Srikrishnan

Sep

2023

Let’s talk mBridge!

To listen to this article, please click on the play button above.

Reading up on the previous article will give you a better context to understand this article.

The Innovation Hub of Bank for International Settlements did a pilot phase of Project mBridge in Oct 2022 with the central banks of Thailand, UAE, China & Hong Kong to settle real transactions (i.e real world business transactions and not merely a test). A platform based on a new blockchain – the mBridge Ledger – was built by central banks to support real-time, peer-to-peer, cross-border payments and foreign exchange transactions using Central Bank Digital Currencies (CBDCs).

Ok lets cut to the chase. How do we understand mBridge payment mechanism with an analogy?

Think of UPI.

For readers outside India who are unfamiliar with UPI, this is India’s Instantaneous payment mechanism. A super-fast, super-convenient immediate end-customer settlement mechanism that brings cash like finality. It is app based and works at a monstrous scale that processes 10 billion transactions a month.

In UPI, both the sender and receiver of the payment have an app. They both have a unique identifier called UPI ID that is linked to their bank accounts. When the sender wishes to send money to the receiver, he opens the app, inputs the receiver’s UPI ID, fills in the amount and authorises the payment with a password. Bingo, the amount is instantaneously credited to the receiver, who also gets a notification on her device. Payment is complete and is final.

In mBridge, a similar thing happens but between banks that participate in the mBridge network.

To participate in the mBridge system, each bank needs to have a digital version of their country’s money a.k.a CBDC.

How do they get that? By exchanging regular money (paper or bank account) with their central bank & getting digital money of the same value. Banks can do the opposite too, redeem their CBDC for regular money.

Then comes the most important transaction of cross border payment.

Say, when one of the corporates in Thailand wants to send 1 million THB to a supplier in UAE, they simply perform a single one way payment transaction to the bank of the supplier. Just like a UPI transaction.

If you observed carefully, there are three important differences in this transaction from the present-day cross border mechanism. (read about the present day cross border payment mechanism here)

(a) No NOSTRO account was involved.

(b) No SWIFT message was sent

The 1 million THB is now credited into the wallet of the UAE bank that received the payment for further credit to their end customer.

And all this happens in less than a minute as compared to about 2 days it takes in the correspondent banking system. Simply because there aren’t a chain of banks that need to be involved.

But behind the scenes there are a few additional steps that the central banks take to ensure risk management – just like in UPI. But at this introduction stage, lets keep it simple from an end customer point of view.

The mBridge set-up (see footnote 1) is such that the central banks have the ability to monitor in real-time, the transactions happening in its jurisdiction and in the currencies it has issued. It also has the ability to set, monitor and enforce transaction limits & balance limits – .i.e how much the banks can hold in their respective wallets. But once the payment is made, it is final. No one can reverse or cancel the transaction – just like UPI.

The third type of transaction mBridge allows is ingenuous and is a real game changer for banks. Say HSBC bank in HongKong performs an FX contract to buy 10 million RMB from Agricultural Bank of China (in China) by paying 10.7 million HKD. This is a transaction where one party has to pay another party RMB and receive HKD in return. In the present NOSTRO based correspondent banking system, because the HKD balances and RMB balances lie in two different banks in two different countries, each bank pays their obligation and hopes the other party also lives up to its end of the bargain. There is no way to ensure the other party pays up. Just in case the other bank doesn’t pay up (for various reasons), the one that paid up first, loses their money. This is well recognised in banking community as “Settlement Risk” [or Herstatt Risk after the infamous German bank that failed to pay up its obligations setting a series of heartaches across the world].

In one fell swoop, mBridge eliminates this risk. Using smart contracts, both legs of the transaction, i.e. HSBC HongKong paying 10.7 million HKD and Agricultural Bank of China paying 10 million RMB are “tied” to one another as conjoined twins. So when each bank initiates their transaction in this FX transaction type, mBridge will NOT execute it unless the other bank has also initiated the second leg of the transaction. While in blockchain parlance it is called an “Atomic” transaction, mBridge calls this as PvP – Payment vs Payment transaction. I.e. both legs “together” make a single transaction. This feature eliminates (not just reduce) settlement risk and hence the overall cost of transaction (in risk capital / risk management processes / insurance etc.) for all parties. Sweet, isn’t it?

In summary, the below picture tells us the three main transaction types mBridge currently supports.

Now let’s see the overall benefits mBridge offers.

The Platform works on Central Bank money issued on Ledger and not on any arcane blockchain token. This not only makes the central bank guarantee the value of money, but also avoids pricing differences as CBDC behaves like a stablecoin (i.e a blockchain token having a fixed exchange rate with a traditional currency).

The mBridge platform can be integrated with the respective countries’ local payment systems like RTGS / NEFT in the same currency reducing transaction costs.

The use of locally issued CBDC also ensures compliance with jurisdiction-specific policy, legal requirements, regulations and governance needs of the central bank in its country.

