Distributed ledger technology brings two reform forces to banks: cross-border payment system and digital legal currency network

The system we currently use to move money is large, complex, expensive, and has no rules. It needs to change. And that change is coming, in the form of distributed ledgers, digital signatures, and virtual currencies. Banks, the traditional middlemen in money movement, must start developing strategies to address the threats posed by these technologies.

According to the statistics of Bain Consulting Company, the cross-border money transfer network handles nearly 300万亿美元of transactions every year, and banks make profits of up to 1500亿到2000亿美元. With such a stable source of income, it is not difficult to explain why banks have never taken the issue of system reform seriously.

Given the high potential risks of digital currencies and the instability of their transaction tracking, it is understandable that banks want to be careful. For example, in early August, the Hong Kong Bitcoin exchange Bitfinex was attacked and lost nearly $65 million. Bitcoin is supported by blockchain, which is widely known for its distributed ledger function.

However, the digitalization of fund transactions is unstoppable, and the innovation of financial technology companies and the service needs of corporate users are important factors driving this force. According to a recent survey by the Association of Financial Professionals (AFP) and Temenos (which provides integrated and modular core bank account systems), about 60% of corporate financial managers are dissatisfied with the payment services provided by their banks and are looking for other options.

Distributed ledgers will bring two forces of reform. First, the development of cross-border payment systems , and reforms in this area are in full swing . Second, digital fiat domestic payment networks supported by central banks . Although this type of reform has not yet been carried out, it will definitely have a long-term impact on the banking system in the future, and it is likely to completely subvert the entire checking account and credit card market.

The nature of distributed ledgers is worth considering. Traditional payment and transfer models rely heavily on centralized institutions. When funds flow between transaction participants, this centralized institution is responsible for recording and monitoring transactions to prevent fraud; then the transaction parties verify the specific information through their own systems. This process protects all participants at the same time, but the cost is too high, it is also time-consuming, and even leads to the breeding of bureaucracy.

A distributed ledger is a secure shared database where each participant can hold a copy of the data ledger. Once a transaction is initiated, it is verified by all participants in the network and can be updated in the network almost immediately. Transactions can be initiated using encrypted digital signatures, without relying on centralized institutions to verify transactions. The distributed ledger system itself only ensures that the entire network holds the same version of the ledger data. In other words, distributed ledgers completely eliminate the middleman.

There is no shortage of innovators in the field of international correspondent banking. For example, San Francisco-based startup Ripple has built a payment system based on a custom protocol and currency, and is currently working with about 30 banks to test its software.

So, given their size and position, how should banks respond to the development of cross-border transactions? Putting aside some technical issues, the reform of the payment system requires the participation of multiple parties. In other words, banks need to establish alliances.

Bank chains that operate across borders will choose local allies that have geographical advantages.

Some large international banks usually need to handle a large number of cross-border transactions. When faced with reforms, they can choose to develop internal distributed ledger projects or cooperate with third-party platforms with great development potential. Such banks need to comply with strict anti-money laundering and know your customer (KYC) regulations. However, they can turn such regulations into a marketing tool to promote the security of their systems to customers.

Distributed ledgers are not only important in the international correspondent banking sector, but will also bring about earth-shaking changes to domestic payment systems. The People's Bank of China and the Bank of England have begun exploring the issuance of a national digital currency based on a distributed ledger. Once such a system is available, consumers and businesses will be able to make electronic payments even without using credit cards or checking accounts. Such a system will also seriously affect the liquidity of bank deposits, which is a major source of their fiscal funds. As a result, banks have begun to invest heavily in digital wallets and payment apps.

No one knows when these two forces will bring digital innovation to the international banking industry. But those banks that are already in the preparation stage will gain great adaptability. Bank executives can start by choosing partners, which customers, colleagues and third parties are suitable. Whether a bank is a cutting-edge innovator or a vigilant follower, it can win this war for itself.

How banks respond to the challenges of distributed ledgers will determine the shape of the global financial system. For banks, digital payment networks are no longer a strategic option but a necessity.