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FX remains a hurdle for Ubin-Jasper project

Singapore and Canada need to solve foreign exchange in their blockchain project for real-time payments.

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Foreign-exchange transactions are emerging as the biggest obstacle to a joint Singapore-Canada project to achieve near-instant cross-border payments using blockchain.

Since 2016, payments authorities of the two countries have been experimenting with their own use of distributed-ledger technology for domestic interbank payments and settlements. Singapore has its Project Ubin, and Payments Canada has Jasper.

Last year they combined efforts to promote cross-border use, and now they have linked their domestic blockchains using digital fiat as a means of transacting.

In theory, payments can be settled instantly on blockchain. However, this Ubin-Jasper project didn't change how banks get quotes for foreign-exchange transactions, says Naveen Mallela, J.P. Morgan’s APAC head of digital. Although participants in Singapore (say) can get a SGD/CAD quote in real time, the execution remains through correspondent banks.

Wim Raymaekers, head of payments markets at SWIFT, whose infrastructure is currently used by correspondent banks, explained in a published interview that the foreign exchange rate and the fees depend on many factors: agreements between two banks; what type of payment it is; whether the payment can be executed automatically or not.

In the Ubin-Jasper case, if a banker in Singapore asks the FX quote and waits for the reply from a banker in Toronto, the blockchain transaction might have to wait for a whole day, because of the time zone difference. (Singapore is 12 hours ahead of Toronto).

Mallela told DigFin that scalability is another challenge to commercialise a real-time solution. He said the proof of concept has been done in a test environment. It hasn't involved real money, real transactions, or real beneficiaries.

We essentially showed how two different block chain networks could interoperate

Naveen Mallela, JP Morgan

Different legder

On the other hand, the project is making significant progress at a strategic level: it built up a framework under which central banks can deal with each others' digital fiat.

This came from the realization that central banks will not end up on a single, universal ledger. Each country wants to control its clearing infrastructure, and so they are pursuing different protocols with different vendors.

Therefore Jasper, the Canadian payments project, began using R3’s Corda, while Singapore’s Project Ubin is using J.P. Morgan’s Quorum (for this cross-border collaboration; it also continues to experiment with other protocols).

“We essentially showed how two different block chain networks could interoperate so that you can make a transfer across two different digital assets,” said Mallela.

Correspondent banks

Making cross-border payments today is a sequential and lengthy process through correspondent banks, which usually send messages among one another via SWIFT.

If you send money from Hong Kong to Myanmar, the actual transaction might need to go through a bank in New York; several correspondent banks are engaged and you would never know where your money actually is.

Moreover, clearing cut-off times vary, and due to distant time zones, a transaction can take two days to settle.

The DLT version would still be through correspondent banks, but it substitute digital fiat currency to speed up the process.

All or nothing

How is that achieved? Mallela explained with this example:

Imagine you have a DBS bank account in Singapore and you need to pay S$100 dollars to an account in Toronto-Dominion (TD) Bank in Canada. Let’s assume that J.P. Morgan Singapore and J.P. Morgan Canada serve as correspondent banks.

First, your DBS account would get debited S$100 dollars. On blockchain, DBS would transfer this amount to J.P. Morgan Singapore.

But the transfer would not be completed; it will be locked into an escrow type contract. 

At the same time, J.P. Morgan Canada, as correspondent bank on the other side, would lock C$98 dollars (equivalent of S$ 00) in a similar kind of contact with the destination bank being TD Bank. 

All of this happens instantaneously on two different blockchains. And once both of these contracts are locked, the Singapore dollars and the Canadian dollars are released simultaneously. 

In case J.P.Morgan Canada doesn’t lock in the money for TD Bank, the money locked by DBS for J.P.Morgan Singapore will be returned and the entire transaction cancelled.

This removes a lot of settlement risk. The technology behind the automatic procedure is Hashed Time-Locked Contracts (HTLC). It uses smart contract to synchronize all actions, so that either they all happen, or none happen.

“In traditional correspondent banking, if the correspondent bank goes illiquid or insolvent, you’re exposed to that settlement risk; but on blockchain, both legs of payments happen simultaneously, so your settlement risk goes down,” said Mallela.

New access

The possibility of a Singapore-Canada payments corridor built on DLT could begin to transform currency markets and open up payments to new correspondent banks.

Today only five banks operate in both countries’ settlement networks. DLT could allow other banks to service the corridor so long as they have the right tech setup.

The Jasper-Ubin combination is meant to go deeper than, say, Ripple, whose xCurrent is actually a database but does not provide actual settlement: that’s still up to local Real Time Gross Settlement (RTGS) system.

The Jasper-Ubin experiment aims to replace today’s RTGS system.

But Ripple, on the other hand, has already created a framework for best execution in foreign-exchange transactions. It uses an automated auction system that sends out bids to the market for quotation.

The SWIFT-based RTGS system today relies on banks maintaining nostro accounts with their central bank, which are used for the actual settlement. On blockchain, these nostros become nodes on the blockchain.

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FX remains a hurdle for Ubin-Jasper project