Main Takeaways

Conventional cross-border payments are hindered by delays, high costs, and a lack of transparency.
Cryptocurrencies provide quicker, more affordable, and transparent global transaction solutions. International liquidity solutions are currently offering crypto as a bridging mechanism for cross-country payments.
The ISO 20022 standard and decentralized technology could enhance the integration of cryptocurrencies into traditional financial systems.

International payments are ready to embrace blockchain technology and its significant benefits for costs and speed.

Traditional international payments have long been the backbone of cross-border financial transactions. They help facilitate global trade, financial interactions, and remittances. However, conventional payment methods often struggle with various challenges that impede their efficiency and transparency.

It’s been known that cryptocurrencies are a potential solution. But how do we help users without the skills or knowledge typically required to use them effectively? With international crypto liquidity solutions and improvements to global standards, there’s hope for change and improvements in this legacy international payments system.

The Issues With Global Payments

If you’ve ever had to send money abroad with a traditional bank, you’ve likely already experienced the most common pain points in the system:

Slow processing times: Conventional international payments frequently involve intermediary banks and clearing systems. Multiple parties often lead to delays ranging from several days to weeks before funds are received by the intended recipient.
High transaction costs: The complex network of intermediaries in traditional payment systems often results in substantial fees. These include currency conversion charges, correspondent bank fees, and other processing costs.
Limited transparency: Due to the multiple parties involved, tracking the status of a payment and identifying the point of delay can be difficult. This difficulty often leads to a lack of transparency in the payment process.
Currency conversion complexity: Traditional methods usually require currency conversions, subjecting payments to exchange rate fluctuations and associated foreign exchange risks.
Lack of on-demand liquidity: When a business or individual makes a global payment, their funds are tied up during the often lengthy process. This reduces their overall liquidity, making it challenging to allocate capital efficiently for personal or business needs.

In the face of these challenges, the financial industry has explored multiple possible solutions. Pre-funded accounts are one popular legacy option, which we’ll quickly dive into. However, the use of cryptocurrencies has become more popular with individuals or businesses that are able to handle these assets.

Can We Remove the Need for Pre-Funded Accounts?

In the context of international transfers, a pre-funded account refers to an account that is already loaded with the required amount of money before initiating a transfer. This type of account is often used for cross-border transactions to ensure that the funds are immediately available and can be transferred without delays or the need for additional processing.

Let’s look at a simplified example. Imagine you want to send $1,000 to a friend in another country. In this case, the bank or money transfer operator you use to send the $1,000 may already have a pre-funded account with the recipient’s bank, meaning that the $1,000 can be released almost immediately to the recipient.

However, there are some drawbacks here. The pre-funded account has to be carefully managed and topped up using the traditional methods outlined above. Furthermore, capital must be locked in these accounts, potentially causing liquidity issues. There are also fees to pay for the convenience and speed gained through pre-funded accounts.

Therefore, crypto is an ideal solution for many, offering speed, convenience, and low costs. By leveraging blockchain technology, there’s a chance to remove the need for pre-funded accounts.

International Transfers & Liquidity With Crypto

International payments have been one of blockchain technology’s most popular use cases since its inception. However, not everyone has the technical know-how or confidence to use them efficiently. One solution has been the development of liquidity services on particular blockchains using cryptocurrencies as a bridge.

These can reduce the need for locking up liquidity in pre-funded accounts and also bring significant advantages for costs and speed. An international crypto liquidity service can be divided into four simple steps:

Fund conversion: Let's say a financial institution wants to send money from one country to another. Instead of holding a pre-funded account in the destination country's currency, the institution converts the source currency into a cryptocurrency.
Rapid transfer: The converted funds are transferred to a wallet owned in the destination country. This step can take anywhere from a few seconds to minutes, depending on the blockchain.
Fund conversion (again): Once the crypto reaches the destination country, it's quickly converted into the local currency using a local cryptocurrency exchange. This step can be almost instantaneous when using an exchange with deep liquidity, such as Binance.
Final settlement: The local currency is then settled in the recipient's bank account.

For institutions, businesses, and individuals that need to move money globally on a regular basis, a system that can do the above but obscure the use of crypto is an attractive option. These four steps can be bundled together, and the institution doesn’t necessarily need to do them manually or have deep crypto know-how. However, there are still some risks associated with these services.

Any user should be aware of the volatility and regulatory environment of cryptocurrencies. Cryptocurrency-based systems can expose users to market fluctuations and regulatory uncertainties that could possibly impact the stability of financial transactions.

Another Possible Solution? ISO 20022

Back in the traditional finance world, we’ve also seen some potential progress on improving international payments. Enter ISO 20022, an innovative global standard for financial messaging.

At its core, ISO 20022 standardizes the format and structure of electronic data interchange between banks. It's like having a universal translator for financial messages, allowing diverse systems to understand each other with ease. What sets ISO 20022 apart is its rich data model and adaptability. Unlike older standards, it provides a robust framework that can be tailored to specific needs, accommodating new developments and regional requirements.

By creating common standards, like SEPA in the Eurozone, the speed and efficiency of transactions are enhanced. The effects of a global standard should then greatly improve the current situation. But what happens when we combine this standard with decentralized technologies?

Combining ISO 20022 with blockchain technology

Development has already begun on creating digital assets compliant with ISO 20022 standards. This means that cryptocurrency transfers could be better integrated into the SWIFT payments system and improve the quality of ODL services. ISO 20022 tokens would also help with increased adoption of digital assets globally and potentially provide enhanced regulatory compliance.

Whether these ISO 20022-compliant tokens will be adopted by SWIFT remains to be seen. However, the willingness of blockchain builders to cooperate with the system is a positive sign for the maturation of the crypto industry.

Conclusion

The future looks bright for international payments. Whether it’s due to improvements in legacy systems or decentralized technology implementation, we can all expect a faster, quicker, and cheaper experience. Exactly how blockchain technology and the traditional payment system will ultimately be combined remains to be seen. However, there’s still a wide variety of options to choose from that are improving accessibility for more people and businesses than ever.

Further Reading