Martin Hargreaves, Quant’s Chief Product Officer, writes on how he believes payment systems will shift from using traditional ledger technology to embrace blockchain systems.
Our payments infrastructure works pretty well within the UK. The majority of monetary transactions are cashless and frictionless. We use digitised bank cards and digital wallets to pay merchants and other people. In domestic transactions, money is quickly credited to personal bank accounts, and funds are efficiently batched and paid to business bank accounts. The resulting system is generally fast, user friendly and nearly seamless.
Our monetary ecosystem is set to improve further as emerging blockchain technology goes mainstream. Whilst many countries will retain much of their existing payment systems, change is indeed afoot.
In June 2022, e-commerce giant Checkout.com partnered with custody provider Fireblocks to settle payments for merchants round-the-clock using USDC stablecoin. Governments and institutions are actively exploring Central Bank Digital Currencies (CBDCs) and stablecoin use.
Today, 105 countries, including the US and UK, are considering CBDC implementation as of July 2022. In a harbinger of things to come, China is piloting a CBDC, and 261 million people – a fifth of the country’s population – have downloaded its digital yuan wallet and have used it for transactions worth 87.5 billion yuan (£13.8 billion).
Traditional payments systems equal friction and delay
The reason so many governments are exploring CBDCs is clear: whilst our current payments system delivers significant benefits, it has a severe limitation in the form of traditional ledger architecture. On ledgers, monetary transactions are represented rather than actualised.
Transactions need to be settled between banks in a central ledger operated by the central bank. This takes time. Central clearing houses for each payment system act as an intermediary, making the process even more complex with cross-border payments.
This means international payments are often delayed. They may involve multiple time zones, regulations and payment systems. Payments in many countries take two to three days to post and are costly, while consumers have little transparency over the process.
Like faster BACs – but with a difference
Blockchain-based payments offer the promise of more streamlined, secure and efficient payments using distributed ledger technologies (DLTs). Furthermore, this new infrastructure could level the playing field and stimulate competition and growth across the paytech sector.
Once a DLT network is established, creating a new payment instrument is something that any system participant can do with ease. Banks, institutions or enterprises will be able to deploy highly secure smart contracts that function as ‘programmable money’ to be accessed and processed by specific, predetermined parties.
The result is like a faster, more efficient BACS infrastructure, but with one key difference: the network only needs to be built once. Participants could continue to innovate and create new services and payment types for years to come – without relying on networks, rails or services such as SWIFT, Visa or Faster Payments to centralise or aggregate transactions.
New DLT-based systems are already being built
It is now possible to develop wholesale stablecoin solutions with enterprise banking account management and payments controls. This will enable banks, credit unions and other financial institutions to ‘plug in’ to a DLT with consumer and business accounts that meet regulatory and compliance requirements.
An example of this is LACChain, a public-private alliance led by the Inter-American Development Bank, which aims to develop a pan-regional blockchain to foster financial inclusion and sustainability, as well as create new efficiencies through digitisation. This alliance will facilitate cross-border payments in the Latin American and Caribbean regions using tokenised currency.
Blockchain-based payments offer developing and emerging markets the potential to ‘leapfrog’ traditional payments architecture. Moreover, by using blockchain and smart contracts, these economies can drive consumer demand and adoption to set the pace for the G7 economies to follow.
It’s just a matter of time before blockchain payments become ubiquitous. It is the technology of the near future. But it is here now.