The London-based bank payment network Earthport is expanding its application of distributed ledger technology (a system best known for its use with Bitcoin) to enable real-time cross-border payments and potentially reduce risk.
The new Earthport gateway builds on an earlier partnership with virtual currency technology provider Ripple Labs to provide an alternative form of liquidity for international payments.
"It's a broad-based technology that has application to a number of use cases," said Daniel Marovitz, president of Europe for Earthport. These uses include land registry, letter of credit, health care documentation and securities settlement, he said, though he emphasized that the new deployment is primarily focused on cross-border payments exected by traditional government-issued currencies.
Earthport refers to the technology as "distributed ledger" to differentiate it from the "blockchain" system that is normally associated with Bitcoin (a blockchain is a type of distributed ledger, but not all distributed ledgers are blockchains).
Earthport's emphasis on fast payments and cross-border risk address a specific pain point for banks, said Gareth Lodge, a senior analyst at Celent.
A payment made on a Friday may leave the sender's bank instantly, but is unlikely to hit the recipient's account until Tuesday or Wednesday, Lodge said. A lot can happen in that time.
"The currency could drop, just look at the Yuan being devalued three times in three days, which means what is received could be a lot more or less in value," Lodge said. "Real-time transactions would reduce this risk."
Banks and other traditional financial institutions have not embraced Bitcoin and other cryptocurrencies in a major way, mostly out of concern for lack of regulatory guidance and the perception that cryptocurrencies have been used to fund criminal activity. But many financial institutions are interested in the underlying distributed ledger system.
"A lot of banks have done proof of concept for distributed ledger," Marovitz said. "But the compliance departments don't have their heads around the strict interpretation of distributed ledger."
Earthport, which is a regulated entity, addresses this concern by enabling banks to connect to the Ripple network without establishing their own virtual currency infrastructure. The combination provides anti money laundering monitoring, sanction screening, transaction monitoring and know your customer tools. The resulting system enables fast processing for mainstream currency, Marovitz said.
"We hear from banks that they don't know where to put the AML and terrorist funding prevention stuff into the [distributed ledger] flow," he said. "We can manage that."