The New Era of Payments

Stepping into the world of crypto from a traditional corporate and institutional (C&I) banking background was super exciting, with tons of new knowledge. At the same time, my background provided numerous opportunities to create, build, and standardize processes to improve operations. Unlike the traditional finance space, systems and procedures were already built decades ago to cater to traditional asset operations. In the article below, I will share some of the experiences I gained and discuss the advantages of decentralized finance payment methods compared to traditional finance, the difficulties we face in this space, and how Zerocap has overcome these problems.

TradFi vs DeFi, the major differences.

Traditional Finance (Fiat)	Decentralized Finance (Crypto)
Intermediaries	Peer-to-Peer
Standard Settlement Instructions (SSIs)	Wallet Addresses
SWIFT Messages	Smart Contracts, Distributed Ledger, Proof-of-Stake (PoS)
Business Days (Mon-Fri excluding holidays)	24/7
Strict Cut-off Times	Anytime

Intermediaries vs Peer-to-Peer

How to make payments “simpler and faster” has always been an ongoing conversation within the traditional finance space. The major limitation in traditional finance is that money (fiat) always needs to go through one or more intermediaries for a payment to reach its recipient. The most common intermediaries include banks, clearinghouses, brokers, payment service providers and many more, who are required to step in and facilitate the transfer for you. Furthermore, regulators will also need to provide oversight and regulate everything that is happening in the financial market.

The rise of blockchain technology and the P2P electronic cash system (Nakamoto 2008) completely removes the need for an intermediary and makes the process much simpler and faster in a secure manner, and at the same time, providing transparency to all transactions conducted on the network which are visible to anyone. Without the intervention of a third party, the DeFi technology allows us to send funds to another party within minutes regardless of both parties’ location. It can be as simple as scanning a QR code or inputting a one-line wallet address, entering the amount and hitting send. 

Some might still question that cryptocurrency is widely used for illicit activities given its easy access nature. However, a recent report from Chainalysis (2022) shows that transactions associated with illicit addresses dropped from 0.62% in 2020 to 0.15% in 2021 of the total transacted volume.

SSIs vs Wallet addresses

Standard Settlement Instructions (SSIs) are your bank account details that others use to pay you money. In the institutional world, SSIs can become much more complicated than your usual BSB and account numbers. Each currency will then have a set of its account details and possibly go through different banks before it reaches the recipient’s account.

Sample SSI document used in traditional finance

On the other hand, the DeFi world simplifies the destination you need to pay into a unique 26-35 characters long identifier (address) consisting of alphabetic and numeric characters. Each asset will have its unique wallet addresses unless the tokens run on the same chain/ network; they will be the same. The way wallet addresses are presented is much more user-friendly and convenient to use when performing a transaction by the general public.

SWIFT Messages vs Smart Contracts, Distributed Ledger, and Proof-of-Stake (PoS)

The Society for Worldwide Interbank Financial Telecommunications, also known as SWIFT, is the most common and secured method where banks communicate payment-related matters and are widely used for trade settlements. SWIFT messages range from categories MT0xx to MT9xx, with several hundred message types that can be used for different asset classes and purposes. They are complicated to handle and take a long time to understand all the Fields required and how everything works fully. On top of that, whoever manages SWIFTs will need to know all the unique requirements for sending certain currencies before the payment is released. Otherwise, the payment will fail and bounce back, causing delays or funding issues.

Conversely, P2P electronic cash system simplifies how a transaction is executed through utilising smart contracts, distributed ledgers and proof-of-stake (PoS) to process, verify and record a transaction on the network. A smart contract is a series of conditions and instructions written in the form of programming codes that have the ability to execute themselves once the predetermined conditions have been met and verified (IBM 2022). Via proof-of-work, a transaction is verified (achieving consensus) and hashed into a blockchain forming a ledger that cannot be amended without going through the whole process again (Frankenfield 2021). However, the PoW consensus mechanism involves high equipment and energy costs, thus PoS has been developed as an alternative to PoW. PoS is much more energy-efficient, secured with fewer attacks due to the compensation structure, and coin owners that offer their coins as collateral (staking) become the validators/ creators of the block replacing miners in the old mechanism (Conway 2022). Once consensus is achieved, this record (distributed ledger) is broadcasted over the entire network providing visibility and transparency to everyone, keeping track of when and where the asset is being transacted from and to. With that being said, these all happen within minutes on the backend via the network, and all that the user sees is the transaction being confirmed for a few minutes; wait while that is being completed. The recipient will see the assets in their wallet immediately.

