What are blockchain cross-border payments?
Cross-border payments are essential for individuals, businesses, traders, institutions and other international organizations. The use of blockchain in cross-border payments makes the process simpler and seamless.
With the rise of blockchain technology and decentralized finance (DeFi), there is now a growing need for cross-border payments in the Web3 ecosystem as more people and businesses look to transact with digital assets.
Blockchain cross-border payments are transactions that occur between two parties in different countries and are facilitated through the use of blockchain technology.
Traditionally, cross-border payments were enabled by banking and financial institutions, often involving a complex web of intermediaries, such as correspondent banks and clearing houses. This can result in high transaction fees, longer processing times and a lack of transparency in the payment process.
In contrast, blockchain-based cross-border payments aim to eliminate intermediaries, reduce costs, and increase the speed and security of financial transactions.
Today, cross-border payments on blockchain enable faster payment solutions for business-to-business and person-to-person blockchain transactions and are proving to be a game-changing financial move in international money transfers. This makes cross-border payments and settlements a prominent blockchain use case.
2.
How do cross-border payments work when using blockchain technology?
Cross-border payments using blockchain technology leverage the decentralized and secure nature of the blockchain to facilitate transactions between parties in different countries and using different currencies.
The benefits of blockchain-based cross-border payments over conventional transnational payments and settlements are driven by the novel architecture of blockchain- and ledger-based technologies.
Traditional international bank transfers between a sender and receiver are connected by an interwoven banking network, including but not limited to commercial banks, clearing houses, credit unions and other financial services institutions, thereby complicating and slowing down the process.
They can look as complicated or more, as shown in the image below.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a messaging network used by traditional banks and financial institutions around the world to exchange information about financial transactions securely and quickly. But SWIFT, too, faces its own challenges of high cost, limited transparency, limited access and centralized control.
On the other hand, smart contracts automatically enforce blockchain cross-border payment transactions as per predefined rules. This removal of intermediaries results in instantaneous transactions with full transparency.
Related: CBDCs could provide smooth cross-border payments, says Bank of Israel official
3.
What are the advantages of blockchain-enabled cross-border payments?
Cross-border payments using blockchain technology offer several advantages, including faster settlement times, access to newer markets, lower costs, increased security and greater transparency compared to traditional payment methods.
Cross-border payments offer several advantages over traditional international bank financial transfers:
- Near real-time processing: Today, blockchain cross-border transactions have four to six seconds of the average velocity of money on a 24/7 basis and without intermediaries.
- Low-cost: Removal of intermediaries and better scaling solutions have allowed for transaction costs to be drastically reduced on blockchain transfers. However, gas fees vary as per demand and supply and market dynamics.
- Automated record-keeping: The immutable blockchain ledger technology enables transparency and verifiable records as all payment transactions and relevant data are automatically timestamped and recorded.
- Secure: Public-private cryptography, data hashing, multi-party authorization and fraud detection smart-contract enablers provide security in cross-border transactions.
These advantages help not just multinational corporations but also small businesses and individuals engaging in global payments. Let’s say Alice, a small fashion boutique owner in Sri Lanka, wants to send money to her merchant partner Bob, who lives in Canada.
Traditionally, Alice would have to go through a bank or other financial institution to make this transaction, which could involve high fees and a long processing time. However, if Alice and Bob both have cryptocurrency wallets, they could use a blockchain-based payment system to transfer funds directly between each other.
This cross-border payment using blockchain could be completed in a matter of minutes, rather than days or weeks like traditional bank transfers. Plus, the transaction cost for Alice would likely be much lower than what a bank would charge. However, given the crypto market volatility, the exchange prices, liquidity and gas fees may shoot upward.
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What are the types of blockchain cross-border payments?
Various categories of cross-border payments are facilitated through stablecoins and cryptocurrencies, as well as via blockchain-based payment rails for business-to-business and person-to-person transactions across international borders.
Business-to-business blockchain cross-border payments are transactions that occur between two businesses in different countries using blockchain technology. These transactions can include payments for goods, services or other financial transactions and are commonly executed using cryptocurrencies or stablecoins or fiat on-ramp solutions.
Specialized networks, such as Ripple and Stellar, provide services for frictionless high-value institutional settlements with the benefits of speed, automation, secure transactions and access to new markets.
Person-to-person blockchain cross-border payments, on the other hand, are transactions that occur between individuals in different countries using blockchain technology. These transactions can include sending money to friends or family members, paying for goods or services, or other financial transactions.
Centralized and decentralized cryptocurrency exchanges (CEXs and DEXs) facilitate person-to-person transactions with on-ramp and off-ramp solutions. These enable borderless access to finance while offering the security and immutability of blockchain technology.
Businesses and individuals are increasingly turning to various options in blockchain technology as a way to streamline their cross-border payment processes.
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What are the use cases of cross-border payments?
Ripple has become a significant player in the realm of blockchain-enabled global payments, while JPMorgan’s Onyx offers intriguing solutions for facilitating cross-border transactions through innovative digital asset payments.
Using distributed ledger technology, Ripple enables financial institutions to send and receive money in different currencies in a matter of seconds, rather than the days or even weeks that traditional international payments can take.
XRP, the native currency of Ripple, is the bridge asset to facilitate international financial transactions between different currencies. This means that the funds are converted into XRP and then back into the destination currency, which allows for near-instant settlement and reduces the need for intermediaries and corresponding banking relationships.
Related: What is Ripple: Overview, history and XRP cryptocurrency
Stellar is another decentralized, open-source blockchain network that enables the transfer of digital currencies. The Stellar network uses its own cryptocurrency, called Lumens (XLM), as a bridge currency to facilitate cross-border transactions. This eliminates the need for intermediaries, such as banks or centralized exchanges.
Onyx, launched by JPMorgan in October 2020, also leverages blockchain technology to improve wholesale payment transactions while offering the efficiency, speed and security of JPMorgan’s financial services offerings. It is working on developing its offerings — Liink and Onyx Digital Assets — as innovative blockchain-based offerings for processing cross-border payments.
6.
Are cross-border payments safe?
Cross-border blockchain payments are built on the principles of cryptography, ledger technology and decentralization, which provide a high level of security.
The use of distributed ledgers to record transactions means that every participant in the network has a copy of the ledger, and each transaction is verified by a consensus mechanism before being added to the ledger. This makes it very difficult for any single party to tamper with the data or alter the transaction records.
In addition to these technology principles, most blockchain-based payment systems also use encryption to protect user data and private keys, which are necessary to access and transfer funds. This adds an extra layer of security, making it more difficult for hackers or other malicious actors to gain access to sensitive information.
However, like any payment system, blockchain-based payment systems are not immune to all risks, and users should take appropriate measures to protect their assets, such as using secure passwords, two-factor and multisig authentication, and storing their private keys in a safe place.