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Blockchain technology is very much an emergent technology changing the game in the global economy. Cross-border payments are one of the most transformational impacts of blockchain technology.
For decades, international payments spanning banks and remittance services have suffered from inefficiencies, high costs, slow speeds, and complex regulatory frameworks.
Blockchain is rapidly replacing many of these problems with faster, cheaper, and more transparent payment systems that can radically alter the global economy.
This article delves into how blockchain is changing cross-border payments, the issues it resolves, and how the adoption of blockchain will impact the wider economy.
Blockchain Technology
Distributed ledger technology, or blockchain, is a system of recording transactions across many computers in such a way that they are simultaneously available and immutable.
The blockchain at its core is decentralized, which means that it isn’t reliant upon a central authority to validate transactions—typically a bank or a government. Instead, it works by a network of participants to interact, verify, and validate transactions via a consensus mechanism.
Once data is added to a blockchain, this can’t be changed, thus making it liable to fraud and tampering.
The key features of blockchain that make it transformative for cross-border payments include:
Decentralization: Here, blockchain also removes the need for intermediating in the transfer by running peer-to-peer.
Immutability: Once the transaction is recorded on the blockchain, it will never change.
Transparency: All in the network have the same information; it’s accountable.
Security: Precisely because cryptos are secured using such advanced cryptographic techniques, data stored on them is protected from anyone but the owner’s access or modification.
Cost efficiency: With blockchain, by cutting out intermediaries, transaction fees associated with traditional payment systems are slashed.
Most of these features are very helpful in areas of cross-border payments since the issues of trust, speed, cost, and security arise here.
The Challenges of Traditional Cross-Border Payments
To better grasp the opportunity presented by blockchain in transforming the cross-border payment sector, it is crucial to identify the issues inhibiting traditional payment systems.
1. High Transaction Costs
Within conventional international remittance solutions, there is a series of links, including the sender’s bank, payment service provider, and receptor’s bank, and each link charges a commission fee for the service provided.
These fees can cumulatively build up to a good amount, especially for small business people and individuals transferring money across borders.
The typical fees for international money transfers are from 3 to 7% of the initiated transaction’s value, and the prices depend on the country and the payment service provider.
2. Slow Transaction Speed
Cross-border payments using the classical banking models might take three or four days to conduct. This is because of contracted intermediaries, differences in time zones, and sometimes banks’ embargoes, and also because transactions require manual confirmation.
To complement a fast send or receive of payments requirement for businesses or individuals, this is a major drawback.
3. Lack of Transparency
Traditional international payment systems are quite nontransparent, and the parties have very limited visibility into the transaction. It gets even more challenging to monitor payments and is there to ensure that such payments are proceeding through the right channel.
In addition, the effect of hidden charges and time costs associated with any project is that clients will only feel frustrated and confused.
4. Credit Dealing and Foreign Exchange Rates
Across the borders, the transfer of money involves the conversion of one currency to another. As is the case with conventional money dealers, most financial institutions have their own exchange rates, which may not be customer-friendly.
Further, the time taken in currency conversions and the actual costs of making such conversions enhance the difficulty in cross-border payments.
5. Regulatory Complexities
International transactions are not the same, and they are surrounded by many regulations specific to the nation. These regulations can include anti-money laundering (AML) and know-your-customer (KYC) laws, which are usually time-consuming and involve much documentation.
Conformity to the above regulations sometimes proves to be time-consuming and costly for both the financial institutions and their customers.
How Blockchain is Disrupting International Payments
In the following sections, the present author deliberates on several important benefits that come with blockchain technology and how they can be used to overcome the current weaknesses of legacy payment systems.
As a proven technology in increasing the efficiency of cross-border payments by making them cheaper, faster, and more transparent, blockchain is revolutionizing the industry.
1. Lower Transaction Costs
Another advantage of blockchain in cross-border payments is the possibility of cutting expenses. The conventional methods are centralized payment systems where many agents participate by pulling a slice from the transaction commission.
Blockchain eliminates the need for such agents because users transfer currencies directly to each other through P2P transactions. Therefore, the costs of transactions are relatively lower, especially when they reach more than half that of conventional approaches.
For instance, Ripple and Stellar are blockchain-based remittance platforms that enable users to transfer money across borders without the services of banks or payment gateways.
These platforms take a percentage of the fees, which is way less than what banks or even money transfer services such as Western Union will charge, hence more convenient for individuals and companies to send and receive payments internationally.
2. Faster Transactions
Transactions can therefore occur within a few seconds, independent of the geographical locations of the counterparties. The existing processes of cross-border payments may take 2 to 3 days to complete because of the chain of intermediaries and manual checks by a bank involved.
Unlike traditional transactions, blockchain transactions are authenticated by a network of nodes in less than a minute, creating real-time payments.
Such a speed proves useful to business people when making payments or receiving funds from a particular location. In the case of cross-border invoices, blockchain can cut down the time taken to process them, which enhances cash flow among the organizations involved.
3. Increased Transparency
This model is decentralized and transparent, which means that all participants in the chain get full access to all the information. Each transaction is posted on a public ledger so that it is possible to know the source, amount, and recipient of payment.
These actions also allow for avoiding various charges for the execution of different operations, as well as minimizing the possibility of fraud, which is explained by the possibility for members of the network to examine the history of transactions.