Allows offshore money. I.e allows currency issued by one country to reside in another country. In our first example, THB went from Thailand to UAE. Once the transfer was complete, THB was really held by a bank in UAE in a wallet. In today’s world of correspondent bank based payments, money doesn’t cross borders at all – despite the moniker “cross border payments”.

24 X 7 Settlement finality. The mBridge platform is designed to work 24 X 7 and each payment is final.

Atomic Payment vs Payment. I.e. Both legs of the transaction settle together eliminating settlement risk.
mBridge claims the settlements happen within 2 seconds including consensus in the pilot. This may not hold when more participants onboard on to the platform. But even if it takes an hour, it is much better than the 2 days in the current mechanism.
The simpler transaction process, lesser time to transfer money & more importantly, the much lower cost of transaction will help all of us common people, who need to remit money across shores – either for business or personal reasons.

All this looks like a magic pill to end all the ills of the correspondent banking system, but we need to remember that before being rolled out across the world, central banks and governments across the world need to agree on jurisdiction, governance & legal matters.

To my mind, the powers that be will bring in a common legal character to this cross border payment mechanism with its own judicial system. This would end the hegemony of a set of countries that have a tight grip over current system. So it is likely it might be some time before mBridge gets implemented across the world. But the pace of implementation of CBDCs across the world shows the world is building financial infrastructure at a good pace to participate in such projects. That makes the prospects bright.

Take for instance India. The Reserve Bank of India launched CBDCs for both retail (for use by individuals) and wholesale (for use by banks & treasuries) use since Nov 2022. Several individuals and organisations have opened their CBDC accounts for eRupee, although transactions haven’t picked up except in random retail transactions and government bonds settlement. Now RBI has mandated a pilot to settle call money transactions between banks in CBDC from Oct 2023. Such progressive expansion into interbank transactions within the country will get banks accustomed to CBDC settlements. We will continue to watch the progress in CBDC use both in domestic and international transactions. That progress will sure be a subject of discussion in our next article. Until then…

Notes & References

Footnote 1: The CBDCs are blockchain based wholesale CBDCs (to be used between banks) and uses a permissioned consensus protocol. This is for blockchain aficionados. The rest of us can pretend we didnt read this.

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Sep

2023

The Shifting gears of cross border payments with CBDC

The gears of Cross Border Payment mechanisms are shifting in favour of CBDCs. To listen to this article instead of reading it, press the play button above.

The previous article on CBDC ended by saying that “a new mode of money is born, a new mechanism of payment & settlement is in progress and it is here to stay and transform international settlements.”

Let us see explore each of these statements & understand how it changes the status quo.

As we saw earlier in the series of articles, money is digital, sits in bank accounts, and any cross border payment utilises

(a) a network of trusted relationship between banks called the correspondent network (remember NOSTRO?) and

(b) requires the SWIFT network – a trusted messaging system, that is reliable & has widespread use.

Based on the instructions in the SWIFT messages, banks that service the NOSTRO accounts, transfer money and effect the international transfer. And banks as we know, will have to obey regulatory pressures like how US banks had to stop doing business with Russian entities. But if a bank or the banks in a particular country are banished from the SWIFT network, their international trade (and even national trade if that is how the country’s financial infrastructure is built on) can be crippled in one fell swoop.

Even otherwise, due to the multiple hops messages take through banks in different time zones, cross border payments are slow (takes about two days) and are costly, as each bank in the chain takes a cut.

This is where CBDCs change the game.

Several central banks have been working on a few important settlement mechanisms among themselves – directly & automatically instead of having to go through the SWIFT network. And since this CBDC network will be a multilateral arrangement, no country gets to monopolise it or have its finger on the kill switch.

A few proofs of concept have already been made.

1. Project Jura: This project explored the direct transfer of Euro and Swiss franc wholesale central bank digital currencies (wCBDCs) between French and Swiss commercial banks on a single blockchain platform operated by a third party. The multinational banks of Swiss & French origin – UBS, Credit Suisse & Natexis – performed a pilot with real value Foreign exchange transactions to validate technical feasibility. The result established the feasibility of DIRECT transfer of two currencies across banks instead of routing through correspondent banks and SWIFT network. The blockchain platform allowed both message and money to be transferred simultaneously. See below picture that makes it obvious.

1. Project Dunbar: This project went a step further to understand the challenges that would be faced in settling multiple country issued CBDC transactions. It worked with CBDCs issued by the South African Reserve Bank, The Reserve Bank of Australia, Bank Negara Malaysia & the Monetory Authority of Singapore. The project was spearheaded by the innovation hub of the Bank for International Settlements (BIS). They worked with two technology parters (R3 & Partior – both working on blockchain platform in the finance space) in building two prototypes. The project showed the technical feasibility of the solution and identified bottlenecks in regulatory & governance issues across the jurisdictions of three countries and in how commercial banks within the country can access the multicountry platform.

BIS is the acronym for Bank for International Settlements headquartered in Basel, Switzerland. Established in 1930s and owned by 63 central banks from around the world, its mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks

3. Project mBridge: Although now called mBridge, the project had metamorphasised from Inthanon to Project LionRock to mCBDC Bridge to the now popular mBridge platform.

