For all the innovation that domestic payments infrastructure has witnessed in recent years, cross-border transactions largely remain, in a word, inefficient.
The correspondent banking system remains an opaque and sluggish method of moving money across borders, and alternatives to this strategy have historically been unsuccessful in gaining the critical mass necessary to displace correspondent banking as the standard of international money movement – particularly for large-value commercial transactions.
It’s unlikely that a silver bullet – a single solution to solve all friction points – will emerge in the payments ecosystem. But in order to achieve critical mass of any new tool, as many industry stakeholders as possible must get on board.
That realization is at the crux of many of the latest efforts from J.P. Morgan and its partners to disrupt cross-border payments – including the creation of its Liink network and JPM Coin within its Onyx unit, as well as Partior, a new entity created in collaboration with DBS and Temasek, and the result of the institution’s collaboration with the Monetary Authority of Singapore on so-called Project Ubin.
These initiatives are years in the making, Naveen Mallela, global head of coin systems at Onyx, recently told Karen Webster, and largely orbit around a central theme: uniting participants of the global financial services industry through open infrastructure and data sharing for a unified approach to cross-border payments friction.
According to Mallela, financial institutions (FIs) have raised awareness of the need for industry collaboration to tackle the cross-border headache.
“My conversations with most of the banks have [concluded] that the industry needs shared platforms,” he said, adding that “it’s not about bank-specific products, it’s not about bank-specific platforms. It’s about shared, industry-wide platforms, and decentralized networks.”
To this end, past efforts have struggled to achieve this kind of bank- or corridor-specific approach to tackling friction. CLS, for example, is a market infrastructure to facilitate the settlement of foreign currencies. But as Mallela pointed out, it only supports 18 currencies to date, thus unable to address the settlement risk of emerging currencies that are gaining a greater share of global transaction volume. There are also plenty of advancements in domestic real-time payments infrastructure, but the challenge then becomes how to connect those networks.
Innovators like Onyx are not the first to take an industry-wide approach to solving cross-border payments challenges. The Bank for International Settlements (BIS) takes a corridor approach, which promotes international cooperation across the 63 central banks that own the entity.
Mallela highlighted a recent BIS paper, which explored the opportunity for mCBDC (multi-central bank digital currency) networks to support real-time cross-border transactions via shared ledgers.
While the world’s financial services ecosystem will not instantaneously agree to land on a single network or shared infrastructure, there are strategies that can support a gradual pursuit of that goal.
Mallela said that the genesis for JPM Coin stemmed from the mCBDC network approach to cross-border payments – although with a focus on corporate transactions rather than retail, upon which CBDC innovations have largely focused, and a focus on digitizing commercial bank money (M1), though not yet digitizing central bank reserves (M0).
Other Onyx initiatives, as well as efforts from Partior, will also continue its focus on using distributed ledger technology as a means of promoting an open approach to industry participation. J.P. Morgan, which stands as the No. 1 clearing bank of the U.S. dollar, will look to partner with top clearers of other currencies to drive adoption of Partior’s wholesale payment rails, or Onyx platforms and networks like Liink.
“This needs to be an open network,” said Mallela. “There are so many small, closed-loop networks that don’t really take off. It really has to be an open platform.”
The use cases for such infrastructure go beyond facilitating the movement of funds across borders. Mallela highlighted FX, FX-swaps and intra-day liquidity management as potential benefits of the infrastructure – and, with greater participation, other financial service providers can promote innovation and the emergence of other use cases. Likewise, JPM Coin’s focus as a shared ledger system isn’t only about real-time, cross-border corporate payments, but also about exploring the use case of programmable payments.
Of course, such an ecosystem cannot be self-governing, and Mallela said the need for a network operator remains an important one. A few banks, including J.P. Morgan and DBS, will stand in to play that role for now, he noted.
But as Onyx and other efforts to disrupt cross-border payments from J.P. Morgan and its partners continue, the demand for participation and collaboration from the private and public sector will intensify. Just how quickly these infrastructure projects can achieve critical mass through this collaboration remains a major unknown.
“It remains to be seen how quickly we’ll be able to scale,” said Mallela, adding that “we don’t intend to do this all by ourselves. As banks, we want to come together and create the rails, then open it up for innovation to happen.”