To the businesses, this has the impact of enhancing the level of trust and accountability in cross-border transactions. They can also keep a record of payments received and validated in real-time.
Concerning consumers, it may help avoid fraud cases and improve the accuracy of a payment process since more people will see it.
4. Reduced Transgression of Money Exchange
Blockchain can facilitate currency conversions as it can break down the process into a payment that can be made in cryptocurrency or a digital asset like Bitcoin or Ripple’s XRP, which is not influenced by the exchange rates like more traditional fiat currencies.
Most often, cross-border payments using blockchain technologies enable businesspersons and other users not to convert one currency to another directly.
For instance, Ripple’s XRP facilitates an effective worldwide, real-time money transfer without the need to transact using a different currency.
XRP acts as an intermediary coin—piling up money from different fiat currencies to let people move it from one place to another. This makes cross-border payments cheaper and faster, thus making guesswork a thing of the past.
5. KYC
In addition, it makes it simple to fulfill regulations like AML or KYC. Because of the decentralized ledger technology used, the transparency and security of blockchain allow easy monitoring of transactions by financial institutions and regulators immediately after they occur.
Furthermore, it means that blockchain has a mechanism for protecting access to certain data based on cryptographic keys so that embezzlement and identity theft would be almost impossible.
Most of the existing blockchain payment solutions have incorporated KYC and AML into the services, thus creating favorable conditions for companies to address the necessities stemming from laws and legislation while enjoying the benefits blockchain offers.
Automating many of the processes involved in regulatory compliance may aid in cutting down on the amount of effort that businesses have to put in to meet the regulatory requirements and thus cut down on the costs of compliance.
Blockchain in Action: Real-World Examples
Some companies and several platforms have, however, incorporated the usage of blockchain technology, mainly in the area of international payments.
The abovementioned use cases showcase how this technological innovation can change the international payment service industry.
1. Ripple (XRP)
Ripple is among the best-known blockchain systems for global payment transfers. It employs ARP, its native blockchain digital asset, to offer almost real-time cross-border transfers at very low costs.
Ripple is an Internet protocol that allows banks, payment providers, and digital asset exchanges to process real-time payments.
Right now, Ripple’s protocol is implemented by some of the most prominent banks, including Banco Santander, American Express, and PNC, to improve international payments.
2. Stellar (XLM)
Stellar is another blockchain platform that aims at enhancing cross-border payment in areas that are not well served. Through Stellar’s network, the transaction therefore occurs rapidly and at a low cost in any currency, including fiat currency and cryptocurrencies.
The Stellar network is currently integrated with various remittance companies such as IBM and Kicked to establish effective payment pathways for commercial and users in developing markets.
3. Bitcoin (BTC)
Bitcoin is traditionally associated with the concept of an electronic currency, but it can also be used for international payments. Bitcoin payment services or transactions are done through a peer-to-peer network, thus aiming at removing the use of a middleman.
Even though Bitcoin has relatively high transaction fees in comparison with other blockchain platforms, it is one of the most used cryptocurrencies worldwide due to its use of the capability to avoid traditional banking services in the process of international money transfers.
4. USDA
For example, a stablecoin; is a type of digital currency backed by a tangible asset. In Circle’s case, the asset is the US dollar, which is regulated by the United States Department of Agriculture.
Circle, the company behind USDA, is employing blockchain technology to offer a stable and efficient mechanism for international payments.
Utility tokens, including USDA, are just like other cryptocurrencies that allow fast and cheap transactions, like utilizing cryptocurrencies, although they lack the kind of volatility in value experienced in the digital currencies market.
5. TransferWise (now Wise)
It is not strictly linked to the blockchain, but employing a similar ethos to traditional payment systems, Wise (formerly TransferWise) cuts the cost of international transfers. Wise uses a model that involves matching customers making payments in one currency against customers making payments in the reciprocal currency.
Paying does not use blockchain yet, but its business model shows how disruptive technology works in lowering costs and enhancing effectiveness in the payment industry globally.
Contemporary Analysis: The Frontier Research in Cross-Border Payments and Blockchain technology today is seen as having the capability of transforming cross-border payments.
Over time, the rate of adoption also increases, which means several financial organizations, businesses, and even consumers will use solutions based on the blockchain.
However, several hurdles remain before blockchain can fully transform the global payments landscape.
Regulatory Framework: Two of the more important regulatory challenges that governments and regulators have to implement are cryptocurrency use in payments and cross-border payments using blockchain.
Scalability: Blockchains have to grow in order to accommodate as many transactions as necessary because the demand for faster and cheaper payment systems is growing globally.
Interoperability: For blockchain to be an industry-standard solution for cross-border payments, there has to be a way by which the various distinct blockchains can interact with each other.
Still, it is impossible to deny the possibility of blockchain in changing the cross-border payment service. Fortunately, innovation and regulatory understanding are expected to deepen substantially in the future, together with the advancement of technology, thus preparing to revolutionize the future of the global financial industry.
Conclusion
Blockchain is now emerging as a key solution to many of the shortcomings of current cross-border payment systems.
Thus, by providing an opportunity for distributed, protected, and open operations, blockchain is facilitating quicker, less costly, and more effective global operations.
When more and more financial organizations and companies use blockchain technology, further the worldwide economy is likely to refer to the efficiency, lower price, and additional certainty that blockchain provides to cross-border payment transactions.