This project too has been spearheaded by the BIS Innovation hub, but with four other central banks across the world. I will write a more detailed next article on mBridge so that we understand the details.

But first I want to make some common observations from the above projects.

1. A realisation grew among all countries that cross border payments are too unwieldy, slow, costly and favours only those with (correspondent) “relationships” with other banks.

1. There was disquiet among developing countries that the international payment system was controlled by a few countries in the world and a growing desire took root among them that this needed to change.

1. So as part of the 2020 declaration, the G20 endorsed a roadmap prepared by the Financial Stabilty Board jointly with the Innovation Hub of the Bank for International Settlements in Switzerland. These projects we discussed above and a few more, are a consequence of this.

1. Considering BIS being the guidepost of all Central Banks around the world, the initiatives taken up by BIS in this area have a greater chance of becoming reality.

1. The new CBDC settlement mechanism across borders will help countries perform international trade in their own currencies instead of having to use a trade currency of a third country.

1. This will further reduce the need for countries to stock up on huge reserves of the currently dominant trade currency(ies) (i.e. USD, EUR, etc) which makes them dependent on moving money through the banks of USA or Europe. This also makes the trading countries vulnerable to the rules of the third country. [Please recall the example of how a trade between Saudi Arabia and India had to comply with the rules of USA as explained in this article.]

1. The new mechanism also reduces the huge dependence of countries on the SWIFT network over which the lifeblood trade & payment messages flow.

1. In the previous article we saw how about a 100 countries are in various stages of implementing CBDC. This is a clear indication of the acceptance of these countries to the new mechanism and is a harbinger of the change in International trade settlements.

In the next article, we will see how mBridge system works and that gives us insights into the future of international cross border payments

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Jul

2023

A review of Christopher Nolan’s Oppenheimer

I’m not one to go watch movies at the drop of a hat, but I try not to miss some important movies (to my mind).

One such film was Oppenheimer. My interest was in the making of the atom bomb. I have known Oppie as the father of the bomb but knew little of him otherwise. Another motivation was it being a Christopher Nolan movie. I have been very enchanted by his story telling style, rather what he doesnt tell in the movie and makes us interpret. So took off on a Sunday morning 6:40 am show with my elder son in tow!

The film did not disappoint.

It was typical Nolan style where he was moving between two or three periods of time while narrating the same incident. Nolan’s movies are like a Wikipedia page with hyperlinks everywhere. A reader gets taken to multiple links while being on the same page (incident). Some we click, some we ignore and thats where the devil usually resides.

Usually he also packs a lot of science in it and this wasnt an exception. Much of the science is in the dialogue and also in the visual story telling. For example, when the bomb is tested in Los Alamos, the bright flash of the explosion is seen first, then comes the shock wave and much much later, the deafening sound. Many might take it to be for effect, but that is how it is in reality. Light travels faster than shock waves, which in turn, is faster than sound. The sound hits a full minute after the flash, accounting exactly for the distance between the test site and observation post. It is like these subtle unannounced, unmarked accurate visual communication in the film that one cherishes in a movie made by a director like Nolan.

There was science everywhere in the movie, split an atom, there was science…oops, split a scene, there was science. That aside, the movie is all about human nature. The interplay of emotions – raw ambition, betrayal, greed, envy, guilt were all in full play. No one, however rational – not scientists, not philosophers, not politicians – are immune to this. This is portrayed beautifully in its myriad shades across the spectrum. People torn between ideology, duty, romantic interests, science, personal ambition, loyalties and cold calculations were shown in Nolanesque style.

The one thing about Nolan I like is that he doesnt insult the intelligence of his audience and packs scenes visually for them to un-peel at their own pace.

Like the scene showing the impulsive nature of Oppenheimer- who out of spite that he isn’t allowed to attend Bohr’s lecture, poisons his professor’s apple. Only to be overcome by remorse, rushes to prevent him from eating it. I understand the second part wasn’t so dramatic in real-life Oppie’s life but Nolan packs a beautiful pun here. When Oppie snatches the apple from Bohr and bins it, he replies “wormhole” to Bohr’s question of why he did that. See that in the context Oppenheimer was working on black holes and Bohr on quantum field theory & time! Mischevous guy this Nolan! Back to the scene, I think he includes this in this 3 hr + movie to give us a clue about Oppie’s nature.

But the reason why Nolan chose to do a biopic on Oppie is pretty nicely buried in the movie to unpack. Among the other “rational” scientists, Oppie stands out in contrast. Not just his maladroit hands in the lab, gauche social skills, he has compunctions!!. Nolan projects him as a man with a heart, with its desires & morals. As with the remorse shown in the above scene, his empathy towards Spanish refugees and sympathies to the cause of communists add to his colourful character. But on the subject of the bomb and its potential to cause imaginable consequences, we get to see a chimaera in Oppenheimer. If you arent convinced, look at his different stances.

