As the annual SIBOS event organized by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) convened in Toronto this week, IBM announced a new regional cross-border blockchain payments solution in a venture with a Silicon Valley non-profit Stellar.org and regional services firm KlickEx Group, designed to “improve efficiency and reduce the cost” of making global payments for business and consumers.
This latest production blockchain network with KlickEx and Stellar is one of a number of blockchain projects initiated by IBM and underway in the financial services space, which includes foreign exchange payments netting, private equity administration, securities lending and trade finance.
While it is currently live in the Pacific Island region, the solution is designed to be global and moving in that direction, with IBM continuing to work with central banks and global banking partners.
Over the past year Big Blue has also been forging blockchain collaborations with exchanges like the London Stock Exchange and Memphis-based cotton exchange The Seam as well as leading retail and food groups to address issue in the global food supply chain using blockchain technology. And, currently they have around 1,600 staff in working in blockchain and distributed ledger technology (DLT) across all areas and sector.
Specifically, the solution uses IBM Blockchain technology to provide both clearing and settlement of trades on a single network in real time. KlickEx brings its expertise in cross-border payment transactions space, while Stellar, as another blockchain/DLT provider, is designed for the issuance of digital assets on the blockchain to drive the settlement component.
Given that payment messaging and clearing happens separately from the settlement functions, the novelty of this solution according to IBM has been to bring together what were historically disjointed functions within the correspondent banking space.
By using the Hyperledger Fabric to drive the payment messaging and clearing component, they are now able to bring cross-border transaction, clearing and settlement on a single network - settling transactions in seconds.
The development follows a report too from the World Bank (‘UFA2020 Overview: Universal Financial Access by 2020’) published in April 2017, which set a goal for adults, who currently are not part of the formal financial system, to have access by 2020 to a transaction account to store money, send and receive payments as the basic building block to manage their financial lives.
On this front, the World Bank Group - the World Bank and IFC - has committed to enabling 1 billion people to gain access to a transaction account through targeted interventions. This goal though requires initiatives to modernize payments and provide financial access.
However, today the reality is that making international payments in developing countries can be costly, laborious and error-prone. Transactions in different currencies can require multiple intermediaries and take days or weeks to complete. By improving the flow of both money and commerce with reduced friction, the economic impact could be profound.
This new regional cross-border blockchain payments solution from IBM, in conjunction with regional financial services company KlickEx Group, and Stellar.org that supports an open source blockchain network for financial services, is designed to improve efficiency and reduce the cost of making global payments for business and consumers.
With the Stellar network held up as “purpose-built” for the issuance and exchange of digital assets, KlickEx serves as the founding financial institution for the region, servicing banks, retail clients and consumers.
KlickEx, which has been responsible for a significant uptake in digital financial services in unbanked regions of the world and lowering costs for banks, central banks and consumers in low liquidity currencies, owns many of the Pacific's largest Money Transfer Operations and is the region's largest clearing hub.
Together with IBM’s universal blockchain payments solution that runs on the Hyperleder Fabric, and Stellar, KlickEx is trying to change that by using blockchains.
Accounting for over 60% of annual retail foreign exchange transactions (by value and volume) in key corridors, KlickEx has a key presence in the Pacific and Europe, and is a founding member of www.APFII.org, processing more than 775,000 transactions per second, per billion of population.
Stellar.org supports the Stellar network, which is a free, open-source blockchain network, that connects diverse financial systems and allows anyone build low-cost financial services - be it payments, savings, loans, insurance - for their community.
Parties in a network can see in real time the creation and progression of immutable records at each stage of a transaction. And, the upshot is touted as lower costs for banks, additional revenue for businesses and more access for individuals.
A whole host of global commercial banks players across Asia and the South Pacific region will advise on and be invited to join the network to help steer expansion of the new payments network to different part of the world starting in 2018.
Among the parties are Mizuho Financial Group, National Australia Bank, Sumitomo Mitsui Financial Group Inc., and other financial institutions in Indonesia, Thailand and the Philippines.
