J.P. Morgan has created what is arguably one of the largest blockchain payments networks to date.
The financial services company announced that the Royal Bank of Canada and Australia and New Zealand Banking Group Ltd. are the first two banks to join the blockchain network, "representing significant cross-border payment volumes."
J.P. Morgan created the Interbank Information Network (IIN), which it said will significantly reduce the number of participants needed to respond to compliance and other data-related inquiries that delay payments.
"IIN will enhance the client experience, decreasing the amount of time – from weeks to hours – and costs associated with resolving payment delays," said Emma Loftus, Head of Global Payments and FX, J.P. Morgan Treasury Services. "Blockchain capabilities have allowed us to rethink how critical information can be sourced and exchanged between global banks."
Other banks are expected to join the IIN in the coming months, J.P. Morgan said.
The IIN unveiling came after a Polynesian payments system provider and IBM unveiled their own cross-border blockchain payments service. That FinTech network was heralded as being able to improve efficiency and reduce the cost of making global payments for business and consumers.
IBM's Blockchain Platform, a cloud service, was used to enable the electronic exchange of 12 different currencies across Pacific Islands as well as Australia, New Zealand and the United Kingdom.
KlickEx Group, a United Nations-funded, Pacific-region financial services firm, and Stellar.org, a nonprofit organization that supports an open-source blockchain network for financial services, are backing the new cross-border payments service powered by IBM's platform.
Payments made and received through KlickEx transfer between bank accounts in the Pacific Islands and Australia, New Zealand and Europe; the service also allows consumers in developing nations to transfer funds directly to mobile wallets.
The Bank of England is also piloting blockchain technology to create a more efficient and less costly payments, clearing and settlement network.
Cross-border payments are complex due to regulatory standards
Emerging technologies such as blockchain, machine learning and robotics are being deployed by J.P. Morgan to improve platforms and develop innovative solutions.
In the case of cross-border payments, processing is complex and includes multiple layers of communication among payment participants to verify transactions – an operation known as payment and settlement.
Earlier this year, Accenture released a report claiming blockchain technology could reduce infrastructure costs for eight of the world's 10 largest investment banks by an average of 30%, "translating to $8 billion to $12 billion in annual cost savings for those banks."
Payments, clearance and settlement in the financial services industry – including stock markets – is rife with inefficiencies because each organization in the process maintains its own data and must communicate with the others through electronic messaging about where it is in the process. Because of that, settlements typically take two days. In turn, delays in settlements force banks to set aside money that could otherwise be invested.
Because it can instantly share data with each organization involved in a blockchain database or ledger, the technology reduces or eliminates the need for reconciliation, confirmation and trade break analysis as key parts of a more efficient and effective clearance and settlement process, according to Accenture.
"It's a very hot topic right now," Zulfikar Ramzan, CTO of RSA Security, said in an earlier interview with Computerworld. "We are definitely getting a lot of inbound inquiries around blockchain and its implication within enterprise environments."
Ramzan said his customers are asking about blockchain for audit logging and or verifiable logs, which is viewed as a reliable way of tracking what happened in an organization to satisfy regulatory auditors. Other RSA customers are interested in it for user authentication to ensure users are accessing the correct digital records at the right time.
By leveraging blockchain technology, the new IIN "will significantly reduce the number of participants currently needed to respond to compliance and other data-related inquiries that delay payments," J.P. Morgan said.
So what is blockchain?
Blockchain is a public electronic ledger – similar to a relational database – that can be openly shared among disparate users and that creates an unchangeable record of their transactions, each one time-stamped and linked to the previous one.
Each digital record or transaction in the thread is called a block (hence the name), and it allows either an open or controlled set of users to participate in the electronic ledger. Each block is linked to a specific participant.
While it natively provides a level of security because blocks cannot be changed, encryption is also added as an additional safeguard against intrusion.
Blockchain can only be updated by consensus between participants in the system, and when new data is entered, it can never be erased. The blockchain contains a true and verifiable record of each and every transaction ever made in the system.
As a peer-to-peer network, combined with a distributed time-stamping server, blockchain databases can be managed autonomously. There's no need for an administrator. In effect, the users are the administrator.
The new IIN was developed in-house by J.P. Morgan and is powered by Quorum, a permissioned-variant of the Ethereum blockchain. Quorum's focus on privacy enables secure data sharing via IIN, the bank said.
Alex Tapscott, the CEO and founder of Northwest Passage Ventures, a venture capital firm that invests in blockchain technology companies, said while no system is "unhackable," blockchain's simple topology is the most secure of any network today.
"In order to move anything of value over any kind of blockchain, the network [of nodes] must first agree that that transaction is valid, which means no single entity can go in and say one way or the other whether or not a transaction happened," Tapscott said. "To hack it you wouldn't just have to hack one system like in a bank..., you'd have to hack every single computer on that network, which is fighting against you doing that."