He knows fully well what making a bomb of that magnitude will do, yet he accepts the position. It might be the prospect that the enemy can get one or the ambition to head a historic project, which is a once-in-a-millennium opportunity for an ambitious scientist who is well regarded, yet not awarded by the Nobel committee.

In those discussions with fellow scientists on what the bomb could do and the morals of building it, he says they are just tasked with making it, not the ones to choose whether or where it will be used. Yet in the meeting to choose targets, he makes a feeble effort against using it. Feeble enough to register his protest but not strong enough to stop its use – so that the world can know what he has made.

In the moments after the bombing, he is proud of (himself and) his team that contributed to the Manhattan project and laments (mildly) it wasn’t ready soon enough to drop it on an already surrendered Germany.

And then after the deed is done and two entire cities are wiped out, he says that he feels like he has “blood in his hands” to Truman. If there had been a person who benefited the most from the Oppenheimer’s bomb project, it is Truman. So it is to him that he could have gloated over the victory and gotten what he wanted. Yet it is to Truman he projects himself as a wimp and gets dissed as a “cry-baby”.

Then begins his mission against more (potent) bombs. It could be genuine concern or the usual refrain of a hunter who turns a conservationist! We’ve seen enough of them from Jim Corbett to Kenneth Anderson.

It is this portrayal of the conflicted mind of Oppenheimer that makes this movie interesting. Now, conflicted mind brings Bhagavad Gita and Oppie’s brush with it.

Some people protest the presence & his quoting the Bhagavad Gita during a sex scene. But it is just that his partner takes a short break from the action, takes a look at his bookshelf and finds the BG in Sanskrit – which is a strange language for her.

She asks him if he can read the text. He says yes. She asks him to. He paraphrases. She objects and wants him to read as it is, which he does. By this time they are in action again.

Protesting this is childish. The lady was just curious about a book in a strange language and more so at his ability to read it.

The scene was a novel way in which Nolan showcases the breadth of Oppie’s reading interest which includes Indian philosophy that was in vogue amidst scientists of that era.

That was all there in it. No disrespect to the holy book.

The other scene which I dont recall if it was there is his quoting from the Bhagavad Gita that goes “I am become…”. This could have been a good scene to include, except that it may not have been understood by many in the audience (Western & probably many Indian too). Oppie had the confusions that Arjuna had too (maybe to a much lesser degree) and Oppie could have taken comfort from Krishna saying “Do your duty. There cannot be moral compunctions when you are a soldier or a scientist that needs to arm the soldier”. But I believe Nolan would have understood the real import of the nuanced meaning of “Dharma” and must have left it untouched. This is evident from the fact that Oppie was only momentarily a soldier (a kshatriya) when he decided to wear the military uniform but reverts back to who he is (a scientist who works for science & betterment of society) and changes into civilian clothes. I am not sure if this was planned this way to let us know who Opppie identified himself as, but I felt so as Nolan took trouble to include the scene.

Matt Damon brilliantly plays the role of a matter-of-fact, man-in-a-hurry, man-on-a-mission, pragmatic general who plans things to the last detail. Even after the tests, he doesnt take the time to celebrate but retreats quickly to report to the political class of the mission having been accomplished in time for the Potsdam conference and then goes incommunicado planning for the bomb’s use. Like a loyal soldier he informs Oppie only after the public announcement by Truman, of the bomb dropped in Hiroshima.

The cake for acting, in the role that is Nolan’s piece de resistance, should go to Robert Downey Jr. If you hadn’t seen the initial credits nor read about the cast before going to the movie, you would be so intrigued to know who this accomplished actor was that is playing the role of Lewis Strauss – the typical “anything goes”, cunning, manipulative & insecure politician. He brings out the visceral hate for him in the audiences’ mind and makes us root for Oppie to come out unscathed.

There are many sparks in the casting, the screenplay (the sage like depiction of Albert Einstein), and some nice memorable dialogues that makes the movie worth the while for having booked the Sunday morning 6:40 show.

What did I miss the most? The remote! There were many scenes that I wanted to go back to – either to watch it again or to understand better. So I will wait for it to come on OTT and watch it again.

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Dec

2022

CBDC – A new form of money.

Image by Gerd Altmann from Pixabay.

To listen to this article in audio form, please press the play button above.

Let us understand what is CBDC, why it is special and attempt to answer some questions that are bound to come up. This one will be a slightly longer read than the other articles on this website. So pick your favourite cup of coffee or another brew that works for you.

I get CBDC stands for Central Bank (Issued) Digital Currency, but what is it?

The responsibility of ‘issuing’ currency in a country rests with its Central Bank. Traditionally Central Banks have been issuing currencies in the form of Notes and Coins. Now Central banks across the world have come up to issue currency in digital form also, in addition to Notes and coins.

Isn’t money already digital?

