Blockchain and Banking: An Analysis of Cross-border Payments in Trade Finance
Blockchain has gained widespread attention around the globe and has been seen as potentially disrupting the traditional banking landscape，particularly trade finance. The innovative concept brings efficiency，decentralization，automation，and security. It has the capacity to ensure certainty in cross-border payments，enable transparency in the movement of trade assets，and facilitate the flow of trade receivables. This article aims to explore the feasibility of blockchain technologies in trade finance from the following aspects: first，comparing traditional cross-border payment forms with existing platforms by analyzing the pros and cons of traditional payment tools; second，conducting an in-depth analysis of blockchain technologies by the use of navigation of the core techniques of Ripple; third，contrasting the application of blockchain in the financial industry in China and the US，and lastly，analyzing recent developments of the application of blockchain in cross-border payments and offering some suggestions for further research.
According to a recent report by consultants McKinsey and Co.，cross-border payment flows totaled more than $150 trillion over the 2013 - 2017 period. Most of this was ultimately driven by consumers，even though it was directly generated by businesses. The payments industry recorded over $200 billion in revenue from services provided to payers and payees in 2017 alone. Currently，most cross-border payments are routed via the messaging protocol for the execution of transactions by SWIFT (the Society for Worldwide Interbank Financial Telecommunications). Despite the great benefits generated by SWIFT，which offers a standard messaging format and a relatively secure network，many banks and their customers alike still feel that it cannot meet increasing demands in terms of efficiency，cost and security.
As financial technologies make rapid advances，FinTech companies are emerging and employing the latest distributed ledger technologies (blockchain) as well as cryptocurrencies. The term “blockchain” originally referred to the distributed ledger technology underlying the digital currency，bitcoin. Blockchain consists of a ledger shared across every computer in a given network. When one party seeks to transfer bitcoin to another party，the payer enters a security code and initiates the transaction. Then，the computers in the network use sophisticated algorithms to verify and clear the transaction. A record of the transaction is then “stored in a block which is linked to the preceding block,” thereby updating the blockchain.
The reason why blockchain can be applied to the banking industry，particularly cross-border settlement，is that it features massive capacity，better security，immutability，and faster settlement. Firstly，blockchain can increase the capacity of the network，through which large quantities of banking transactions can be processed within seconds. Blockchain tends to have better security because there is no single point of failure to shut down the network. However，even the highest levels of our existing financial system have been vulnerable to hacks. In July 2018，for example，a Russian bank was hacked and millions of US dollars were transferred as a result of suspected vulnerabilities of the SWIFT system. The most infamous incident involved the theft of millions of dollars from the Bangladesh central bank – also via the SWIFT network. Blockchain can create immutable ledgers，which can sharply reduce the potential for fraud. Lastly，traditional cross-border payment is comparatively slow，with settlement times often taking hours or even days. This is the main reason why most financial institutions are willing to upgrade their systems. Blockchain can reduce the time required for cross-border settlement to several seconds，greatly enhancing the efficiency of business transactions.
Technical Analysis - SWIFT and Ripple
As the heavyweight in cross-border payment，SWIFT has a strong advantage in the reach of its network. Employing its messaging platform，products and services，SWIFT can connect more than 11,000 banking and securities organizations，corporate customers and market infrastructure entities in more than 200 countries and territories.
The original services provided by SWIFT are composed of a messaging platform，message processed computer system，and precise messaging standards. However，for half a century the fundamental feature for SWIFT has remained unchanged，namely，the intermediary platform for international banks around the globe. Conventionally，the procedure of cross-border payment is demonstrated as follows: SWIFT plays the role of message transferring rather than effecting funds directly to system participants. Each banking institution，which needs to make cross-border payment，must be a SWIFT member. Members pay annual fees in order to support the building of correspondent banking relationships within the SWIFT network.
Nevertheless，with the advent of new technologies like big data and blockchain，SWIFT cannot meet the expectations from both individual enterprises and banking conglomerates in terms of efficiency and cost-effectiveness. And as stated earlier，SWIFT has had its problems with security breaches. In summary，SWIFT has been playing the role of an intermediary much like a clearing house. That is true today despite recent reports of developments in a “Global Payment Innovation,” which is said to improve the efficiency and transparency of cross-border payments.
What differs from conventional cross-border payments is the application of blockchain technology，which has transformed cross-border payment in a disruptive manner. As Don & Alex Tapscott，authors of The Blockchain Revolution (2016) have written，“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” What constitutes a blockchain is nothing but “nodes” connecting a network as a whole. As indicated below，distributed ledgers can be connected without the need of an intermediary. Business transactions can be processed through distributed ledgers，and this increases efficiency，reduces operating costs and makes transactions traceable.
Ripple Company，as the largest and most successful operating supplier of cross-border payments，has developed inter ledger protocol (ILP)，which resembles the internet http protocol.
ILP brings new efficiency by enabling real-time settlement，ensuring transaction certainty and removing settlement risk. Ripple’s software also includes data-rich messaging between all transacting parties – delivering a real-time payment experience to end users.
The blockchain technologies within Ripple and the recent developments in technologies within SWIFT can be compared in order to identify their strengths and weaknesses. Generally speaking，Ripple tops SWIFT in terms of efficiency，cost reduction，and security.
Analysis of Blockchain Technology
According to Wikipedia，“A block chain is a decentralized，distributed and public digital ledger that is used to record transactions across many computers，so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.” Moreover，“Ripple is a real-time gross settlement system，currency exchange and remittance network created by the Ripple Company. Also called the Ripple Transaction Protocol (RTXP) or Ripple protocol，it is built upon a distributed open source internet protocol，consensus ledger. ”
There has been criticism that Ripple is not truly decentralized because it maintains a trusted Unique Node List (UNL) and Ripple has centralized control over the nodes. But it is our understanding that Ripple still uses the basics of blockchain technology.
Although Ripple has its own cryptocurrency called XRP，it is totally independent of the Ripple network for the transfer of dollars，euros，or even frequent flyer miles. And there is huge enthusiasm for Ripple as opposed to Bitcoin. Banks are actually making use of Ripple technology – rather than the cryptocurrency – to make transactions.
Ripple maintains a trusted UNL (Unique Node List) that is meant to protect against potentially malicious or insecure validating servers. And this is what leads to criticism that Ripple is not really blockchain technology. Because they argue that Ripple has a list of trusted nodes，it can complete transactions within seconds，while bitcoin often requires 10 or more minutes. But Ripple uses another algorithm that allows the achievement of consensus on collectively trusted sub-networks within a larger network. This is just a novel algorithm that avoids failures and doesn’t mean Ripple is not blockchain.
Currently，there are 43 members of the Ripple network while some 100 banks work with Ripple on a consulting basis as compared to SWIFT's 11,000 financial institutions. It is belie