Report: DLT, SWIFT gpi, Ripple and cryptos shape payments

The greatest impact of blockchain on payments is the acceleration of SWIFT gpi, according to Ed Adshead-Grant, general manager of payments, at business banking technology firm, Bottomline Technologies.

“One of the changes that happened over the last couple of years was that gpi was introduced. gpi could have been done a long time ago, it just wasn’t recognised as needed or the innovation business case wasn’t there.

“Then the threat of a Ripple blockchain technology came along and they thought, ‘oh, hang on a minute, how do we modernize and close the gap between these irrefutable transactions that are immediately settled and visible and accountable?’

“All of a sudden, up comes gpi. It has been a success and taken the wind out of Ripple’s sails somewhat,” said Adshead-Grant.

SWIFT, the organisation that hosts a business to business financial transactions network, launched its Global Payments Innovation (gpi) in early 2017 to improve traceability, speed and accountability in existing payment rails following criticism from corporates and treasurers.

At Sibos 2017, a panel of treasurers led the criticism of SWIFT. Chief among the complaints was the cost of access and transaction fee transparency over foreign exchange fluctuations during the time taken to settle a transaction.

SWIFT’s gpi now makes use of real-time tracking, offering an end-to-end view of the payments life cycle via unique tracking codes, with 50% of transactions credited to end beneficiaries within 30 minutes or less. But competition has heated up in the market, with new players such as blockchain-inspired US start up Ripple driving innovation within payments. The payments world is now evolving across the board, with diverse options at hand for payments firms, says Adshead-Grant.

“Gpi is incremental on top of existing or legacy technologies rather than transformational plays [such as Ripple] built upon something that was invented only 10 years ago and born in a digital age,” he says.

Ripple on the other hand, makes use of distributed ledger technology (DLT). The firm operates the XRP ledger which was initially developed to solve the double spend problem and now offers banks end-to-end visibility and transaction speeds of seconds rather than minutes. The fact that it’s crypto friendly has helped the firm grow – with the number of blockchain wallets having doubled between the second quarter of 2017 and the final quarter of last year, according to Statista.

But banks have yet to take the leap with decentralised cryptocurrencies, says Joel Camacho, managing director of Decipher Capital, a fund that invests in early stage projects that utilise blockchain technology.

“I remember trying to open a bank account for Decipher Capital back in February of 2018. I went to over five different banks (Chase, HSBC, Wells Fargo, First Republic, Union) and four of them rejected my application. Union Bank didn’t because they are owned by MUFG Bank, which is a Japanese and crypto-friendly bank.

“The other banks all said they couldn’t open a bank account for us because any business in crypto is too risky. We weren’t even planning on holding cryptocurrencies but for them anything anywhere near the space was toxic,” says Camacho.

He believes banks’ attitudes towards cryptocurrencies have changed – largely thanks to Ripple’s growth and how the firm has educated market participants on DLT.

“Ripple played an important role in educating banks on DLT,” he says. “Ripple’s business model [to build out its cross-border payment network] depended on banks adopting DLT and thus were incentivized to educate domestic and foreign banks on how they could facilitate faster cross-border transactions and save costs on the back-end.”

Ripple’s strategy to incentivise banks has been important, according to Marcus Treacher, the firm’s senior vice president of customer success, but that shouldn’t detract from the continual technological work done in the back end: the average time a payment takes to complete on the Ripple network is around two minutes, as opposed to two or three days using other methods, according to Treacher.

“Our solutions take the best of blockchain (immutability, validators and cryptography) but address its key limitations (privacy & scalability) to transfer value in a way that will best serve our customers,” said Treacher, by email.

The rise of companies operating in the crypto and blockchain space is substantial, according to Kriya Patel, managing director at Gibraltar-based payments outfit Transact Payments Limited (TPL).

“We saw a lot of operators try and align blockchain-based solutions and crypto assets to typical mainstream asset in fiat currencies and that lends itself very well to what we do as an e-money institution,” says Patel, the company’s managing director.

Regulating DLT and cryptos

With fraudsters stealing more than $1.7bn worth of crypto assets globally in 2018, 3.6 times higher than 2017, according to a CipherTrace report, payments regulators have focused in on the market.

In the UK, a crypto taskforce has recently been formed between the Financial Conduct Authority (FCA), the Treasury and Bank of England crypto, both to monitor the market’s risks and identify use cases of the underlying DLT technology.

“To combat financial crime risks, the Treasury will undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the existing directive, the fifth EU Anti-Money Laundering Directive (5AMLD),” said Christopher Woolard, the executive director of strategy and competition of the task force, at a conference in November last year.

The UK does not yet offer a crypto licence, and just three companies working with crypto assets have received an e-money licence, according to the FCA.