Yes money in the sense that ordinary people & companies use, is mostly in digital form. Our account balances held with banks don’t sit in physical (notes & coins) form but as entries in the banks’ digital core banking system. We pay each other digitally using apps and other electronic means. In that sense our transactions have become digital. However, originally as money, the central bank issued it in some physical form. As ‘users’ of money, we use it digitally but still retain the ability to convert our digital money to cash. So now Central banks also want to issue currency digitally. Such digital currency will never see any physical form.

Ok, but if we already have digital transactions, why need CBDC at all?

This is a question that needs more elaboration in different dimensions. Stay along as we explore.

Monetary stability

Central banks are tasked with managing the monetary system of their respective countries. This includes maintaining a trustable currency which is the foundation of the monetary system. The last decade has seen several crypto currencies gaining popularity that seem to offer an alternate monetary mechanism – outside the purview of governments. Some people are attracted to private digital currencies for the data privacy it offers. There are growing concerns of banks accumulating enormous data of their customers’ transactions. With increased technological capabilities of AI, ML, and cheap computing power, the privacy concerns of many law-abiding citizens are real. Such customers, especially those who either have the technical familiarity or have excess wealth to experiment with, gravitate towards such cryptocurrencies. This brings in unknown (and sometimes undesirable) private enterprises creating a parallel monetary system which seems to offer alternate payment mechanisms. This creates an apparent & even real impression that central banks ceding control of monetary policy to private actors. To remedy this situation, central banks are pushed to publish their own digital currencies that offer most, if not all of the features private currencies do.
As the Global Financial Crisis of 2008 indicates, money chasing dubious assets creates far-fetched misery in the larger economy – even across borders in our connected world. Central bankers and governments want to avoid such crises. Many people who convert real world money to crypto currency, do so out of greed (the lure of supposed superior returns), and some, for de-risking themselves from govt sanctions through the existing financial system or for genuine privacy concerns. In addition to bringing financial misery to the individuals who purchase those crypto currencies, at an aggregate level it diverts national resources to unproductive & purely speculative assets. So central banks across the world are forced to take notice and do something about it.
Currently people transacting through private crypto currencies do so outside the purview of the regulatory framework. With a view to leveraging the blockchain technology of cryptocurrency and also bring much of these transactions inside the regulatory purview, central banks first want to launch their own digital cryptocurrencies before a possible ban on private currencies across the world.

Strategic reasons

We will address this in an answer to a subsequent question.

Improving operational efficiency

Today Central banks spend a lot of money in printing cash in security (read expensive) paper, store it in high security vaults (read high costs), transfer to banks’ currency chests (incurring transport & transit insurance costs), plan and arrange for checking counterfeits & reissuing soiled notes (more expenses). All these costs can be avoided if currency is issued digitally. Of course, this will entail costs in hardware, software, network, application building & maintenance etc. But these costs will not be directly proportional to the amount of currency issued. So there will be net savings by issuing currency digitally. The shift to a digital currency -instead of cash- is a step towards reducing cash in the economy in the coming years. If the CBDC projects of different countries pass their pilot project and move into production mode, we will progressively see lesser and lesser cash in our economies going forward.
Distribution of bulk cash, along with being a risky activity, is a tedious activity too for some countries. Take countries that are far-flung, dispersed over several islands of an archipelago (The Bahamas and Jamaica, which straddle multiple islands, mention this as a primary reason they are going digital with their currency).
A digital currency makes a brilliant case for efficient implementation of targeted social welfare programs. Let’s take an example. A country provides cash subsidies to its farmers to purchase fertilizers. The farmers are issued cash, with the intent they will use it to buy fertilizers only. But cash being fungible, can be used to buy anything. From a genuine farmer using it to buy liquor, to a conman pretending to be a farmer just to get some free money, the subsidy can be misused. Being digital, CBDCs can be issued like tokens with numbers on them, so it can be used only at fertilizer shops (as an example). Or it can have an expiry date, so the subsidy is not rolled over to a different season / year.
Built in blockchain technology, CBDCs can be integrated with a variety of platforms. We saw a brief example in this artice where CBDC can be automatically settled between two traders through smart contracts, without the need for costly trust providers.
Banking is also undergoing another change. Many markets, for instance in Europe and in India, have Open banking, which allows customers to hold accounts in one bank, allows another operator to transfer it and the end customer to own her data – not the banks. In this “open banking” era and the growing data governance to safeguard customers’ privacy, the use cases for CBDCs are plenty!
The CBDC allows an alternative to cash and if implemented in “anonymous” mode (called a “token” based system),, one doesn’t need an account with a bank to even transact it. Just like how two people can transact in cash without having a bank in between, two people can transact in CBDC using their smartphones through an app.

But if a bank account is not needed, does it mean that the central banks are sidestepping the banks and the banking system in their respective countries?

The banking system and banks will continue to be the essential nervous system of the economy of the country. To dissuade people from sidestepping the banking system, central banks are making it clear that the CBDC held by people will NOT earn any interest. It is exactly like cash in our wallets and under the mattress. Even today we all hold some cash and at an aggregate level, forms a very small fraction of the overall money supply. CBDC will be like that. People will hold it in small quantities – if at all.