Support has also been expressed by from banks around the world: Banco Bilbao Vizcaya Argentaria, Bank Danamon Indonesia, Bank Mandiri, Bank Negara Indonesia, Bank Permata, Bank Rakyat Indonesia, Kasikornbank Thailand, Rizal Commercial Banking Corp. (RCBC) Philippines, Sumitomo Mitsui Financial Group, TD Bank, Wizdraw (HK) of WorldCom Finance.
Currency Corridors
Already in production supporting transactions in twelve currency corridors across the Pacific Islands and Australia, New Zealand and the UK, it is being designed to “augment financial flows worldwide” for all payment types and values. But by next year there are likely to more than twelve currency corridors according to an IBM spokesman.
There are high hopes too for Big Blue’s universal blockchain payment solution to be positioned going forward to “support central bank-issued digital currencies” as well as securities, bonds and structured financial assets.
Jesse Lund, VP, Global Blockchain Market Development, IBM, commenting in the wake of the announcement from Toronto, said: “With the guidance of some of the world’s leading financial institutions, IBM is working to explore new ways to make payment networks more efficient, and transparent so that banking can happen in real-time, even in the most remote parts of the world.”
The Californian, who spent over a decade working at Wells Fargo before joining IBM, added: “Making distributed ledger technologies more interoperable is the latest example of IBM’s leadership driving the rapid advancement of blockchain.”
In keeping with IBM’s commitment to open source blockchain, this universal blockchain payments solution integrates the IBM Blockchain Platform, which runs on Hyperledger Fabric, with the Stellar network, an open-source blockchain network.
By ‘universal’, Lund said payments are treated by IBM in a “ubiquitous fashion”, which could span remittances, consumer payments, corporate payments, large and small value “within a certain spectrum.”
Initially, Stellar will provide the network and digital asset to facilitate the settlement of transactions cleared on Hyperledger. However, financial institutions will be able to choose “the settlement network of their choice or the exchange of central bank-issued digital assets”, IBM said. And, as part of its involvement Stellar has also joined Hyperledger.
The Future
Look into the future, IBM ventured by way of example that the same universal blockchain payments solution could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia.
Here the blockchain could be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, secure letters of credit, and finalize transaction terms with immediate payment. In so doing conducting global trade with transparency and ease.
Jed McCaleb, co-founder of Stellar.org, commenting said: “This new innovation and collaboration represents a significant milestone for Stellar as well as the financial technology industry as a whole.”
He added: “For the first time, public blockchain technology is being used in production to facilitate cross-border payments in multiple integrated currency corridors. Currently, our cross-border payments tended to take up to several days to clear.”
As such McCaleb said this new implementation is “poised to start a profound change” in the South Pacific nations. And, once “fully scaled” by IBM and its banking partners, it could potentially change the way money is moved around the world, thereby helping to “improve existing international transactions and advancing financial inclusion in developing nations."
The network is currently in use by Advanced Pacific Financial Infrastructure for Inclusion (APFII) members, a public-private partnership initially funded by the United Nations and SWIFT. It is understood that it will process up to 60% of all cross-border payments in the South Pacific's retail foreign exchange corridors including Australia, New Zealand, Fiji, Samoa and Tonga by early next year.
Robert Bell, Chairman of APFII and founder/CEO of KlickEx, said: “This is the first time anyone has made blockchain work at an institutionally viable scale.”
He added: “Through KlickEx, the Pacific has had relatively low-cost, real-time, multi-currency payments for most of the past decade, and this project was a natural next step following our work to create seamless and borderless payments across the Pacific.” By using IBM Blockchain technology they hope to “push forward” in removing payment friction across borders.
It is understood that the banks that have been announced as taking part in this IBM Blockchain initiative - as well as a few others - will participate in a “series of exercises” scheduled over the fourth quarter of 2017.
Explaining broadly how these exercises will take shape Lund said: “IBM will help the banks to understand the platform, while they will assist us to drive the priorities in terms of how we would take their transaction volumes and expand the network into new geographies beginning 2018.” This is expected to lead to additional currency corridors - more than the initial twelve pencilled in today - and greater transactional volumes.