Business Days (Mon-Fri excluding holidays) vs 24/7

As we all know, banks only operate on business days (Mon-Fri) and close on public holidays. This causes significant issues if a payment/ settlement is missed or failed; it cannot be processed until the next business day, varying from T+1 to T+5 during holiday seasons. It also means that once dealers or traders book a trade, they will need to know how they have structured the product. If any settlement begins to land on a non-business day, the transaction will need to be amended accordingly to accommodate that. Whereas with digital assets, the market operates 24/7 non-stop and can be traded and settled any day within the year. At Zerocap, we have the capacity and ability to deal and settle trades according to clients’ needs and objectives at any given time.

Strict Cut-off Times vs Anytime

Different currencies will have their specific cut-off times within the bank depending on the nature of the currency, the payment format, and the particular relationship the bank has with the counterparty bank (lots to take into account, I know!). Cut-off time for a currency is when the banks stop processing payments in that currency for that day (known as the value date). However, given the nature of crypto and Zerocap’s in-house technology, systems, and processes, we can help facilitate transactions and settle digital assets within a matter of a couple of minutes, providing a frictionless and borderless service for our clients.

Obstacles vs Solutions

Below are the major issues that exist within the DeFi space:

1. Hacks, cyberattacks and scams
2. KYC, AML, CTF, and upcoming regulations
3. Human errors/ losing assets for good

At Zerocap, we have overcome these obstacles and provide our clients with institutionalised digital asset services. By utilising an Institutional grade digital asset custody platform and a world-class insurance policy, we assure our institutional clients that their investment assets are in safe hands. They are protected and covered by an insurance policy in any unfortunate situations. We also have an entire team of KYC professionals ensuring that we comply with all current rules and regulations in the industry, plus thinking a step ahead and preparing for any upcoming regulations to ensure we have audit trails for all the trades and actions we perform. Lastly, to minimise human errors, we have developed various approval policies and standardised workflow procedures to ensure faults will get picked up, preventing any loss of client assets when handling them.

Conclusion

In conclusion, from an institutional settlement’s perspective, the technology utilised in the DeFi space solves many of the problems people face within the TradFi world and provides much simpler and faster solutions to payments. Given that there is no central point of control and the whole technology being built on the network, it is technically impossible for this to fail without shutting down the entire internet network. I look forward to helping Zerocap build, refine, and automate trade operation functions and processes to ensure we provide a zero-friction settlement experience for our clients while complying with any regulatory requirements.

References

Chainalysis 2022, The 2022 Crypto Crime Report, Chainalysis, February 2022,

<https://go.chainalysis.com/rs/503-FAP-074/images/Crypto-Crime-Report-2022.pdf>.

Conway, L 2022, Proof-of-Work vs. Proof-of-Stake: Which Is Better?, Blockworks, 18 February 2022, <https://blockworks.co/proof-of-work-vs-proof-of-stake-whats-the-difference/>

IBM 2022, What are smart contracts on blockchain?, IBM, retrieved 25 April 2022, <https://www.ibm.com/topics/smart-contracts>.

Frankenfield, J 2021, Proof-of-Stake (PoS), Investopedia, 17 December 2021,

<https://www.investopedia.com/terms/p/proof-stake-pos.asp>.

Frankenfield, J 2021, Proof of Work (PoW), Investopedia, 22 July 2021, <https://www.investopedia.com/terms/p/proof-work.asp>.

Kehrli, J 2019, Dissecting SWIFT Message Types involved in payments, niceideas.ch, retrieved 24 April 2022, <https://www.niceideas.ch/roller2/badtrash/entry/dissecting-swift-message-types-involved>.

Nakamoto, S 2008, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin, pp. 1-9, retrieved 24 April 2022, <https://bitcoin.org/bitcoin.pdf>.

Rosic, A 2020, What is An Ethereum Token: The Ultimate Beginner’s Guide, Blockgeeks, retrieved 24 April 2022, <https://blockgeeks.com/guides/ethereum-token/>.