While blockchain and faster payments gurus are quick to sing the praises of these technologies, sometimes it takes someone outside of that spectrum to provide you with a dose of reality. Daniel Wood, attorney with Pillsbury Winthrop Shaw Pittman LLP, believes treasury and finance professionals need to consider these key issues:
Wood noted that there are actually some competitive advantages to not using distributed ledger technology (DLT). That’s because once a bank network utilizing DLT is implemented, and all the major banks are working on a blockchain project, transaction data will be transparent. “There may be a layer that only allows the network to see the financial institution’s account and not sub-accounts belonging to customers,” Wood said. “So you could insulate customers but not the institution itself, and then the institution would have to keep all that information and keep it private. But privacy law and a whole lot of regulations will have to come into play.”
Additionally, there are some questions about whether DLT could even handle the scale of the U.S. economy. There are just over 16 million bitcoins in circulation, but blockchain protocol caps the ceiling at no more than 21 million bitcoins in play at a given time. In contrast, there are more than 600 million traditional payment transactions occurring per day in the United States. “In a couple of years, your distributed ledger is going to have trillions of entries,” Wood said. “If you are using a distributed ledger for recordkeeping and reporting purposes, will it be manageable for searching, indexing and identifying data? That’s a big, open question that I haven’t seen anyone address yet.”
Real time vs. “fake” real time
Turning to faster payments, Wood noted that payments settlement currently doesn’t occur in real time –and with good reason. Many of the platforms that are currently in play essentially “fake” settlement by taking such actions as crediting the recipient of a transfer before actually debiting the sender. “Faking it” like this, puts more risk on the bank.
Actually speeding up the settlement places the risk on a different party—typically the sender. This is because the money is gone; it’s out of the account and is settled. If the sender wants to delay the payment, he or she is out of luck. “If someone gets ahold of my account information and fraud and theft happens, the money is gone and there’s no chargeback—no reversibility,” Wood said. “The risks aren’t completely eliminated; they’re only shifted from one point to the other.”
Thus while The Clearing House claims that its new Real Time Payments (RTP) system removes all of the risk by providing every aspect of the transaction in real-time, a delayed settlement actually allows for risk mitigation. So if corporate treasurers opt to send payments using RTP, they will have to accept that they—not the banks—will likely be liable should fraud occur.
Wood added that in other countries that have implemented real time, the settlement does not occur immediately. In Japan, for example, about 1,300 financial institutions are on a payment network that does real-time account posting, but delays settlement until the end of the day. “It was a conscious choice to bake-in a deferred settlement,” he said. “Delayed settlement allows more time to scrutinize transactions for fraud, theft, etc.”