On Monday, the groups of the Innovation Board of the Central Bank will present cutting-edge projects to continue innovations in financial matters
21.11.2019 • 14:44hs • Financial revolution
Financial revolution
What comes in innovation: blockchain banking clearing, cloud data and CVU for everyone
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When making balances, the members of the Financial Innovation Board created by the Central Bank close a year more than positive. Not only because in 2019 the agency formalized this area of debate between banks, fintech and regulators, but also because progress was made on a series of proposals that promise to revolutionize the financial system:
- The use of blockchain technology to make compensation between banks
- The massification of the use of the Uniform Virtual Key (CVU)
- A plan for all entities to save their data in the cloud
- The strengthening of the bank correspondent figure among other points, they are part of the long list of projects addressed by the working groups.
"In the first meeting several challenges were raised, they were analyzed and in the second meeting we started with a specific one that we have developed throughout the year," says one of the members of the Blockchain Solutions (SB) work group, thematic that was added to the three groups created: Means and Payment Infrastructures (MIP); Transversal Technologies and Systems (TST); and Alternative Credit and Savings Channels (CAL).
The proposal
The challenge finally faced by the "Blockchain Group" and which was endorsed by the members of the BCRA was the operation of a compensation system between banks with this technology. In their final work, which was accessed exclusively by iProUP, they list a series of objectives and benefits of this initiative:
- Improve the processing of back-office payments and reconciliation within and between financial institutions
- Reduce the likelihood of errors and costly disputes between participating entities
- Improve the treatment of false positives linked to the detection of sanctions
- Provide a clear and consistent audit trail for the financial sector
- Provide a continuous system of transparency and monitoring for central banks and regulators
- To achieve a continuous preservation of the privacy of information between the different entities
- Advance automation through the use of smart contracts
But what is bank compensation? This process covers all the operations of the financial system, such as transfers, deposits or withdrawals, both those of the banks with their clients and those that the entities do with each other. Today, they are channeled through Interbanking or Coelsa, whose main shareholders are the largest banks in the system.
"One of the issues that led us to face the challenge was that Brazil has been advancing with this idea and we saw that it is something that can have an impact at the Mercosur level, since clearing occurs not only within a nation but between different countries ", explains one of the people involved.
With this premise, in April the group made up of more than 30 bank professionals, fintech, service firms, consultants, interbank compensation companies and BCRA officials faced this challenge, which in May was approved by the Financial Innovation Board and that It concluded in mid-September.
As detailed in the document, the work covered different stages:
- Identify all the actors involved in the interbank compensation process
- Define the participation of each of them in the MEP system (Electronic Payment Method)
- Evaluate advantages and disadvantages of blockchain technology for these issues
- Identify similar experiences in other countries
- Analyze the practical feasibility of carrying out the proposals made
- Verify the need for regulatory changes for the application of this technology
The first meeting was held in the Red Link building and then rotated through the headquarters of some banks and companies, something that the members of the group defined in the days before each meeting.
In one of those meetings, the representatives of JP Morgan spoke about a project that they have in the United States and already operates with more than 365 banks in the world, among which are Galicia and Industrial.
This is the Interbank Information Network (IIN), which was launched in pilot mode in 2017 being the first peer-to-peer (peer) scalable network of the company driven by blockchain technology.
"From minimizing friction in the cross-border payment process to allowing those payments to reach beneficiaries faster and in fewer steps, IIN serves to address the long-standing challenges of interbank information exchange," the US bank details.
The project, which was developed with Quorum, an authorized variant of the Ethereum blockchain (Ether digital currency platform), allows member banks to exchange information in real time as a way to verify that a payment has been approved.
The impact
When analyzing the local impact, the Blockchain work group carried out a detailed study of the MEP system, where transfers between banks and the BCRA are carried out, with their pros and cons. In addition, it prepared a list of contingency plans established by the BCRA regarding the improper functioning of components.
"The MEP works in a robust and reliable way. But, within the framework of the strong technological advances - among them blockchain - its current functioning could be improved, this being precisely the challenge that the Group took," highlights the paper. He also listed the advantages of the implementation in Blockchain of compensation between entities:
- "Tokenize" the guarantees that banks have in each of the chambers: it would imply issuing a token - digital asset - fungible for each peso that appears in the custody accounts, with banks being able to move those funds more easily and lead to a reduction in the capital that each one must keep fixed as guarantees.
- Maintain a consolidated balance register: each of the chambers would keep updated the position of each bank with said chamber
- Contribute to making the MEP a more efficient system, based on the use of Distributed Registration Technology (DLT)
The experience and knowledge that processing cameras have today to make payments is not something that this technology comes to replace. Quite the contrary, they are the pillar and the backend of the system, as detailed by the Blockchain Solutions working group.
After listing these advantages and making a series of recommendations to the Innovation Board, the group remarks: "Once this technology has been implemented for these purposes, it could be quickly scalable and implemented in other operations within the Argentine financial system."
In addition, its members are convinced that the proposal "will achieve a more efficient, transparent and inclusive means of payment system." On the other hand, the Transversal Technologies and Systems (TST) group analyzed the possibility that the financial system can support cloud services. In that sense, he argues that there is no regulatory impediment.
"Banks have to make a protocol to work in the cloud, which has its pros and cons, although it is allowed in both local and international regulations," explains one of the members.
One of the requirements that the group will recommend to the BCRA is that the financial entity or fintech grant permits to an inspector to know the location of the information. "Even if it is on a server in Gibraltar, the US or Brazil, the Central Bank has to access as a comptroller's body to see where the data is hosted," says the source.
In addition, it highlights that the use in the cloud of "the hard data of its customers with confidential information of its operations" should be analyzed, since "it is a risk and standards and norms must be met".
More projects
The Media and Payment Infrastructure (MIP) group dedicated itself to exploring the world of the Uniform Virtual Key (CVU) and inquiring about its potential. The proposal that will raise aims to increase its use and take it to new land.
So ambitious is the initiative that defined it "The CVU of things" - paraphrasing "the Internet of Things" - and imagine taking the CVU to areas as far away as the payment of parking meters or including the key in the chip of the cars.
Meanwhile, the group of Alternative Credit and Savings Channels (CAL) worked on bank correspondents and the possibility of adding functionalities. This figure aims to expand banking, so that entities can offer services in other businesses, such as pharmacies or supermarkets, without the need to install a branch.
The document includes cases such as Colombia or Mexico, where the number of correspondents exceeds more than eight times that of the banking subsidiaries. "The idea is that they can do everything that is done in the banks. Today they are limited to giving loans, obtaining payments, making fixed terms or opening accounts," says one of the group's executives.
Thus, all these proposals will be received this Monday at the BCRA Bosch Room by the authorities of the Financial Innovation Board at the close of 2019. Next year it will be the new BCRA executives who define the priorities and from there on they will decide on What project to move forward.
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