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- OMFIF presents a report on blockchain technology and the benefits of Ripple products as an alternative to SWIFT.
- The report indicates a reduction in correspondent banks around the world, which may be an opportunity for XRP and DLT.
A new report presents blockchain technology as a solution for several sectors. From governance, finance, data access, scalability, the report of the Official Forum of Monetary and Financial Institutions (OMFIF), a think tank focused on central banks, covers different types of blockchain: private, public and consortium. Ripple products are part of the solutions presented.
According to the report, blockchain technology is suitable for improving several key functions of the banking system such as payments, settlement and validation of transactions. The report points out that the DLT technology on which XRP operates, for example, can deliver improvements in 5 key areas: security, speed, transparency, traceability, cost and risk management.
Implementing an XRPL-based system could reduce the vulnerability of the traditional banking system and its single points of failure. The report gives the following example:
The centralized nature of existing financial systems makes them vulnerable to single points of failure. For example, a one-off attack on an intermediary responsible for payments, clearing, or settlement could suspend system-wide services, leading to widespread outages among payment services. By creating a distributed network, a DLT-based system could eliminate these single points.
Additionally, distributed ledger technology could improve the delivery and payment function required by some banking services. Therefore, XRP could be applied to eliminate an intermediary in a transaction and remove credit risk. This way, transactions recorded by a banking institution could be “cheaper,” according to the report.
XRP and its advantages for the traditional financial system
The report examines several banking institutions that agree on the disadvantages of the SWIFT network for carrying out transactions. These are expensive, have many obstacles, and involve many parts to complete. In addition, a banking institution representative interviewed said that the SWIFT network is not suitable for businesses:
(SWIFT) These are really just bank-to-bank messages, so again, this is insufficient. The reduction and consolidation of the number of correspondent banking channels has reinforced the higher costs associated with cross-border payments, as institutions seek to reduce their exposure to risk (…). Bypassing this costly system is widely seen as the main motivation for applying DLT to cross-border payments, as there are real efficiencies to be achieved.
Highlighting the benefits of Ripple products that use XRP, such as on-demand liquidity, the report notes that a bank can eliminate the complex process required by SWIFT and replace it with an XRP pool. This way a bank can allocate less liquidity as part of a service and still get the same volume of transactions in overall payments:
The bank only needs to hold its national currency and maintain an account with XRP, with only enough XRP to meet its largest expected payment obligation. The process minimizes the number of intermediaries and their mark-up on the spreads.