a SWIFT evaluation

SWIFT has published an article on the application of a shared ledger system to improve transparency in cross-border payments. It's an excellent article, raising worthwhile issues that caution us all against rushing into shared ledger/blockchain solutions. Yet a viable means of creating end-to-end transparency is sorely needed and, while several infuential bodies continue to work towards a practical solution, there's little evidence of adoption.

read the original article

The cost and potential risk of participating in payments involving marginalised regions is hard to justify. Volumes are usually relatively low, and the expenditure of potentially thousands of dollars on compliance is unlikely to be recompensed by the ensuing transaction fees. But one minor procedural slip can result in crippling regulatory penalties. International banks can hardly be blamed for the derisking that has inevitably resulted. Yet much of this cost - and delay - stems from the need to repeat diligence that has already taken place. If every party in the chain had access to the same verified data, then both risk and cost would fall to acceptable levels, reopening trade with emerging economies. A shared ledger - almost by definition blockchain-based - could provide an answer.

But, as SWIFT's article highlights, conventional crypto-based blockchains are flawed when applied to such an application. They require huge numbers of competing nodes, usually provided by anonymous members, consuming an unsustainable amount of energy. And each member must be rewarded for participation, usually in the form of cryptocurrency. While Ethereum has made significant strides to reduce its energy footprint, we're still looking at a power-hungry, expensive storage system.

But there are other shortcomings, not mentioned in the SWIFT article.

• The dependence on a large network demands that a stable internet connection is constantly available.
• The competitive nature of the nodes, followed by the need to duplicate data, creates latency, slowing response, particularly where large files are concerned.
• Recent blockchain penetrations, resulting in the loss of millions of coins, demonstrate that conventional chains aren't as impenetrable as originally hoped.

The crypto operators aren't to be criticised. Their blockchains were designed to fulfil their intended purpose. Essentially, we're asking the blockchain to perform a role for which it was never designed.

"our investigations quickly revealed the weaknesses in existing sytems"

Clarency's payment platform was built upwards from compliance. We identified from the start that an immutable source of truth was core to auditability, suggesting from the start that we should investigate blockchain technology. And our investigations quickly revealed the weaknesses in existing sytems.

A long search brought us to the guys at InterlockLedger. They showed us a working solution that needed just two nodes, yet provided stronger security than any other blockchain we'd investigated. It removed the need for external networks, and with it the requirement for a reward system. It gave us the low running cost and environmental we were looking for, and could even operate offline. The even better news was the enthusiasm and creativity they brought to the party. This is what gave us the key to an operable shared ledger.

the immutable core

To be honest, the concept of shared data wasn't a front-of-mind element of our initial development. We were more focused on capturing full onboarding and transactional data, and storing it securely in an evidential audit trail that could prove every action and decision, from first contact to all of the ensuing transactions. Data loaded into the IL2 blockchain can never be changed - even by the system's creators. Updated information can be added - for example when a passport is renewed - but the the initial data remains available for inspection. Because the IL2 blockchain could handle multi-document blocks of any size, we were able to store digital copies of every document. This information could be retrieved by any authorised party, providing a hyper-detailed and unquestionably accurate audit trail. Our technology teams worked closely together on a bespoke implementation of the IL2 platform, and on-chain storage of all customer and transaction data went live in 2021.

sharing the ledger

Having established a stable, dependable and flexible blockchain storage solution, the next logical step was to consider how the information could be shared. Our aim was to create a method whereby all of the parties to a payment could examine the full underlying information stack, including being able to view the documents themselves, from individual passports to invoices and bills of lading. It's an easy aim to state, but it contains an inherent contradiction. Individuals have a legal right to privacy; companies, while not generally covered by privacy laws, nevertheless have a moral right to commercial confidence.

"Individuals have a legal right to privacy; companies, while not generally covered by privacy laws, nevertheless have a moral right to commercial confidence"

We've called this dichotomy PvT, for privacy versus transparency, and it's an issue that has demanded considerable thought and ingenuity. The solution, worked out in collaboration with our ever-responsive partners, is the eKeyID. It's a short code that can be embedded in SWIFT MT messaging, communicated through card scheme and other payment systems, or even shared by email or WhatsApp. Banks, NBFIs and other ISO20022 users can access structured data and drill through to verified AML/KYC data. A unique DataVault, again developed alongside InterlockLedger, ensures that security and privacy requirements are met, while allowing full transparency of information across the transaction chain from originator to beneficiary.

We strongly echo SWIFT's view that collaboration is key to reaching a much-needed balance of privacy versus transparency. The Clarency shared ledger is operational now and in active use. We’re eager to discuss potential partnerships with parallel organisations among fintech, banking and standards institutions.