Highlights:
Delays, high costs and lack of transparency make conventional cross-border payments difficult.
Cryptocurrencies offer solutions for faster, more affordable and transparent global transactions. International liquidity solutions are currently offering cryptocurrencies as a bridging mechanism to make payments between countries.
ISO 20022 and decentralized technology could improve the integration of cryptocurrencies into traditional financial systems.
International payments are ready to embrace blockchain technology and its significant cost and speed benefits.
Traditional international payments have long been the backbone of financial transactions. They help facilitate global trade, financial interactions and remittances. However, conventional payment methods often face several challenges that impede their efficiency and transparency.
Cryptocurrencies are known to be a possible solution. But how can we help users who don't have the skills and knowledge typically required to use them effectively? Thanks to cryptocurrency liquidity solutions and improvements in global regulations, there is hope for changes and advancements to this ancient system of international payments.
The problems with global payments
If you've ever tried to send money abroad with a traditional bank, you've probably experienced the most common issues with the system:
Slow processing times: Conventional international payments often involve intermediary banks and clearing systems. Using multiple parties often leads to delays ranging from several days to weeks before the intended recipient receives the funds.
High transaction costs: The complex network of intermediaries in traditional payment systems often results in significant fees. These include currency conversion charges, applicable 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 typically require currency conversions, which subject payments to exchange rate fluctuations and associated currency exchange risks.
Lack of liquidity on demand: When a company or individual makes a balloon payment, their funds are held up during the lengthy process. This reduces overall liquidity and makes it challenging to allocate capital to personal or business needs efficiently.
In light of these challenges, the financial industry explored several possible solutions. Prefunded accounts are the only popular old option that we will quickly delve into. However, the use of cryptocurrencies has become more popular among those people or companies that are capable of managing these assets.
Can we eliminate the need to use 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 typically used for cross-border transactions to ensure that 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 wanted 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 the $1,000 can be released to the recipient almost immediately.
However, this has some disadvantages. The prefunded account must be carefully managed and reloaded using the traditional methods we already described. Additionally, the capital must remain locked in the account, which could cause liquidity problems. There are also fees to pay for the convenience and speed you get with pre-funded accounts.
Cryptocurrencies are therefore the ideal solution for many people, offering speed, convenience and low costs. By leveraging blockchain technology, there is the potential to eliminate the need to use pre-funded accounts.
International transfers and liquidity with cryptocurrencies
International payments have been one of the most popular use cases for blockchain technology since its inception. However, not everyone has the technical knowledge or confidence to use them efficiently. One solution has been the development of liquidity services on particular blockchains that use cryptocurrencies as a bridge.
These can reduce the need to lock liquidity in pre-funded accounts and also offer significant cost and speed advantages. An international cryptocurrency liquidity service can be broken down into four simple steps:
Conversion of funds: Let's say a financial institution wants to send money from one country to another. Instead of having a pre-funded account in the destination country's currency, the institution converts the source currency into a cryptocurrency.
Fast Transfer: Converted funds are transferred to a wallet whose owner resides in the destination country. This step can take anywhere from a few seconds to minutes, depending on the blockchain.
Conversion of funds (again): Once the cryptos reach the destination country, they are converted to the local currency using the services of a local cryptocurrency exchange. This step can be almost instantaneous when using an exchange with ample liquidity, such as Binance.
Final Settlement: The local currency is then settled in the recipient's bank account.
For institutions, businesses, and individuals who need to move money around the world on a regular basis, a system that can do what we mentioned without disclosing cryptocurrency usage is an attractive option. These four steps can be synthesized into one, and the institution does not necessarily have to follow them manually or have deep knowledge about cryptocurrencies. However, there are still some risks associated with these services.
Every user should be aware of the volatility and regulatory environment of cryptocurrencies. Cryptocurrency-based systems may expose users to market fluctuations and regulatory uncertainties that could possibly impact the stability of financial transactions.
Another possible solution? ISO 20022
In the world of traditional finance, we have already seen some potential advances in improving international payments. ISO 20022 is an innovative global standard for financial messaging.
In essence, ISO 20022 standardizes the format and structure of electronic data exchange between banks. It is like having a universal translator for financial messages, which facilitates mutual understanding between various systems. What sets ISO 20022 apart is its excellent data model and adaptability. Unlike older standards, it provides a robust framework that can be adapted to specific needs, thus supporting both new developments and regional requirements.
By creating common standards, such as SEPA in the eurozone, the speed and efficiency of transactions is improved. Therefore, the effects of a global standard should significantly improve the current situation. But what happens when we combine this standard with decentralized technologies?
ISO 20022 with blockchain technology
Development to create digital assets that comply with ISO 20022 standards has already begun. This means that cryptocurrency transfers could be better integrated into the SWIFT payment system and improve the quality of ODL (on-demand liquidity) services. ISO 20022 tokens would also help increase the adoption of digital assets globally and possibly offer streamlined regulatory compliance.
It remains to be seen whether the SWIFT system will adopt these ISO 20022-compliant tokens. However, the willingness of blockchain developers to cooperate with the system is a positive sign for the maturation of the crypto industry.
Conclusions
The future of international payments looks splendid. Whether through improvements to traditional systems or the implementation of decentralized technology, we can foresee a faster, more agile and economical experience. It remains to be seen how blockchain technology and the traditional payments system will ultimately come together. There are still a wide variety of options to choose from that are improving accessibility for more people and businesses than ever before.
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