Using distributed ledger technology (DLT) to lower the cost of cross-border payments requires regulators to stop looking at individual companies like banks and instead focus on the entire decentralized network, according to a working paper from the Bank for International Settlements (BIS) in Basel.
International standard-setters hope to streamline the current cumbersome and expensive systems for cross-border remittances - but to unlock the potential of blockchain-like technology, they may first have to turn away from rules that traditionally assume a single central player calls the shots.
"Improving cross-border payments is a multi-faceted problem that requires a comprehensive approach, and DLT could be one way to address these inefficiencies," says the working paper, written by a team led by Dirk Zetzsche, a professor at the University of Luxembourg.
That's the crux of why regulators and the crypto world are often in such conflict. Traditional financial regulations focus on institutions like banks, and it's not easy to integrate blockchain payments or smart contracts into that model. In practice, regulators tend to look for intermediaries on which to impose obligations such as money laundering controls, such as crypto exchange providers or wallet services.
That could change, Zetzsche said, by shifting the rules to a mindset where the distributed system as a whole, rather than individual nodes, is regulated by default.
Advantages of blockchain
Existing cross-border payments, which often depend on banks entering into correspondent partnerships with foreign counterparts, allow them to charge "oligopolistic rents" that enable them to drive up prices for ordinary users, the paper said.
However, DLT could be used to create competition among payment service providers by allowing people to easily choose the best deal in the market, the paper says. Another benefit cited by the study is easier identification of customers, which means more people can enter the financial system without increasing the risk of money laundering.
Regulators should focus on the ledger when it comes to how the system makes decisions and manages risk, and in all other cases where it would improve efficiency because of the DLT's transparency or security, the authors argue - with developers specifying the exact details upfront in an operational plan that regulators must approve.
DLT is not the only way to reduce the cost of cross-border remittances. Another recent BIS paper examined the impact of more prosaic changes, such as central banks staying online at night and on weekends.
But international payments - making it easy to transfer wages to developing countries, for example - were one of the main motivations for stablecoin projects like the now-defunct Libra, which was then renamed Diem. Global regulators may be starting to get the message.