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IBM Blockchain World Wire: growing competition in payments

Last year October I wrote a blog about IBM’s World Wire project. In that month they announced to come to the market with a global blockchain network for cross-border payments and foreign exchange for regulated financial firms using digital assets. But at that time it was not yet ready for production.

A month ago the firm has announced that World Wire has been sent into limited production. According to IBM “this is the first blockchain-based network that integrates payment messaging, clearing, and settlement on a single network”.  The World Wire network will support instantaneous foreign exchange payment and settlement in locations in more than 70 countries, supporting close to 50 currencies and 45 banking endpoints.

This will definitely lead to growing competition in the payments industry. Should What could that mean for institutions like Ripple and SWIFT?

Why is World Wire needed?

But firstly, why is World Wire needed? And other blockchain solutions? International money transfers especially remittances make up an important part of the global economy. According to the World Bank, migrants across the world sent an estimated $574 billion to relatives in their home countries in 2016.

Current global payment systems however are not adequate enough for the high number of transactions that are happening across the world. Nowadays banks have to go through inefficient processes involving many intermediaries for both the clearing and settlement to conclude these transactions. Sending money across borders today is as a result a time-consuming and costly process.


What is World Wire?

On March 18, IBM announced the launch of IBM World Wire, a global network for regulated financial institutions to simultaneously clear and settle cross-border payments in real time. First unveiled last year October, World Wire now has entered the production stage.

“We’ve created a new type of payment network designed to accelerate remittances and transform cross-border payments to facilitate the movement of money in countries that need it most.” “By creating a network where financial institutions support multiple digital assets, we expect to spur innovation and improve financial inclusion worldwide.” Marie Wieck, General Manager, IBM Blockchain.

The platform is designed for fast and easy cross-border payments, foreign exchange, and remittances, thereby integrating payment messaging, clearing, and settlement on a single, unified network. The aim of the IBM Worldwide Wire payment system is to remove the function of banking intermediaries to international payment options, thereby lowering the cost and at the same time the transaction speed.

“World Wire’s novelty in the blockchain space regarding settlements is that payment messaging and instructions for settlements can happen in real-time. Hence driving all sorts of efficiencies into the process mainly because you’re doing things on one network, i.e. reconciling information and post fact isn’t necessary.” Jesse Lund, VP Blockchain and Digital Currencies IBM

The platform is developed on the open-source Stellar’s blockchain network. This operates as the backbone of their payment solution, allowing cross-border payment settlements in near real time using digital assets as a bridge currency. It is said that the settlements can be done in five to 10 seconds.

How does World Wire works?

World Wire functions as a network provider for international payments. This enables point-to-point money transfers instead of the complexity of conventional cross border payments with their multitude of intermediaries.

World Wire is a network of global financial institutions where each act as a gateway. Money, or value, in this case, flows in and out of the network through these gateways. As a result, no new infrastructure needs to be set up by banks.

It is a simple and configuration-ready solution that can integrate with all existing payment systems to “replace costly opacity with affordable transparency”.  Financial institutions can simply connect to IBM’s World Wire through the provided APIs and convert fiat currency into digital tokens. World Wire can support payments of any size to any destination in the world in a variety of asset types.

It works by using a stablecoin or other digital assets as a bridge between any two fiat currencies being transferred. Financial institutions who are transacting with each other on World Wire will agree on the use of the facilitating currency - stablecoin or a central bank backed digital currency. By doing this, the digital asset is able to facilitate the transaction between the two banking institutions and supplies them with important settlement instructions and information.

The World Wire settlement platform finally simultaneously converts the digital asset into the second fiat currency, in order to complete the transaction. All transactions are then recorded onto an immutable blockchain to allow for the clearing of the transaction.

Stellar Protocol
World Wire is using the Stellar protocol, that does serve as the engine powering Blockchain World Wire, to fiat currency transfers, enabling cross-border payments and settlement. The Stellar protocol is an open-source, decentralized protocol for digital currency to fiat currency transfers, that uses its own cryptocurrency, Stellar Lumens (XLM).

“Stellar emerged pretty clearly, as it provided the scalability we needed to support the transaction volumes we were looking at, which is thousands of transactions per second.” Jesse Lund.

The Stellar protocol offers clear benefits in terms of using blockchain technology to facilitate cross border payments through the World Wire network, that will serve as the as a network provider for international payments.

Digital Assets
IBM World Wire network has been designed to enable transactions between a variety of cryptocurrencies and digital assets, thereby adding trust, simplicity and efficiency to the payments industry. These digital assets are serving as an “agreed-upon store of value” for parties to transact in and sparing time, costs and inefficiencies, meaning funds can be transferred at a fraction of the cost and time of traditional correspondent banking.

At the start the World Wire network will use Stellar Lumens (XLM), and the US dollar linked stablecoin as the primary bridge currency for settling payment-related transactions. Stable coins should be seen as a subset of cryptocurrency that have a value rigidly tied to a national currency.

