wirings. Indeed, in Singapore, the idea of blockchain-powered cross-border payments is even propelled by the local central bank. In March, Monetary Authority of Singapore (MAS) managing director Ravi Menon reaffirmed that the country’s blockchain plans — dubbed ‘Project Ubin’ — will “solve the challenge” of increasing efficiency in the arena:

“One of the potentially strongest use cases of crypto tokens is to facilitate cross-border payments in traditional currencies”

Other startups trying to disrupt the banking system

On May 21, Argentinian Banco Masventas (BMV) announced a partnership with Bitex, a local fintech startup founded in 2014 with a focus on “developing the Bitcoin market in Latin America.” Now, BMV clients can use Bitcoin for international payments as an alternative to conventional ways.

As a result, the bank states, the customers get to transfer money from account to account in less time than traditional bank transfers: BMV states that the new service will reduce transfer times by up to 24 hours.

José Humberto Dakak, a principal shareholder of Masventas, said that the move intends to strengthen the bank’s digital and smartphone-based services and reduce banking service costs. In addition to expediting transfers, Bitex claims that it can provide more secure transactions.

Moreover, there’s Wyre, a San Francisco fintech startup whose self-titled cross-border payments platform alleged in 2016 to make international payments faster and more cost effective by putting them on a blockchain. In addition, Red Belly Blockchain — a project run by researchers at the University of Sydney — has been developing new blockchain technology for secure and rapid transfers of virtual currencies that have allegedly outrun Visa and Bitcoin network with “more than 440,000 transactions per second on 100 machines.” However, these startups don’t deal the existing banking system, per se, essentially trying to substitute it instead.

Finally, there are big league players experimenting with blockchain as well: In February 2018, J.P. Morgan (JPM), whose CEO has infamously called Bitcoin a fraud, launched the blockchain-powered Interbank Information Network (IIN) in collaboration with the Royal Bank of Canada along with Australia and New Zealand Banking Group Limited. The platform, which is based on the bank’s private Quorom blockchain, allows JPMorgan to exchange information with other banks and “minimize friction in the global payments process,” speed up the process and improve security, according to the bank.

Moreover, IBM has announced a blockchain banking solution that aims to cut the settlement time and costs of international payments; and MasterCard (MA) has introduced its own blockchain technology for partner banks and merchants…

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