Empower People Blockchain Technology as an alternative payment
Empower People Blockchain Technology as an alternative payment method By Gabriel Abed
Key Talking Points 1. The problem of De-Risking in the Caribbean 2. The threat to financial inclusion posed by De-Risking 3. The problem inherent in current interbank systems 4. Distributed ledger technology and its implication for banking networks 5. Bitt’s innovation on the settlement layer for the Caribbean banking system
Why Are Banks De-Risking? In general there are three direct drivers of De-Risking: 1. A fear of reputational risk 2. Rising compliance costs 3. Rising fines and penalties
Real World Problem: The Case of Western Union In July 2015, Fidelity Bank & Trust International, a Caribbean-based financial services company operating in The Bahamas, the Cayman Islands and the Turks and Caicos Islands, ended it’s near 20 -year relationship with Western Union closing down 26 franchise in The Bahamas. Western Union, like all other money transfer businesses, requires a local bank to carry out transactions.
The Rise of “De-Risking” Bank De-Risking practices may result in shifting AML/CFT risks to less secure areas and may in fact be counter-intuitive to AML/CFT efforts. According to James Richards, a compliance officer at Wells Fargo, “The ironic result of de-risking is rerisking. . . you are sending them [institutions whose CBRs have been terminated] to banks that probably can’t handle it. ” De-Risking may therefore encourage entities to move into less regulated (or even illegal) channels, thus reducing transparency and limiting monitoring capacities.
The Threat to Financial Inclusion There also humanitarian concerns. Termination of CBRs can negatively impact the ability of human rights and not-for-profit groups to get financial assistance to vulnerable populations who need it. De-Risking threatens the livelihoods of people with limited access to financial institutions. Derisking is a threat to the citizens of the Caribbean.
Impact of De-Risking Trade: Currently, CBRs is the highway on which global trade in driven, facilitating cross-border payment services. Remittances: Social insurance, helping to combat poverty Foreign Direct Investments (FDI): Without CBRs the flow of FDI is significantly inhibited. The reliance of the Caribbean on FDI therefore makes the region particularly vulnerable to bank de-risking.
The Interbank Problem Interbank fund transfers impose financial and operational costs on financial institutions, which help dictate the retail prices consumers and businesses pay. In addition, counterparty risk and settlement delays are factors that banks and their customers need to constantly manage.
The Double Spend Problem -Transaction settlement has historically been a tri-party arrangement between the sender, the beneficiary, and a trusted third party clearing agent. -The need for a clearing agent stems from what technologists refer to as the double spending problem. Without the Central Bank acting as a trusted clearing agent, a bank could conceivably “double spend” its assets and simultaneously send payments to multiple counterparties, which presents significant counterparty risk. - Distributed ledger technology (DLT) solves this problem
Distributed Ledger Technology/Blockchain Solution The Bitcoin blockchain protocol offered a novel solution to the double spend problem. In the Bitcoin blockchain protocol, a network of interconnected computers collectively manages a ledger which tracks ownership of digital assets. This eliminates the need for a clearing agent, thus enabling the peer-to-peer transfer of funds with no intermediaries. This eliminates many of the fees and underlying counterparty risk.
The Bitt Settlement System In contrast to the existing system, Bitt’s network operates 24/7 and provides for real-time, bilateral settlement, eliminating the need for a third party clearing agent. Two counterparties, who are integrated into Bitt or Bitcoin’s blockchain technology can exchange funds or assets simultaneously.
Ripple Protocol vs Blockchain Settlement
DLT Benefits to Banks Financial transaction recording and settlement systems require the duplication and distribution of enormous amounts of data. This results in inconsistent transaction data that often necessitates costly reconciliation processes. A distributed ledger system is exactly replicable across many entities and adds an increased level of resiliency and data integrity. By sharing and replicating information, distributed ledgers allow real-time information, reduced error rates and tremendously reduced costs from building shared infrastructure. DLT enables economies of scale by allowing the transaction to serve simultaneously as agreement, settlement, and regulatory reporting.
Conclusion The Bitt Settlement system presents a compelling alternative to traditional interbank fund transfer systems.
www. bitt. com
- Slides: 15