“The stable coin we’ve currently come to market with is a USD-backed stable coin, which is the easiest to use by default. Remember, this network is designed for cross border payments, where foreign exchange needs to be an inherent part of the capability. Most FX activities around the world tend to price through the US dollar, so it’s natural that the highest demand for participants on the network are willing to settle in US Dollars.” Jesse Lund

World Wire World Wire thereby takes an “open approach” in selecting digital assets which act as settlement instruments. They will also allow customers to use Bitcoin, stablecoins, and even Ripple’s own XRP. Six banks have already announced the upcoming creation of their own stablecoin on the IBM blockchain. More banks will eventually create their own stablecoin depending upon client demand.

“IBM Blockchain World Wire could support other cryptos but is only supporting lumens for the moment because financial institutions are put off by the volatility of cryptocurrencies. It intends to add more digital assets based on client demand and participants on the network." Jesse Lund

Set of APIs
Financial institutions will still be able to use their existing payment systems. Financial services firms that want to connect into IBM's Blockchain World Wire would be using a set of APIs to integrate with legacy processing systems. They will be seamlessly connected to World Wire’s APIs to allow the system to convert the first fiat currency into a digital asset.

"Integration would take from a few days to a few weeks based on the complexity of what they want to do with the system." Stanley Yong, CTO and Global Lead for Central Bank Digital Currency IBM

All traffic and messaging going across the network is encrypted. IBM tis thereby  providing safeguards for encryption keys, which are what represent stable coin and cryptocurrency on a blockchain network, by including online storage on its own servers.

"The keys are stored in a way inaccessible to us directly, but it's on hardware and we have backups of the hardware." Stanley Yong

IBM hopes to cover a substantial part of the world with their World Wide network services. Currently the World Wire network will support instantaneous foreign exchange payment and settlement in locations in more than 70 countries, supporting close to 50 currencies and 45 banking endpoints.

“We are convening a brand new network in 72 countries that will support pay-in and payout end points in 48 currencies. Our goal is to provide global coverage to support as many fiat currencies as possible. We hope all money is moving digitally. We’ve got letters of intent with several banks around the world to support and issue digital currencies, stablecoins and other currencies.” Jesse Lund, head of IBM Blockchain

IBM is ‘actively growing the network with additional financial institutions globally’. In the next three years IBM seeks to expand worldwide to make fast and cheap transactions “anywhere in the world”. These numbers are expected to grow as IBM is working with regulators in numerous countries to bring the platform online in their jurisdiction.

IBM's blockchain-based real-time global payments network has started to rollout, with several banks also committing to issue their own stable coins on the platform. Pending regulatory approvals and other reviews, six international banks, including Banco Bradesco (Brazil), Bank Busan (South Korea), and Rizal Commercial Banking Corporation (RCBC) (Philippines) have all signed letters of intent to issue their own fiat backed tokens or stable coins on the World Wire network. This may add Euro, Indonesian Rupiah, Philippine Peso, Korean Won and Brazilian Real stable coins to the World Wire network.

World Wire is in negotiations with more financial institutions that are looking to trial the blockchain-based payment system.  As “local regulations continue to guide activation for the World Wire network”, additional financial institutions across the globe have expressed interest in joining. IBM said it will continue to expand the ecosystem of settlement assets based on client demand.

"RCBC is pleased to be an early innovator with plans to issue our own Peso stable coin on World Wire, pending final approval from our regulators." "We're focused on innovation that adds value for our customers, and World Wire presents a tremendous opportunity to transform and enhance our payment infrastructure." Emmanuel Narciso, RCBC's group head for Global Transaction Banking.

What could World Wire bring for financial institutions?

A number of banks and other regulated financial institutions have expressed their interest in joining World Wire due to the benefits the network could offer to those sending money across borders.

IBM World Wire has the ability to completely disrupt the current banking payment system. The platform could revolutionize several aspects of the concept of cross border money transfers and for instantaneous settlement. It could become a major force in effectively eliminating the need for banking intermediaries to execute the process of payment transactions, thereby lowering the cost and at the same time the transaction speed.

World Wire is said to provide much faster payment processing than the average payment system due to its simultaneous clearing and settlement features. Settlement time can be reduced to seconds by transmitting monetary value in the form of digital assets such as  stable coins.

"Clearing and settlement would be near-real time, so businesses would be able to access funds paid through the system immediately." James Wester, research director for IDC's Worldwide Blockchain Strategies

IBM Blockchain World Wire will help financial institutions improve the services they deliver to their consumers by optimizing and accelerating foreign exchange, cross border payments and remittances.

“With IBM Blockchain World Wire, clearing and settlement with finality happens in near real-time. The solution uses digital assets to settle transactions — serving as an agreed-upon store of value exchanged between parties — as well as integrating payment instruction messages. It all means funds can now be transferred at a fraction of the cost and time of traditional correspondent banking.” IBM

“The distributed ledger technology on which World Wire is based enables verified participants to transact openly, reducing risks and the costs associated with mitigating fraud, and would presumably be offered at a competitive rate to be viable." James Wester

The blockchain network will also allow wholesale players such as banks and market makers to perform foreign exchange settlement of batch financial transactions; that offers far higher value, but lower volume traffic compared with retail remittance.