If it is not going to be held in large quantities and by large number of people, why at all issue CBDCs then? What are the central banks trying to achieve?

CBDCs are being issued in two variants.

(i) CBDC-Retail, meant to be used by general public like you and me

(ii) CBDC-Wholesale, meant to be used by banks for their interbank settlement – amongst themselves, across borders. It is this feature that is a bigger and more important use of CDBC. The ability to settle between banks directly without the need for regular channels of banking or using messaging platforms like SWIFT. This alternate cross border payment mechanism can be a redundant payment rail for payments supporting trade or a conscious route to de-risk economies from being sanctioned & sabotaged. Read more about these risks in this Show Me My Money! and The Kill Switch. articles.

How many countries are getting into CBDC?

119 countries are in various stages of issuing CBDC. Yes 119. That is most of the countries.

11 have launched and are using it now. This includes Nigeria (eNaira), the Bahamas (Sand Dollar), Jamaica (JAM-DEX) and 8 countries in the Eastern Caribbean island countries. Most of these countries have gone the CBDC-retail way. The biggest success has been in the Bahamas and in Jamaica, which had trouble in managing cash logistics across the archipelago.

Some 17 countries have launched pilot projects. Notable among them are China, Thailand, the UAE, Hong Kong and India that have launched the CBDC- Wholesale variant. This is significant because of its usefulness in cross border payment & settlements

The remaining countries are in research and development mode. The below pictures gives an idea of which countries are in what stage.

Image Credit:Atlantic Council

This widespread blooming of CBDCs across the continents tells us a story, that a new mode of money is born, a new mechanism of payment & settlement is in progress and it is here to stay and transform international settlements.

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Dec

2022

The challengers and the challenges with them.

Photo credit: Image by World Spectrum from Pixabay

The challengers and the challenges with them.

We know, that while Bitcoin will never gain currency as a currency (wouldn’t it be a crime to squander an opportunity at pun?), it showed how promising, the technology behind it is. Called ‘Blockchain”, its primary advantage in the financial payments industry is that it didnt need a clearing & settlement system for payments. Instead, it worked on a peer-to-peer direct settlement. In this aspect, it behaved like cash. Direct settlement between two parties without the need for an intermediary.

Keeping with the ethos of our blog, we will try to explain what type of a technology “Blockchain” is, to a lay audience with some common examples.

If you watch a sports match these days, say football or cricket, the scores of the teams are accounted for by a central unit. Irrespective of who all are behind it, lets keep the grand scoreboard in the stadium as the central unit. The scores are accounted for and published by the central unit and are final when it appears in the scoreboard. If we consider the teams to be two parties between whom the match is happening, the scoreboard is a third party. Any dispute in score will have to be taken up with them, because they are the gatekeepers…err, the scorekeepers – the central authorities!

Contrast this with how kids play the sport in local gullies. There is no central scoreboard, but each kid keeps the score in its head. Each goal or run will get accounted in each kid’s head and agreed upon commonly between them. If there is a dispute, they will go back to the previous point when all had agreed and will “re-build” the remaining score with all the events that had happened since that time. In a crude way, we can compare this to the distributed ledger technology of the Blockchain. Each node (kid) will keep count of the score and will proceed to the next step only if all nodes (kids) have reconciled with the score. Arguments like “is this a better system than centralised?” aside, there are business cases where this type of technology is useful. The crypto folks revel at the fact that there is no ‘all powerful’ central unit. So this is helpful to keep the gatekeepers (scoreboard) away. This egalitarian model is very appealing to the cryptocurrency worshippers and those who want to step away from central banks & governments.

Beyond the fact that there is no central unit, the fact that these records are ‘immutable” – -i.e. cannot be changed once registered- is very useful in maintaining non financial records also. Particularly when it comes to establishing provenance – like in maintaining transactions of land records, art collections etc. This technology has been used across the world from maintaining land records in Jamaica, to Toyota implementing this to maintain the provenance of the spare parts of its vehicles across all suppliers and its factories.

Beyond just being a “distributed ledger”, the technology can integrate with multiple third party applications to trigger events automatically. So when a Toyota supplier completes their supplies and the transaction is validated against the contract (the description, quality & quantity), their payments can be automatically made instead of someone having to verify the documents & initiate the payment. We saw how in international trade, banks play this role of verifying shipments against Letters of Credit. These can be automated using blockchain.

Several organisations across the world have come up with various uses with the Blockchain technology as its backbone.

So this is a pretty good technology with real life applications that is already in place over a wide variety of industries & geographies.

One of those applications is having “medium of exchange”. Several private companies came up with their own cryptocurrencies based on blockchain and paraded it as an asset whose value (ahem) will not erode like the value of fiat currencies (i.e. currencies issued by central banks) due to inflation. The thought is ambitious & lofty (in a sense that they will somehow circumvent the governments of the world) and they even made an argument that as an asset, it is superior.

