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Blockchain & Instant Payments: Bedfellows or Opposites?

  • By Pankaj Gindodia
  • Published: 8/29/2016
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Instant (or real-time) payments and blockchain are perhaps the two biggest buzzwords in the financial and payments industry today. They are being adapted by not only the leading financial institutions, but also by new, agile and small startups that are cropping up to make constructive use of these technologies.

However, treasury and finance professionals should proceed with caution when lumping them together. Although instant payments and blockchain seem to complement one another, their processes are more or less at odds.

While the objective of instant payments is self-explanatory, the infrastructure/architecture is still open to vulnerabilities and faces security issues.
Conversely, blockchain appears to overcome security fears, but the speed of the completion of the transaction is much longer. This is mainly because the transaction registration process in a blockchain infrastructure is not as simple and straightforward as that in the traditional database architecture. In addition to this, there is quite a bit of cost involved in registering a transaction in a blockchain network as compared to the traditional client-server architecture.

Less cost and more speed happen to be the forte of instant payments, which gets violated by the blockchain principle. Moreover, the belief that computing power will increase in future years to counter the complexity of blockchain, resulting in transaction blocks being registered faster, goes against the philosophy of blockchain as it might become more open for tampering. Hence, as computing power increases, the complexity of the transaction block registration in the blockchain network should also increase automatically.

Moving forward, regulators and innovators have a very delicate balance to keep in implementing blockchain for faster payments. There might be a middle of the road approach that could be taken, where the traditional architecture gets used for completing payments faster and a blockchain network gets used for reporting and archival of transactions. This would achieve the dual purpose of speed and security. It would also mean that blockchain would come in as a value add to the existing architecture and infrastructure of the central banks and clearing and settlement networks rather than as a total replacement for them.

The only missing piece from the puzzle left to solve would be the costs, as institutions will have to maintain both the traditional and blockchain networks. But at the same time, it would leverage the benefits of both the architectures, which would help reduce hacks, as well as achieve the financial objectives of reducing poverty and illicit money circulation.

Pankaj Gindodia, is a Lead Business Analyst with Fundtech.
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