What are cross-border payments and how do they work?

What are cross-border blockchain payments?

Cross-border payments are essential for individuals, businesses, traders, institutions and other international organisations. The use of blockchain in cross-border payments makes the process easier and seamless.

With the rise of blockchain technology and decentralized finance (DeFi), there is now a growing need for cross-border payments in the Web3 ecosystem as more people and businesses look to trade digital assets.

Cross-border blockchain payments are transactions that take place between two parties in different countries and are facilitated using blockchain technology.

Traditionally, cross-border payments were facilitated by banks and financial institutions, often involved in a complex web of intermediaries, such as correspondent banks and clearing houses. This can result in high transaction fees, longer processing times and a lack of transparency in the payment process.

In contrast, blockchain-based cross-border payments aim to eliminate intermediaries, reduce costs and increase the speed and security of financial transactions.

Today, cross-border payments on blockchain enable faster payment solutions for business-to-business and person-to-person blockchain transactions, and are proving to be a game-changing financial move in international money transfers. This makes payments and settlements across national borders a prominent blockchain use case.

How do cross-border payments work using blockchain technology?

Cross-border payments using blockchain technology take advantage of the decentralized and secure nature of the blockchain to facilitate transactions between parties in different countries and using different currencies.

The advantages of blockchain-based cross-border payments over conventional transnational payments and settlements are driven by the new architecture of blockchain and ledger-based technologies.

Traditional international wire transfers between a sender and receiver are connected by an interwoven banking network, including but not limited to commercial banks, clearing houses, credit unions and other financial institutions, thus complicating and slowing down the process.

They can look as complicated or more, as shown in the image below.

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a messaging network used by traditional banks and financial institutions worldwide to exchange information about financial transactions securely and quickly. But SWIFT also faces its own challenges with high costs, limited transparency, limited access and centralized control.

On the other hand, smart contracts automatically enforce cross-border payment transactions in the blockchain according to predefined rules. This removal of intermediaries results in instant transactions with full transparency.

Related: CBDCs Could Enable Smooth Cross-Border Payments, Bank of Israel Official Says

What are the benefits of blockchain-enabled cross-border payments?

Cross-border payments using blockchain technology offer several benefits, including faster settlement times, access to newer markets, lower costs, increased security and greater transparency compared to traditional payment methods.

Cross-border payments offer several advantages over traditional international bank transfers:

• Near real-time processing: Today, cross-border blockchain transactions have four to six seconds of the average speed of money on a 24/7 basis and without intermediaries.
• Low costs: Removal of intermediaries and better scaling solutions have made it possible to drastically reduce transaction costs on blockchain transfers. However, gas taxes vary according to demand and supply and market dynamics.
• Automated record-keeping: The immutable blockchain ledger technology enables transparency and verifiable records as all payment transactions and relevant data are automatically time-stamped and recorded.
• Secure: Public-private cryptography, data hashing, multi-party authorization and fraud detection provide security in cross-border transactions.

These benefits not only help multinational companies, but also small businesses and individuals involved in global payments. Let’s say Alice, a small fashion shop owner in Sri Lanka, wants to send money to her trading partner Bob, who lives in Canada.

Traditionally, Alice would have to go through a bank or other financial institution to complete this transaction, which could involve high fees and long processing times. However, if Alice and Bob both have cryptocurrency wallets, they can use a blockchain-based payment system to transfer funds directly between each other.

This cross-border payment using blockchain can be completed in minutes, instead of days or weeks like traditional bank transfers. In addition, the transaction cost for Alice is likely to be much lower than what a bank would charge. However, given the volatility of the crypto market, exchange prices, liquidity and gas fees can skyrocket.

What are the types of cross-border blockchain payments?

Different categories of cross-border payments are facilitated through stablecoins and cryptocurrencies, as well as via blockchain-based payment rails for business-to-business and person-to-person transactions across international borders.

Business-to-business cross-border blockchain payments are transactions that occur between two businesses in different countries using blockchain technology. These transactions may include payments for goods, services or other financial transactions and are usually carried out using cryptocurrencies or stablecoins or fiat on-ramp solutions.

Specialized networks, such as Ripple and Stellar, provide services for frictionless high-value institutional settlements with the advantages of speed, automation, secure transactions and access to new markets.

Person-to-person cross-border blockchain payments, on the other hand, are transactions that occur between individuals in different countries using blockchain technology. These transactions may include sending money to friends or family members, paying for goods or services, or other financial transactions.

Centralized and decentralized cryptocurrency exchanges (CEX and DEX) facilitate person-to-person transactions with entry and exit solutions. These enable limitless access to funding while offering the security and immutability of blockchain technology.

Companies and individuals are increasingly turning to various alternatives within blockchain technology as a way of streamlining their payment processes across national borders.

What is the use of cross-border payments?

Ripple has become a significant player in blockchain-enabled global payments, while JPMorgan’s Onyx offers exciting solutions to facilitate cross-border transactions through innovative digital asset payments.

Using distributed ledger technology, Ripple enables financial institutions to send and receive money in different currencies within seconds, rather than the days or weeks that traditional international payments can take.

XRP, the original currency of Ripple, is the bridge asset to facilitate international financial transactions between different currencies. This means that the funds are converted to XRP and then back to the destination currency, allowing for near-instant settlement and reducing the need for middlemen and corresponding banking relationships.

Related: What is Ripple: Overview, History and XRP Cryptocurrency

Stellar is another open source decentralized blockchain network that enables the transfer of digital currencies. The Stellar network uses its own cryptocurrency, called Lumens (XLM), as a bridge currency to facilitate cross-border transactions. This eliminates the need for intermediaries, such as banks or centralized stock exchanges.

Launched by JPMorgan in October 2020, Onyx also leverages blockchain technology to improve wholesale payment transactions while offering the efficiency, speed and security of JPMorgan’s financial services. It is working to develop its offerings – Liink and Onyx Digital Assets – as innovative blockchain-based offerings for processing cross-border payments.

Are cross-border payments safe?

Cross-border blockchain payments are built on the principles of cryptography, ledger technology and decentralization, which provide a high level of security.

The use of distributed ledgers to record transactions means that every participant in the network has a copy of the ledger, and each transaction is verified by a consensus mechanism before being added to the ledger. This makes it very difficult for a single party to tamper with the data or change the transaction records.

In addition to these technology principles, most blockchain-based payment systems also use encryption to protect user data and private keys, which are necessary to access and transfer funds. This adds an extra layer of security, making it more difficult for hackers or other malicious actors to gain access to sensitive information.

However, like any payment system, blockchain-based payment systems are not immune to all risks, and users should take appropriate measures to protect their assets, such as using strong passwords, two-factor and multi-sig authentication, and storing their private keys in a secure location.