How Bitcoin Will Change International Bank Payments

Correspondent banking can be made cheaper and faster using the type of peer-to-peer technology underlying Bitcoin.

Peer-to-peer technologies that allow parties to bypass intermediaries are bringing change, and competition, to a wide variety of industries—and banking is no exception. New companies like TransferWise and CurrencyFair, for example, offer better foreign exchange rates than have been traditionally available. They do this by matching buyers and sellers of different currencies together directly, taking bank currency exchangers out of the equation altogether.

Peer-to-peer technologies are coming to the world of international bank payments as well. On March 3rd, I participated on a panel at the SWIFT Business Forum in New York about cryptocurrencies and global bank payments. The Society for Worldwide Interbank Financial Telecommunications, or SWIFT, provides a messaging network widely used by banks and other financial institutions to process transactions.

Moving money across borders from the bank of a buyer to that of a seller usually entails a practice known as correspondent banking. And it’s hardly peer-to-peer. Separate banks in each country agree to act on behalf of the buyer and the seller in accepting and transferring funds. These correspondent banks use yet another bank to settle the transaction among themselves. Transaction and exchange fees are charged along the way, and scarce capital must be used to maintain accounts at correspondent banks. Payments are also slow, and often take up to four days to settle, and sometimes longer. Large banks, such as Chase and Societe Generale, maintain thousands of correspondent banking relationships and process millions of correspondent transactions daily.

Fortunately, the correspondent banking process can be made cheaper and faster using the type of peer-to-peer technology underlying Bitcoin. As I noted at the SWIFT event, a decentralized ledger that does not require an intermediary to keep track of payments can connect buyer and seller banks directly.

The peer-to-peer payment infrastructure created by Ripple Labs, for example, allows banks anywhere in the world to bypass the traditional correspondent system and transfer payments between themselves in real time. This is made possible because Ripple provides a settlement infrastructure that operates through a single network rather than through several banks or other intermediaries. Ripple is meant to be used by banks by plugging into existing payment systems, including by integrating the interbank messaging standard provided by SWIFT.

Bitcoin also creates a decentralized transaction ledger. While Ripple enables banks to engage in peer-to-peer payments, in principle Bitcoin allows anyone to engage in their own cross-border banking by transferring funds to a seller that accepts Bitcoin. This functionality is important because most international trade does not involve banks directly. Today, global suppliers typically provide their goods on credit and expect to be paid within 30 to 90 days.

It’s safe to say that Bitcoin and other decentralized ledger technologies will improve the efficiency of international bank payments. Over time, they will also enable companies and individuals to bypass the banking system altogether in making cross-border payments. In so doing, decentralized ledgers will likely improve cross-border payments and accelerate the already existing trend of buyers and sellers turning away from using banks in international trade.

​Houman Shadab is professor of law at New York Law School and a Coin Center Fellow. Photo by Sid Kalla.