IBM launches challenge to Ripple and Swift
IBM has taken an idea Ripple made popular — conducting cross-border payments over a distributed ledger using a digital currency as a “bridge” between fiat currencies — and has built its own version using the Stellar blockchain and a U.S. dollar-backed stablecoin.
The network has been in testing since late 2017.
“This is an entirely new kind of payment network or payment rail built with blockchains for regulated financial institutions and money services businesses,” said Jesse Lund, head of blockchain solutions for financial services at IBM. Previously, he worked for Wells Fargo for 20 years and ended up as head of innovation labs there.
Six international banks, including Banco Bradesco, Bank Busan and Rizal Commercial Banking Corp. (RCBC), have signed letters of intent to issue their own stablecoins on World Wire, adding euro, Indonesian rupiah, Philippine peso, Korean won and Brazilian real stablecoins to the network.
RCBC is the Philippines bank that was involved in the $81 million heist from the Bank of Bangladesh that took place over the Swift network a few years ago. Though one of the bank’s employees was found to be complicit in the theft and was prosecuted for it, RCBC considers itself a victim in the crime.
“Transparency and traceability might be of interest to them, yes,” Lund said.
The choice of Stellar is a bit surprising given that IBM has been working with the Linux Foundation on Hyperledger Fabric for years.
But Hyperledger Fabric is permissioned, private distributed-ledger technology. IBM wanted something more open that any organization could join if it met certain criteria.
In World Wire, IBM has created kind of a virtual private network within Stellar. Organizations can register assets and become part of the network, but IBM carefully vets each participant and validator. By contrast, Ripple says it does not know who runs the validator nodes on its distributed ledger.
“It's really about knowing the validators, but without creating this walled garden that you have to have special permission to join,” Lund said.
Transactions are recorded and can be publicly seen on the Stellar network itself. But IBM will vet every participant to make sure it’s a regulated financial institution in good standing.
“We do the governance and due diligence as part of our network operator role,” Lund said. “But joining the network is free if you meet those criteria. You only really pay for the value that you move through the network.”
What most banks use for cross-border payments today is the Swift network, through which correspondent banks pass messages instructing one another to deduct the payment amounts from one another’s accounts. Swift members are starting to use Swift’s GPI technology, which lets them see the status of their payments and requires them to settle within prescribed time periods.
With World Wire (as with Ripple and any other blockchain-based network), customer information, payment instructions and the payment itself (in the form of a digital asset), move together on the same network.
“The risk of settlement is drastically reduced because you're not talking about a deferred net settlement that happens three days from now and might later need to be reversed,” Lund said. “It’s either settled in the course of five to 30 seconds, or it’s not."
“We're not trying to dethrone Swift in any way,” Lund said. “In fact, there may be opportunities to integrate with Swift.”
World Wire is initially available in 72 countries in Europe and Asia, where payments traffic is lighter. These less-used payment corridors represent more than 50% of the total cross border transaction volume, Lund said.
“There's a lot of room for optimization there, and that's really what we're going after,” he said.
Payments can be settled using a U.S. dollar stablecoin, Stellar’s cryptocurrency lumens, and other digital currencies.
U.S. banks are likely to find use of a U.S. dollar stablecoin as a bridge currency more palatable than Ripple’s controversial XRP token. A stablecoin backed by the U.S. dollar should always be worth a dollar, if it is backed properly.
“The ecosystem of digital assets [we support] is one of the things that differentiates World Wire from Ripple and the rest of the market; we're not an issuer of a digital asset, and we don't have a dog in that hunt. So we're going to support a wide range and encourage participation from banks for cryptocurrencies, stablecoins, fiat-backed digital tokens and even central bank digital currencies.”
One thing that worries banks about the idea of cross border payments on a distributed ledger is they do not want their competitors to see the volume and amounts of transactions that they're pushing through.
“It's an interesting tug of war, because I think the social movement underlying distributed-ledger technology and cryptos is pushing the financial services industry towards more transparency,” Lund said. “And the banks are saying, eh, we're not ready for that much transparency — we don't want our competitors to see how much volume we're pushing.”
To accommodate this desire for discretion, IBM splits up transactions into pieces and spreads them across different accounts on the network. They are visible, but it would be hard for anyone to reassemble the pieces and see how they represent volumes from any one participant.
Security on World Wire, as with most distributed ledgers, is rooted in public-key cryptography, “which is very difficult at least with current competing technology to reverse-engineer, to kind of brute-force attack accounts, even on public networks,” Lund said.
Also, each participant gets a self-contained set of infrastructure that supports their access to the API.
Sometime during 2019, World Wire will support the U.S. as an end point, Lund said.