U.S. Faster Payments Update, Canadian Blockchain Experiment

Last week, I attended the 2016 edition of the Federal Reserve Bank of Chicago's Payments Symposium. As I listened to the presentations, it became clear to me once again how important internetworked technologies are to the future of the financial system in terms of individual empowerment and corporate control.

Payment systems based on digital tokens rather than computer accounts combined with publicly accessible payments directories “change the relative power of large and small players in any network,” said Charles Kahn, an economics professor at the University of Illinois. “They bring the power of the small guy up in relationship to the big guy."

These relationships will not sort out easily, nor will the inevitable shifts in power.

Faster Payments in the United States
Nor will the shifts in behavior required for adoption by consumers. As Korie Miller, a vice president at Federal Reserve Bank of Chicago said, in providing an update on the Faster Payments Task Force's adoption group, “Consumers aren’t going to be willing to try too hard. If we want this to work, we will have to make it easy.”

The main focus of the symposium for the last several years has been the development of a realtime payment infrastructure in the United States that allows anyone to send a faster payment to any counterparty in the country. No single solution will be mandated in a market economy like the United States, participants agreed, and any system must be both ubiquitous and interoperable.

How far faster-payments solutions reconceptualize existing technologies and organizations remains a question open for discussion. The systems that promise the greatest efficiencies and most change—those based on digital tokens and shared ledgers—and require the greatest changes in legal governance and process change.

The system I found the most interesting sought to test the ability of a central bank to use decentralized financial technologies to achieve efficiencies. A number of central banks are working with blockchain-based systems, and a representative of the Bank of Canada described for the symposium the blockchain experiment it undertook this past summer.

Wholesale Cash Transfer Blockchain Experiment in Canada
The Canadian central bank wanted to experiment with a wholesale, interbank system based on digital tokens tracked on a distributed ledger. "If you have a cash-based blockchain at the base perhaps you can build overlays to exchange other assets," said Scott Hendry, special director of financial technology, at the Bank of Canada, who described the system.

Like many systems using emerging technologies, the Bank of Canada’s system replicates the functionality of the country’s existing wholesale interbank payment system. The Bank of Canada set up an asset registry to hold funds belonging to the participating financial institutions, all of which had wallets on the blockchain-based system. The system ran on an Ethereum-based network, operated by R3 consortium, using three smart contracts as part of the system.

The system generated a settlement coin on tranche 1 payments, which in the Canadian system are payments that are fully covered by cash. Bank of Canada would take in cash from the banks and keep on balance sheet for the day, and then create coins on the ledger in the banks wallets, at one coin to one Canadian dollar.

"The coins or tokens were depository receipts, claims on the funds in the pooled account that the Bank of Canada held, real cash assets," Hendry said.

The banks do exchanges between each other as needed based on what they have in the wallet. At the end of the day--or anytime during the day, a bank participant can send Bank of Canada a message that they want to redeem x dollars. Bank of Canada sends good funds through the pooled account and destroys the coins they redeem, keeping a complete audit log of all the transactions.

Like many experiments, Bank of Canada's blockchain test raised more questions than it answered. "We recognized that we would not be able to fully answer our questions. And that's how it came out. We were not surprised. But we wanted to do it anyway," Hendry said.

And they'll do it again. Bank of Canada is planning the next phase, to begin sometime in the next year.

In other FinTech news:

Future of FinTech report
This week, the Financial Times announced its creation of the Future of FinTech awards, which will highlight the companies and projects aiming to bring long-lasting change to the financial services industry and has also dedicated a section of coverage to the emerging sector.

FinTech is not a niche anymore, it’s a powerful and highly disruptive industry
International investments in FinTech firms grew from $9.6 billion in 2014 to $22.3 billion in 2015. JPMorgan, Capital One, the Bank of England and other mainstream banks have turned their attention to FinTech. It’s time to recognize the scale of FinTech as not just subsect of the financial services industry, writes Elena Mesropyan for Let’s Talk Payments.

World Payments Report 2016
Among the report’s key findings are the 8.9 percent jump in non-cash payments, the increased use of debit cards and consumers’ changing expectations of banks. Download the full report here.

Why the Facebook of Banking won’t have a charter
Banking is ripe for technological change, but jumping into FinTech is not the same as running a typical tech startup. Firms will need to get the required FDIC capital assets. The FinTech startup landscape is dominated by non-banks, and the likelihood of them scaling is very low, argues author and radio host Brett King in a post for Linkedin Pulse.

Will today’s FinTech alliances become tomorrow’s acquisitions?
FinTech and mainstream banks started as “polar opposites,” but whether they will “live happily ever after” remains to be seen, writes Bryan Yurcan in American Banker. "Banks usually prefer to do everything on their own. Partnering is not natural for them; it is not a muscle they've exercised much," said Dan Latimore, senior vice president of the banking practice for Celent, told American Banker. "And when it comes to acquisitions, acquiring a company is a skill unto itself."

THE BLOCKCHAIN WATCH

Bitcoin searches for itself
As more transactions are done using bitcoin, the flood of traffic on the network has lead to problems. As author and New York Times reporter Nathaniel Popper explained in a Techcrunch video, there’s a lack of consensus as to how to handle the sudden growth.

Poland takes positive approach to bitcoin and blockchain regulation
When the Polish government opened up the floor to bitcoin and blockchain, it showed an interest in regulation and legitimization of bitcoin in Poland, according to Altcoin Today. The discussion points to future dialogue surrounding bitcoin and blockchain with the Polish government.