"We do expect to see from 10% and 20% savings in operational liquidity management and potentially more than a 50% reduction in overall transaction cost." "But that's speculative because of the nascent nature of this network; it could be more or a bit less." Stanley Yong


IBM World Wire: rival for Ripple and SWIFT?

IBM World Wire network is said to become a serious rival for other payment platforms such as SWIFT, the platform that is used by hundreds of banks and other payment institutions,  and a direct competitor to Ripple’s xRapid platform.

IBM World Wire versus SWIFT
Both World Wire and Ripple are fishing in the same pool, especially with SWIFT as their main target, trying to attract banks from the traditional SWIFT network. Both have been launched to compete and eventually make an end to these old world networks with their huge number of intermediaries in the cross border payments world, particularly those involving multiple currencies. This via creating decentralised solutions.

“The world has been using the same network to process financial transactions for 50 years. And even though globalization has changed the world, payment fees and other financial barriers remain the same. But now there’s a new way to move money.” Lund

It is not surprising that the first target of IBM’s World Wire is SWIFT, that has existed for so long and has many banks in its network, but which today do not seem to be able to offer fast and cheap transactions.  In World Wire money transfers will go directly from one financial services firm to another, thereby speeding execution.

SWIFT cannot beat the blockchain technology which World Wire will operate and Ripple already operates and that is much more advanced, cost-effective and efficient than what SWIFT has. This notwithstanding their recent upgrading of their payment messaging system. Above that SWIFT is not a settlement solution at all.

IBM World Wire versus Ripple
The second target is Ripple. From the start Ripple, one of the pioneers if digital global payments, has clearly and openly expressed their intention to replace SWIFT as the world leader in cross-border payments. The World Wire initiative is expected to be in direct competition to Ripple’s xCurrent and xRapid cross-border payment solutions.

When comparing World Wire and Ripple we can see a number of similarities between the two solutions. Both are  using distributed ledger, based on the same blockchain technology to process transactions. They thereby aim to surpass intermediaries.

They are thereby using highly efficient payment protocols, that have pretty similar codes. Although Stellar updated the codes to accommodate their target market better. Moreover, both of them also have private nodes and don’t allow mining.

The World Wire’s benefits, are almost identical to those of Ripple’s xCurrent and xRapid offerings: near-instant transactions, complete transparency and thorough transaction tracking, low clearing costs, and compatibility with any currency or asset type.

Despite the many similarities that both networks have, there are also a number of significant differences between the two. They are actually complete different entities, with differing governing principles, core philosophy and business strategy.

The target markets they aim to cover are not all the same. World Wire is especially focused on the remittances market, while Ripple has a more broadly payments base as its target.

Ripple facilitates payments for financial institutions using XRP. xRapid uses XRP coins as a liquidity tool for its own version of converting fiat currency to digital assets.  World Wire on the other hand will use various digital assets, cryptocurrencies and side coins. 

The IBM World Wire should be merely seen as a facilitator, as a payment settlement platform. Its role is limited to building the requisite infrastructure.


Ripple still ahead

So, should Ripple and World Wire actually be seen as head-to-head competitors? Ripple has the advantage of being the first-mover. They have been in the blockchain industry already for some time. And BM World Wire on the other hand is still in the production phase.

So far Ripple has been ahead in the provision of remittance services in the cryptocurrency industry with XRP as its token to provide liquidity to settle cross-border payments. Ripple has been the place-to-go for cross border payments in the blockchain world. The company has already an established customer base, that is not likely to be taken away very soon.

Ripple has already an entire network of banks that have joined and they have a multitude of other projects. Agreements have already been signed more than 200 banks and financial institutions.

Another point that argues for Ripple is that the World Wire solution does not solve the centralisation issue. While Ripple is a decentralised solution, themselves as the central operator of the Stellar based Word Wire network, meaning it approves all validators and therefore controls the transactions. Just like SWIFT and other traditional payments networks IBM is positioning

It is also questionable if all these banks in Word Wire will be prepared to create their own digital currency or issue their own stable coins. This could add complexity to the system. A centralised US dollar backed stable coin is not the solution and cannot be part of global pools of liquidity that anyone can contribute to and draw off of. Mass adoption asks for a “universal bridge asset that is geopolitically neutral”.


But the battle will be long and hard

With the coming of IBM World Wire the battle for the future of payments is just getting started. Ripple may still seem to be ahead in this play to date. IBM World Wire however has good cards in their hands to powerly challenge Ripple, but especially SWIFT.

Competition is healthy, and getting traditional financial institutions on the blockchain and cryptocurrency train is a good thing in the long haul. We are still a long way from getting a firm answer on which solution will dominate the future of the global payments industry. As long as there is no massive adoption of blockchain in the payments world it will remain guessing: World Wire, Ripple or both. Or another solution!.

Due to the competitive nature of their ventures, it's likely they will still be competing for years to come. What is sure: the battle will be long and hard.

By the way, it is remarkable – or is it just a coincidence ? – that both IBM, Ripple and SWIFT recently joined the International Association of Trusted Blockchain Applications (INATBA), that was launched on 10 April in Brussels. This new blockchain association aims to promote adoption of the technology across the EU.


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