Payments
Right: Jan Lebbe, change manager, financial markets group treasury at ING.
Left: Samantha Emery, payments industry and development director at Lloyds Banking Group.
same bandwidth, time zones – or, indeed, to the same standards. To get around this problem, Ram says that Fnality will allow banks to “interact with a single pool of liquidity, instead of parking capital across fragmented nostros, correspondents and the like.” That effectively enables ‘Payment versus Payment’ (PvP) and ‘Delivery versus Payment’ (DvP) transactions to be settled by participating banks on a near-instant basis. For Jan Lebbe, ING’s change manager, financial markets group treasury, this aspect of the Fnality project exposes payments to significantly less risk. “For the settlement of currency transactions (PvP) or the settlement of security transactions (DvP) between banks, you have two legs of the same transaction that settle independently of each other,” Lebbe explains. “This creates settlement risk if one leg would settle without the other and has in the past led to severe liquidity effects in the market when one of these settling banks went bankrupt overnight.” Lebbe is not talking hypothetically, either. In 1974, the German Herstatt bank went bust in the middle of a currency exchange, causing chaos as individuals who had transferred deutschmarks to the bank in exchange for US dollars never received the agreed upon settlement. This subsequently became known as the ‘Herstatt risk’ – a cautionary banking tale that repeated itself at other finance houses in 1990, 1991 and 1995. “By linking both legs of the transaction to each other via smart contracts,” Lebbe stresses, “Fnality not only enables instant and atomic settlement but also the reduction of the various inefficiencies.”
A decentralised future? So how does the industry view the future of decentralised finance (DeFi) solutions like Fnality in a traditional finance (TradFi) world? Will Fnality’s payment scheme be the first step in mainstream banks embracing DeFi technologies more broadly? “Yes and no,” says Ram, striking a tone of caution.
“We expect mainstream banks to eventually adopt the operational techniques and technologies of DeFi, but we do not see a medium-term future where there
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are no institutions accountable for the various functions of settlement.” Emery agrees. “It’s clear that DeFi has challenged
TradFi...over the last few years,” she says, while noting that DeFi remains nascent in development and lacks a regulatory framework and protection for customers that is already pervasive in TradFi. That’s true from KYC rules to AML clauses. “It is for this reason that we have partnered with Fnality to enable us to merge these two concepts...within a fully regulated environment.”
Perhaps unsurprisingly, Lebbe strikes a similar tone, though he can definitely see DeFi’s promise in terms of customer satisfaction. “At ING the perfection of our customers’ experience is at the heart of what we do,” he says. With DeFi aiming to limit human intervention in transactions governed by smart contracts, ING sees this as a way of making banking services as smooth and automated as possible. “Where DeFi in its current form still leaves clients with various risks,” Lebbe argues, “we think banks can add the trust layer that clients need to truly unlock the value of this new set up, while maximising customer protection.” With all that in mind, however, Ram remains optimistic about Fnality’s role as a trailblazer in the financial space. “What is really needed is a foundational, regulated, technologically-sound ‘trust layer’ to safely drive this convergence and ensure that both sides fully realise their shared aims,” he says. “As a TradFi-backed consortium with both substantial DeFi pedigree and longstanding relationships with key central banks and regulators, we believe that Fnality can provide this.” By lighting the path for others to follow – or even by taking it upon itself to work with banks and governments to determine the best way forward – Fnality’s payments system may just be the first step towards a brave new world. If mainstream banks embrace crypto and DLT technologies similar to Fnality’s offering, blockchain could finally shake off the last vestiges of suspicion that have hounded it since Nakamoto first introduced the world to Bitcoin all those years ago. ●
$1trn
The total value of the cryptocurrency market in 2021.
Reuters $250trn
The projected value for international transactions in 2027.
Bank of England 41
Lloyds Banking Group; ING
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