If you have seen kids playing with Pokemon cards, they will also make a similar argument. Each card has a certain value, some more than the others and somehow each kid believes that it is sitting on a treasure trove because they have a stash of certain high value Pokemon cards. They will even name a price for each of them. Adults will be quick to realise that the value of these cards exists only in the minds’ of the kids but as far as they are concerned, these cards are just junk.

Truth be told, there are a lot of people who believe in the story of cryptocurrency & have exchanged real money (did you catch that I am implying crypto isnt?) for some fancy sounding cryptocurrencies. Some famous companies (like Tesla) even announced that they will sell their products in exchange for crypto, but rolled the decision back promptly in a few months. [Regular readers of this blog already know from this post, how a volatile currency poses problems in trade]. A country (El Salvador) even made Bitcoin a legal tender in the middle of 2021 and suffered a hit to its economy a year later.

A bigger truth be told, a currency is not just some technological tool that exists in vacuum. It is a deceptively simple looking instrument, which is backed by the strength of a country’s economy, managed through trade, economic, monetary, foreign policies and even more importantly by geo-politics. A single currency across borders will remain an utopian dream because all the policies (mentioned in the previous sentence) are governed within borders. Forget Bitcoin, if such a single currency across countries was even possible, the world would have had a single currency long back, making things simpler. Truth is, it is not simple. Even within Europe, that came together to have a common currency (Euro), some countries struggle because of the lack of flexibility this imposes on their monetary policy. Well-meaning & smart governments across the world will never cede their power to manage monetary policy to some faceless algorithm, however impressive it appears to be.

Ok lets get back to the challenger then. If such a currency is not possible, then what else will challenge the dominance of the USD?

Citations

World Economic Forum

Coverage of WSJ, Reuters and CNBC on El Salvador

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Oct

2022

The villains of Yellowstone & your decisions!

It was 1995, present in the middle of Yellowstone national park, in the US, was a beautiful & scenic valley. Miles and miles of panoramic treeless land, dotted with shrubs and small plants. Beautiful spotted deer were browsing the plants and grazing the grass. There was silence, not even the sound of the wind rustling the trees as there weren’t any trees around. There was silence, No sound of flowing streams that are usually found in a forest, for there weren’t any. There was silence, as there weren’t any animals apart from the deer.

Suddenly, out of nowhere come a pack of wolves which makes the deer scatter like an explosion.

The pack of wolves target a single deer, chase it, spring on it and snap at it from all sides.

The deer falls pathetically, its hooves drumming the ground in a frantic hope for survival. One of the wolves strangles its neck and in less than a minute, all is over and the wolves have their meal.

Who is the villain here?

Yellowstone was not a natural habitat for the wolves. They were introduced into it in 1995 as part of a science experiment called “rewilding”.

A few days and a few more hunts later, the deer learn from experience and radically change their behaviour. They start to avoid the places where they could be trapped by the wolves– the valleys, the gorges and the ridges.

With no deer to stop vegetation growth, these places start to regenerate. The height of the trees increase 4 times in just a year, leading to a traffic of birds, bees and beavers. The bees help in pollination, the birds help spread the seeds of trees far and near and the beavers build dams of water along the small streams which bring in fish, reptiles and amphibians. The area explodes with life!!

Barren valleys grow to be forests. Then come the large birds like eagles and vultures. The rivers have more water and because of the new forests coming in their way, rivers change their courses. Vegetation grows and stabilises soil erosion. In just a matter of few years, the entire ecology of that part of the Yellowstone national park changes into a wild forest, a noisy forest, a very wet forest. Wild with a variety of flora & fauna, noisy with the cacophony of bird calls & insect songs and wet with rains and streams and rivers.

All because of a small pack of wolves and a few herds of deer less.

Now with this sequel to the initial story of the hunt, our initial judgement of the wolves being the villains of the story change and the possibility that the deer aren’t saints either, dawns on us.

It is very easy to fall for the drama and unduly make a villain out of the wolves when the deer were doing the same thing to the plants and shrubs. They stopped what could have been a thriving habitat for several flora and fauna.

If you look at the big picture, you could say both were villains or if you put in some perspective, both of them were not villains, they were just eating their food. They were just trying to survive, and the only difference was that the wolves’ way of bringing food to the table was more dramatic in our eyes!!!

That brings us to the crux of this post. The above real-life story was to highlight how drama hijacks our normal thinking process. Not just here, but everywhere a sense of drama clouds our judgement and we could take wrong decisions.

We need to be dispassionate in decision making in our everyday lives. We vote the wrong person falling for an impassioned speech, or choose a wrong partner at an emotional moment. We could make bad investment choices based on an entertaining presentation or quit a company because we are angry with the boss. This power of drama / stories / narratives are very well exploited by companies in their advertisements. The next time you see an advertisement, pause to reflect if it was about the products’ features or its benefits or was it just an emotional story to make you feel a particular way. I am not advocating you to be a callous calculating machine, but at least take a moment to reflect without emotions before you make an important decision.

