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Subscribe Now A persistent challenge for financial firms that want to do business on a blockchain is the disconnect between digital money and the traditional, fiat-based system. The rails are separate, and a way to bridge them seamlessly has yet to emerge.
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That was the issue facing HSBC executives when they realized clients wanted to experiment with using digital assets for payments but didn't want the complexity that comes with cryptocurrencies and digital wallets. One HSBC client, for example, created an in-house digital-payment system but had a long list of suppliers that weren't using blockchain, so it needed to link the two worlds without burdening its customers.
"Different blockchains don't talk to each other, and they certainly don't talk to fiat or the traditional banking system," Preeti Chaturvedi, global payments leader at HSBC, said in an interview. Chaturvedi is part of the team that created the bank's distributed ledger settlement utility, HDSU, that allows blockchain-based payments to be sent to anyone with a bank account.
"We absorb all the complexity of routing the payment with the best rail," she said. The client referenced above saw a 50 percent reduction in payment costs, up to 80 percent faster invoicing and faster deployment of capital after using HDSU during a 6-month trial, according to HSBC. The project, which operates with private permissioned blockchains, is live now, Chaturvedi said, and processes about $1 million in digital payments per month.
The global payments industry generates $2.5 trillion in revenue, McKinsey said in a report last year. Yet payments have largely not kept pace with other technological advances and can be slow, expensive and error-prone. Digital rails offer meaningful efficiencies and tend to be nearly instantaneous with a clear audit trail. Other attempts to link blockchain-based payments to the traditional financial system include Ripple, Kinexys by J.P. Morgan, and Project Agora, a consortium of central banks and Wall Street firms managed by the Bank for International Settlements.
Chaturvedi said HDSU differs from these projects because it addresses fragmentation across blockchains so that central-bank money settlement and regulated financial infrastructure are integrated and don't rely on external liquidity networks. So it's tapping into central bank settlement systems that have been used for decades with no intermediary cryptocurrency involved. Even though a blockchain is in use to initiate a payment, the settlement is in fiat such as U.S. dollars, Euros or Yen, for example.
"The bridge layer is about interoperability, the broader solution is about delivering scalable, bank-grade settlement across multiple rails," Chaturvedi said.
HSBC is aiming to scale the system for enterprise use to reduce cost and risk for industries with high payment demands.
"Some of our customers will be ready and using a blockchain, others won't," Tom Halpin, head of North America global payments solutions for HSBC, said in an interview. "But what they both have in common is they're looking for a partner like us to meet three or four critical business outcomes." HSBC operates in 65 countries around the world, he said. "A lot of banks can't do that last immediate rail."
