Chain CEO On Why B2B Payments Needs Blockchain

The blockchain has a bit of an identity crisis. Everyone who is anyone in financial services knows what it is, and there is broad consensus at this point that it will play a very important role in financial services.

Yet few can really articulate how it all works or what exactly it will do — and when.

Here’s a little proof.

According to WEX’s First Annual Payments Pulse Survey, 66 percent of the 500 CFOs interviewed say that they are quite certain that they understand blockchain; 50 percent think it is going to change the way they pay other businesses; 38 percent believe it will be the catalyst for massive innovation and only 6 have any real thoughts on how they might specifically use the blockchain. Not 6 percent — that would be 30 people with concrete ideas — we mean six CFOs in total.

And while it might be tempting to poke fun at those confident, if somewhat confused, CFOs, Adam Ludwin, co-founder & CEO at Chain, told Karen Webster that, actually, they are pretty much in the same boat as everyone else when it comes to the blockchain.

“No one knows how it works. They just don’t. And mostly because there is no ‘it,’” Ludwin said.

Ludwin told Karen Webster in a recent conversation that saying you understand the blockchain is like saying you understand the internet. A person could mean they understand how DNS works, they might be extolling their knowledge of servers, they might just be bragging at how good they are at using Google.

“And it’s worse than that with the blockchain because there are many blockchain protocols and standards and initiatives. Things that run the gamut from being more or less variations on existing database technologies to things that are really sci-fi and exciting but very different than anything that is out there right now,” he explained.

The crux of the problem, Ludwin said, is that the blockchain has been around for a while, and it’s a business faux pas to admit to not knowing what the blockchain is.

“So, everyone has to say that they get it, when, in reality, no one does.”

And that can make the blockchain a bit scary, particularly when combined with the fact that its most well-known and famous application is bitcoin — the international cybercriminals’ currency of choice. Given the lack of comprehension and its status as the unregulated cryptocurrency of the lawless, the blockchain has a significant barrier to overcome in the world of financial services, noted Karen Webster. It’s a seemingly scary way to send trillions of dollars zipping all over the world.

But one, Ludwin noted, that the world needs to get ready for nonetheless, because as a technology, it simply outpaces what exists today.

“I don’t want to sound like too much of a futurist, but I think it is inevitable at this point that cryptographic networks — blockchains, shared ledgers, whatever it may end up being called — in one form or another will become the basic underpinning of how the financial system works. I don’t know if anyone can predict the how or the timeline, but having spent years in the existing systems and building new ones, the contrast is so sharp when it comes to the security level and the speed that it has to happen.”

But, he noted, has to happen is a long timeline — and some other things have to happen first.

Back to the Basics

An oft-overlooked step, Ludwin said, in getting up-to-speed about what the power and potential of a blockchain world might be, is the part where one actually learns about the origins of the idea.

“The best one can do and should do is read and study … the original Satoshi bitcoin whitepaper and master that. If you really understand the mechanics and interlocking parts … then and only then should you start looking at other things: permissions, enterprise and smart contracts. If you want to learn calculous, you have to understand algebra first. If you want to understand master level blockchain, step one is basic bitcoin.”

Also important, he added, is resisting the tendency to attempt to boil the ocean in response to an emerging technology form. Throwing technology at the financial services world because one can doesn’t make sense — the history of financial innovation isn’t about finding solutions and reverse engineering a problem to solve. The problem, the friction and the pain point generally come first, and new tools like the blockchain enter the market not to replace systems that are working, but to fill in the spot where they aren’t.

In other words, don’t just show up to a bank and tell them that they need blockchain because it’s the blockchain.

The Move on a New Market

Banks, Ludwin said, are looking for better products to offer their clients when sending money from one business to another cross border. Corporate clients are frustrated with the costs, the (lack of) speed and (lack of) transparency associated with sending money internationally.

Banks, themselves, may also be a little skittish in the wake of the SWIFT/Bangladesh heist. Ludwin said that the correspondent banks have begun pulling back from correspondent banking because of the increasing regulatory burden of being an intermediary bank.

All that said, the commercial payment markets are a big opportunity worth solving for — a market worth roughly $200 billion a year in potential revenue, not to mention trillions of dollars in transaction volume. Historically, it has been a market that the card networks have avoided, Ludwin noted — not because they don’t like having more volume on their rails, but because the form factor of the card number and the underlying infrastructure and business model of the card networks weren’t easily compatible with the ways in which corporate payments are done.

And that’s where a different network architecture, the blockchain, on top of existing payments rails, could offer all parties the best of all worlds.

A Good Cooperator

What Ludwin says separates Chain from rival firms like Ripple is that Chain wants to build the network solutions with blockchain in cooperation with existing payments rails — rather than in competition with them.

“Our point of view is if you already have 17,000 banks in your network and you have global settlement infrastructure and a trusted platform that has the permissions and regulatory licensing, you need to be able to launch new products and services — and Chain has a good track record of helping institutions build those innovations.”

Ludwin said that his work with Visa is about leveraging its global settlement network and the software that allows banks to issue liabilities back and forth instantly — and to be cleared instantly — by the beneficiary bank taking the payment. Cryptocurrencies are checked at the door and are not needed, since local fiat currencies are the ones being cleared and settled.

Chain’s software product riding on Visa’s rails, Ludwin said, unlocks the power of the blockchain while leveraging the secure, private, regulated and permissioned networks that move clearly and settle trillions of dollars daily — and do it with speed at scale.

“This is a product that is sorely, sorely needed right now in the international payment landscape. Everyone knows the reality, which is that today there is really only one choice. And when you only have one choice, that is not the best outcome for the users of the ecosystem.”