But while the UK’s FCA lists just three firms working with crypto assets that have received an e-money licence, the country’s authorities are not just issuing a clampdown. In a speech at London Fintech Week, then head of the Bank of England’s Fintech Hub Cordelia Kafetz acknowledged that DLT – as it has developed within crypto markets – might bring with it practical benefits.

“The real-time gross settlement system is 20 years old and we need to update it so that it’s fit for purpose. If distributed ledger technology comes along with a good use case, we could use that,” said Kafetz, discussing the future of the infrastructure that houses the accounts of the UK’s financial services.

Other jurisdictions are attempting to garner attention from those within payments looking to work with cryptos. Estonia, for example, offers a crypto license, which can be issued within two weeks, according to Tallinn-based law firm, Njord. That’s led to the issuance of some 500 licenses issued to crypto exchange companies, and 410 to crypto wallet organisations.

But the regulator has grown aware of the risks of the fast-growing market. “The primary risk is of frauds and scams and the consequent reputational risk for Estonia,” said Kilvar Kessler, chair of the management board of Finantsinspektsioon, in the national paper [Estonian]. “We believe that there is an element of fraud within the crypto-sphere. This is something we are dealing with almost every day as it is an unregulated market”.

In Gibraltar, the Financial Services Commission (GFSC) has seen the opportunities in the payments market, and moved to develop a framework to regulate the crypto and DLT industries.

“[GFSC] was approached by a number of DLT operators, and as crypto solutions matured, it has recognised that there are a lot of barriers to entry to make the product move into the mainstream,” says TPL’s Patel.

Ripple’s Treacher believes regulators have offered promising guidance on the future of DLT, citing examples such as the UK, Singapore, Japan and Abu Dhabi.

“Regulators see the benefits of blockchain,” he said. “But they also want to protect consumers. The focus is how do you protect consumers while still allowing for innovation? We expect that payments will be the first use case for mainstream adoption of blockchain technology to take place, and we think that’s an area where regulators also see value.”

Growth in numbers

The mainstream adoption of the underlying blockchain technology has interested many firms in the payments industry. Bottomline worked with Ripple two years ago on a pilot, but now the latter has grown to critical mass, with 200 banks across a global playing field in its network, it will be drawing more attention across the payments ecosystem, according to Bottomline’s Adshead-Grant.

The firm recently partnered with Visa in its B2B Connect – a DLT-based platform designed to process cross border business-to-business payments globally. Adshead-Grant feels that an incremental approach with established players is the way forward – logic that can be applied to explain SWIFT’s gpi adoption over Ripple.

“Gpi has certainly had a bigger, quicker and stronger uptake than would the uptake of a completely new replacement technology,” he said. “We’re talking incremental layering on top of existing technology, NT messaging, etc, versus a complete switch across to a newer 10 year old technology.

“It always feels safer in the payment ecosystem to go with a proven company like SWIFT that has operated since 1973. It’s been through a number of cycles – it’s robust, it’s resilient, understood, with plenty of technical staff around to support the system,” says Adshead-Grant.

That’s a sentiment echoed by Robert Pehrson, head of business development at SEB Transaction Services, who puts transactional banking appetite for real-time cross border payments down to domestic schemes in recent years, particularly within the Nordics.

“In Sweden, with its real-time payments, clearing and settlement you can see the benefits and want to apply to cross-border transactions. Ripple came along and provided that opportunity which probably woke SWIFT up to really focus on gpi.

“In the last year or so there’s been really positive news that gpi is moving close to real-time which is what customers are looking for and that’s why we’re going all in with SWIFT gpi,” he says.

On January 30, it was announced at the Paris Fintech Forum that SWIFT gpi has initiated a Proof of Concept with DLT platform R3 to combine the benefits of “gpi payments – speed, ubiquity and certainty – to DLT-enabled trade.”

Reacting to the news, SEB’s Pehrson says: “[It’]s a good development because within SWIFT you already have the governance, the regulatory frame and the reach in the system. If you could make that infrastructure network more efficient using DLT, that’s probably an easier way to move forward than to build a completely separate network outside of the existing model. For Ripple, the future is for them to be integrated into some other network like, for instance, with SWIFT.”

Pehrson believes if SWIFT gpi developed to the point of becoming real-time, it would undoubtably stay ahead of the other players in the market.

“But if Ripple were able to make real-time transactions in a network of not only companies and banks in the same legal entity but also extend it to other parties they could add value on top of SWIFT gpi. But I don’t really see that happening right now.

However, SWIFT does have doubts over the viability of DLT solutions, currently.

“While significant progress has been made with the technology, it is still not clear that it is mature and scalable enough for mission critical applications such as cross-border payments,” said Tom Poppe, DLT product manager at SWIFT, in an email.

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