IBM and Stellar Are Launching Blockchain Banking Across Multiple Countries

The news also comes as an important validation of blockchain technology.

In a breakthrough for payments technology, IBM and a network of banks have begun using digital currency and blockchain software to move money across borders throughout the South Pacific.

The significance of the news, which IBM announced on Monday, is that merchants and consumers will be able to send money to another country in near real-time, accelerating a payments process that typically takes days.

The banking network includes “12 currency corridors” that encompass Australia and New Zealand, as well as smaller countries like Fiji and Tonga. It will reportedly process up to 60 percent of all cross-border payments in the South Pacific’s retail foreign exchange corridors by early next year.

The news also comes as an important validation of blockchain technology, which has long promised enormous efficiencies for the financial sector, but has been slow to move from the concept stage to the real world.

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Blockchain, which relies on a disparate network of computers to create an indelible, tamper-proof record of transactions, is most famously associated with the digital currency bitcoin. But it can be used in many other applications such as tracking shipments or, as in this case, to record a series of cross-border transactions.

As an example, IBM said a farmer in Samoa will soon be able to contract with a buyer in Indonesia, and use the blockchain to record everything from the farmer’s collateral to letters of credit to payment.

“This is the next step in the evolution of blockchain technology. It’s live money moving around a network,” Jesse Lund, IBM’s VP of Blockchain, told Fortune.

Digital Currency is Key

The new blockchain banking process is also notable because the banks will initially rely on a bitcoin-like digital currency, known as Lumens, to facilitate the cross border payments.

Currently, banks arrange such payments by maintaining foreign accounts in a local currency (so-called nostro accounts), and then debiting the accounts as required—a process that is both slow and ties up capital.

Under the new blockchain arrangement, banks will conduct the transactions using Lumens, and then rely on local market makers to convert the Lumens into local fiat currency. The Lumens are created by a non-profit company called Stellar, founded a Jed McCaleb, a well known figure in the payments and crypto-currency world.

Both Stellar and IBM are part of a project called Hyperledger Fabric, which is building open source blockchain tools to support payment infrastructures.

According to Lund, though, the banks use of Stellar’s digital currency is likely to be temporary. He predicts that, in the next year, central banks will begin issuing digital currencies of their own, and that these will become an integral part of blockchain-based money transfers.

The IBM-backed blockchain project comes at a time when other companies are creating efficient new ways to conduct global money transfers. These include BitPesa, which relies on the bitcoin network to replace traditional wire transfers between merchants in Africa, and TransferWise, which provides an inexpensive way for consumers to obtain foreign currencies.

This is part of Fortune’s new initiative, The Ledger, a trusted news source at the intersection of tech and finance. For more on The Ledger, click here.

Tech

Exclusive: Royal Bank of Canada using blockchain for U.S./Canada payments – executive

TORONTO (Reuters) – Royal Bank of Canada (RY.TO) is experimenting with blockchain to help move payments between its U.S. and Canadian banks, one of the bank’s senior executives told Reuters on Thursday.

Martin Wildberger, RBC’s executive vice president for innovation and technology, said use of distributed ledger technology, or DLT, would improve the speed of payments, reduce complexity and lower costs.

The bank developed the system over the past six months at an RBC blockchain technology center in Toronto, deploying software developed by a cross-industry open-source blockchain consortium known as Hyperledger.

The technology was integrated into RBC’s existing systems several weeks ago as a “shadow” to RBC’s primary ledger, letting the bank monitor payments in real-time as they travel between the United States and Canada, he said.

“We wanted to set it up as a shadow ledger so that we can demonstrate our leadership in exploiting that technology while at the same time recognizing that the technology is still early in its adoption phase,” Wildberger said.

Blockchain emerged in 2009 as the system underpinning the cryptocurrency bitcoin, allowing people to quickly and anonymously exchange electronic currency. It is a shared ledger of transactions maintained by a network of computers rather than a central authority.

Investors have since put billions of dollars into developing blockchain, betting the technology could make banking operations faster, more efficient and more transparent.

Although concerns remain about the legitimacy of bitcoin, which JP Morgan (JP.N) Chief Executive Jamie Dimon described as a fraud earlier this month, the credibility of the blockchain technology itself has increased.

A growing number of senior bankers have said they believe it will eventually revolutionize the way payments are made across the industry, reducing complexity and costs of back-office processes.

“Everybody recognizes blockchain will be transformative and critical,” said Wildberger. “At the same point in time, I think everybody recognizes these are early days.”

RBC is looking to use blockchain to improve its rewards and loyalty offers and trade finance capabilities, he said.

Canada’s central bank said in May that it had decided against using blockchain to provide the underlying infrastructure for the country’s interbank payment system after a year-long investigation, saying “too many hurdles” had to be overcome to make the approach viable.

Reporting by Matt Scuffham; Editing by Jim Finkle

Our Standards:The Thomson Reuters Trust Principles.

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