International network AML/CFT Institute 4th international scientific and practical conference "The Era of Crypto Economy: New ML/TF Challenges and RechTech Fintech Ecosystem and the Growing Competition in the Market for Cross-Border Interbank Payment Services I A. Kopytin Ph.D. senior researcher at the Energy Research Center, Primakov Institute of World Economy and International Relations Moscow 2018

The cross-border interbank payment services market – changing times Swift – a recognized leader in the market for cross-border interbank payment services since the 1970s After the 2008 financial and economic crisis, there was a demand for a new type of inter-bank cross-border payment services: Fintech platform Ripple Blockchain World Wire (BWW) IBM Interbank Information Network (IIN) J.P. Morgan Chase & Co Swift transformation

Swift – a recognized leader in the market for cross-border interbank payment services Founded in 1973 by banks as a standardized system for sending and receiving cross-border financial messages Headquartered in Brussels, Belgium Status - a cooperative managed by thousands of member banks Handles about half of global cross-border payments Brings together 11,000 banks and financial institutions Operates in more than 200 countries

Ripple - a new, technology-based approach to interbank cross-border payments Founded in 2005 Headquartered in the U.S. Status – a private fintech company (centralized) Co-investors – major market players: Google, Goldman Sachs, Standard Chartered Plc, Banco Santander SA, etc. Ripple cryptocurrency, XRP, was launched in 2012 The pilot version is used by over 100 banks: Santander, Bank of America, Axis Bank, Standard Chartered, etc. Ripple strengths Transactions between any currencies and assets Fast transfer times Unlimited scalability Ripple is not a “disruptive technology”; it aims to improve existing payment technologies by speeding up exchange transactions and facilitating trade in low-liquid assets.

IBM is another challenger to Swift Blockchain World Wire (BWW) is a direct competitor of Swift and Ripple BWW currently operates in a pilot mode Ideologically, IBM offers a new, simple way to move money: two financial institutions connect their payment systems to BWW via API the sender of money selects the currency in which the amount to be sent is denominated, the currency in which the payment is to be credited to the recipient’s account, and the digital asset that will serve as a bridge between the two currencies the sender presses the key (validates the action) and the system converts the amount in the payment currency into a digital asset, and then the digital asset into the settlement currency The whole process takes seconds to complete and is recorded in the registry for clearing purposes Competitive advantages: The BWW algorithm can be embedded into other IBM products, facilitating and accelerating its propagation across the extensive business communication network The use of Stellar as a bridge currency, which, although more volatile, cannot in principle even be considered as a security, unlike XRP, which addresses the issue of regulation

Interbank Information Network (IIN) J.P. Morgan Chase & Co is another company to compete in the market for cross-border interbank payment services J.P. Morgan Chase & Co Interbank Information Network (IIN) J.P. Hosted on Quorum blockchain Piloted in October 2017 Launched in September 2018 Connects, so far, 75 banks, including Santander, Societe Generale, Royal Bank of Canada and ANZ. Competitive advantages: Significant time savings in performing compliance checks. Compliance procedures currently delay payments for up to two weeks. The proposed technology of interbank information network allows compliance procedures to be completed within minutes

Swift's response to potential competitors 2015 - Swift joined Linux Foundation (a non-profit organization) distributed ledger initiative, Hyperledger 2017 - Swift launched a proof of concept (PoC) to explore whether distributed ledgers may be able to help banks reconcile nostro accounts more efficiently and in real time, lowering costs and operational risks. In this work, the company relies on open-source Hyperledger technology. 2017 - Swift launched the Global Payments Innovation (GPI), a cloud-base technology that allows bank corporate customers to make payments in under two hours as well as to track the movement of the funds within the system, similarly to FedEx packages (Swift expects GPI to handle 85% of all transactions by 2020) 2018 - Swift, in partnership with 28 banks, piloted the use of distributed blockchain technology for interbank payments. The testing involved the creation of 528 sub-ledgers to avoid confidential information being revealed to rivals. It is estimated that all of Swift members would need to build 100,000 sub-ledgers to carry out transactions. As a result, it was concluded that in the future, the obstacles to using the blockchain system for cross-border interbank payments will be overcome, but at the current stage, blockchain is not ready for wide-scale adoption.

Conclusions SWIFT, for now, retains its status as the global leader. The competition in the market for cross-border interbank payment services has only begun. Importantly, with the race to develop the final solution still on, the testing of new technologies continues. It is highly likely that many market agents work in private to keep the details of their work secret. Ripple, BWW, and J.P.Morgan Chase & Co offer radically new business solutions to making payments: Swift solution involves charging a fee for intermediary services related to the transfer of funds and payment documents. Swift competitors offer to pay their customers for using an infinitely scalable computer program. The growing competition is good news for the real sector and private individuals. Whoever wins out, cross-border payments are set to become faster and cheaper.

Ripple specifics A fully centralized private system controlled by Ripple, a company The system consists of two parallel elements: RippleNet and XRP cryptocurrency RippleNet (a non-blockchain based network that uses Interledger protocol. It functions as an online payment system that integrates with other payment systems. Within Ripple, gateways act as banks that operate within a single network, with Ripple playing the role of a central bank. There are few independent gateways (servers) in the system, most of them are controlled by the company itself. Transactions and settlements in the system are made using the Ripple protocol consensus algorithm (PPCA) XRP (a blockchain protocol for consensus voting of validated nodes, that is, pre-selected by Ripple. Consensus is achieved when the transaction is confirmed by 80% of validated nodes. These nodes, which are predominantly operated by banks, market makers and Ripple itself, support real time gross settlement system (RTGS). It is not mined. 100% of XRP (100 billion units) were issued prior to the launch The cryptocurrency is deflationary by nature – 0.00001 XRP is burnt with each subsequent transaction XRP cryptocurrency is not the only settlement tool in the Ripple cryptosystem, the company works both with other cryptocurrencies and fiat money

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