World Wire, the blockchain-based network announced last week by IBM, is focused on remittances. But its designers are hoping it becomes key infrastructure for when central banks issue their own digital coins.
Stanley Yong, Singapore-based CTO for IBM’s global blockchain work for financial services, was previously the company’s leader on central bank-issued digital currencies (CBDCs).
Last year he moved from that role to take over a project called Universal Payments System, which was looking at a universal payments coin (similar to the Universal Settlement Coin that banks such as UBS and State Street have researched).
That ambitious project was narrowed down to what is now World Wire, a focus on replacing wire transfers for remittances and cross-border payments based around e-commerce (in which end consumers often still need to pay via a money-transfer operator). The aim is to bypass intermediaries and the need for reconciling accounts, so that remittance companies can engage in foreign-exchange transactions directly.
But Yong – whose career includes working at the Monetary Authority of Singapore, R3 and ConsenSys – told DigFinthe greater ambition still remains, but it has been recast as a future infrastructure for CBDCs.
“Remittance markets are fragmented,” he said, noting that many remittance companies have been shut out of banking as banks worldwide cut off services for smaller, riskier companies. “We want to reunify these companies, and let them reconnect in a single venue without correspondent banks. It’s about access.”
Remittance markets are fragmentedStanley Yong, IBM
The broader line from Big Blue is that World Wire is for financial institutions too, which could use the blockchain technology to process lots of small transactions at a wholesale level. By cutting out SWIFT and correspondent banks, they increase speed, reduce errors, and lower cost.
Jesse Lund, head of blockchain and digital currencies at IBM, described World Wire as a new type of payment for regulated financial institutions, including banks and non-banks.
The network is launching with two assets available for live transactions: a U.S. dollar stablecoin called Stronghold USB, and Stellar Lumens, the crypto-currency of the Stellar network (XLM), which is similar to Bitcoin. These are not for investment, but to facilitate cross-border payments, clearing and settlement in near real-time.
The network can today transfer funds among 50 countries using 47 digital coins backed by fiat currencies. (Which makes IBM now a competitor to many blockchain-based startups such as BitPesa and BitSpark trying to achieve the same thing.) This builds on earlier experiments with the Stellar blockchain protocol to transfer electronic funds across Oceania.
(George Harrap, co-founder of BitSpark, countered that World Wire is more hype than substance. “The system that IBM has launched, using Stellar, does not solve the settlement part of cross-border payments. It only tokenizes transactions for better recordkeeping…[but] settlement is the core issue here.”
BitSpark is using crypto-currencies to remove banks from the remittances equation, while World Wire would sustain the existing need for third parties in a cash-in, cash-out system and to rely on SWIFT’s rails for final settlement, he says.)
Yong expects the most activity will involve settling transactions in U.S. dollars circulating in Asia without U.S. involvement (the Asian version of the Eurodollar market), either within the region or to other non-U.S. destinations.
This is encroaching on Ripple’s turf. Ripple’s xConnect performs similar transactions, using its XRP token as the means of facilitating trades. But Yong says IBM is not trying to supplant correspondent banking but build a parallel infrastructure for customers that are largely underbanked.
The [IBM] system…does not solve the settlement part of cross-border paymentsGeorge Harrap, BitSpark
The same goes for working with global banks such as Citi or HSBC with vast networks extending into local markets’ payment networks.
“Just because they have infrastructure doesn’t mean remittance companies can avail themselves” to banks’ systems, if these users are too small, Yong said.
From remittances, IBM is experimenting with other ways to bring services to the underbanked, particularly in emerging markets. Many people lack bank accounts because they lack identification. IBM is working on projects to provide such digital identities on a blockchain.
If identity is combined with a regulator-led know-your-customer process, it could bring vast populations into financial services.
IBM’s ongoing research and proof of concepts include working with governments, which would be necessary to making an I.D.-and-KYC service work.
Central bank digital coins
In particular Yong has worked with various central banks on the potential for CBDCs, to facilitate such use cases. He notes that central banks don’t have an incentive to create digital coins linked to fiat for its own sake.
Some central banks such as Lithuania’s are looking at opening the reserve account to non-bank fintech companies that, in theory, could use that to send money to any other E.U. bank account.
This makes fintechs part of the country’s M0 money supply (the coins, notes and cash substitutes in circulation), and would allow companies to issue their own digital currencies linked to fiat.
Other central banks, uneasy with such an arrangement, are looking at blockchain to issue digital coins on a standalone basis, as a substitute for cash. Sweden, for example, is considering such arrangements because its population has stopped using cash, but if there were a failure on its payments network, people would be moneyless. So a digital krona could serve as a backstop.
Blockchain would be necessary for its resiliency, transparency and security. Yong says a hybrid model may evolve, in which fintech companies use the existing real-time gross settlement infrastructure but have indirect settlement accounts with a central bank via an automated clearing house. In this case, fintechs could have a sub-account with the central bank that’s held at a bank.
What does this have to do with World Wire? It’s not a direct journey. But Yong has argued (elsewhere, in a personal capacity) that to allow for meaningful financial inclusion will require blockchain-based technologies, using smart contracts. And these need stablecoins or other transfer mechanisms that have no credit or liquidity risk.
But stablecoins like Stronghold USB (or Tether or TrueUSD) must hold all of their capital to back their coin: they can’t on-lend it or do anything else to generate a return. It’s a crimp on the expansion of the crypto economy.
Therefore to realize the benefits of blockchain in financial services, it may be necessary to convince central banks to issue a digital currency to provide the capital and liquidity for the promotion of smart contracts.
Whether those central banks adopt World Wire or Stellar to do so, then, may be less important than simply using these new rails to nudge monetary authorities into action.