Emotion is temporary, while the decisions you take could be permanent.

Beware that an emotional decision is not always the right decision. In such circumstances, we could be our own villains & victims. So the best way to avoid these traps is to defer decision making until we clear our heads and are ready to be objective.

Picture credits: Forest picture is a Photo by Luca Bravo on Unsplash & the stream picture is a Photo by Amit Godase on Unsplash.

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Oct

2022

Thoughts on the natural world we inhabit.

Something we all do, but understand so less about. Not we aren’t talking about anything fancy, just sleep! What is it, why we need it and some fascinating animal behaviour around sleep in this article.

Did you get conned in recent times by a trickster? Did you think such tricksters abound only amidst humans that are a supposedly advanced species? Think again. Several animals do this, even to us? What exactly happening when animals put on their camouflages? Read and share your thoughts in this article that puts forth some alternate arguments.

The natural world offers some lessons on decision making. From drama in the wild to advertisements that get our attention, this article offers some suggestions on when to decide and when not to.

Most movies are for entertainment, but some are lessons. Here is a review of one such movie that helps us understand human nature, science, scientists and politicians with a bomb.

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Oct

2022

Why you should lose sleep over your lack of sleep.

Is this owl winking? Awake or Asleep?

A few years back, the then youngest CEO of SAP India, Ranjan Das, a fitness freak, a marathon runner, came home from his usual workout at the gym, and collapsed of a massive heart attack.

How can someone who was athletic, at the pink of his health and in top form, die of heart attack? The reason? He didn’t sleep enough.

In today’s fast paced world where time is at short supply, the first activity we cut short on, is sleep. So let’s attempt to understand about sleep a little more: why we sleep, how much sleep is enough, what are the effects of lack of sleep and how to sleep better.

During the time we sleep, we don’t eat, we don’t work, we don’t play, we don’t have sex, we don’t seem to be doing anything worthwhile and hence at first glance, sleeping appears to be a complete waste of time. But we all sleep, every single day.

It is not just humans that sleep, all mammals and birds sleep too. Even small animals that are at risk of losing their lives to their predators while asleep, also sleep. Why do they need to sleep at such high risk to their lives? Normally evolution would have weeded out such species as part of natural selection. But it hasn’t happened, pointing to the importance sleep plays in every life form.

Dolphins, which are closer to human beings are not like other fish. They breathe air like us through the blowholes on top of their heads. Which means, they need to periodically surface from water to breathe. But how do they breathe when they sleep? Without any predator they might die simply because they slept when they had to breate!! But we know dophins don’t die in their sleep. How do they do it? To manage this, they sleep one half of the brain at a time called unihemispherical sleep. One hemisphere of their brain sleeps while the other stays alert. And then the cycle alternates. They sleep in pairs such that the alert part of their bodies (since each hemisphere of the brain controls one half of the body) are on the outside, to keep an eye on predators and synchronise their surfacing to breathe.

Dolphins courting? No they are sleeping partners, each helping the other to sleep during the night.

A few other mammals like bats, seals, some long distance migratory birds and owls also demonstrate unihemispherical sleep.

Why did nature go to such lengths to ensure we sleep?

That’s a question scientists have been trying to answer for several years now. Despite the years of scientific research on sleep, our understanding of sleep is very basic even today.

When asked why we sleep, Dr William Dement – called the Father of Sleep Medicine – who was also the Founder of Sleep Research Centre at Stanford says

“We don’t really know. We sleep in order to not be sleepy otherwise”

Dr. Clete Kushida, the Medical Director, Stanford Sleep Medicine Centre, after years of research since the 1970s also says he still doesn’t know.

But there are a dozen theories, let’s see the three most popular ones

We sleep to conserve energy. Our brain is only 2% of our body weight but uses 20% of the energy. To provide this, our brain shuts down active bodily functions [it literally paralyses our muscles to keep us still] during sleep and uses the energy for itself.
Body restores itself during sleep. Muscle growth, tissue repair, protein synthesis – all happen through an orchestra of hormones that create a symphony of events during our sleep. In simple terms, various toxins are flushed out and we grow during our sleep
Brain processing and memory consolidation –the filing of events, making them available when needed and using them to handle similar situation – in short this is intelligence. So during sleep, brain does the housekeeping to keep us intelligent. Empirical evidence suggests that if you sleep well, you are three times more likely to be creative.

Okay, so what is the right duration of sleep. Is it 6 hrs, 7 hrs? 8?, 9? How much is good enough. There is no consensus, but adult humans need at least 6 hrs of sleep at a stretch. A good empirical measure is, if you don’t feel sleepy during the day until your next regular sleeping time, then that sleep duration is adequate for you.

Lack of sleep leads to mental, emotional & physical fatigue, depression, obesity and lower life expectancy.

On days following sleepless nights, high levels of cortisol accumulate in your body which leads to stress related disorders like cardiac ailments and diabetes. Sleep loss produces Grelin, which makes you seek carbohydrates and makes you obese. In short, chronic lack of sleep sets in motion a series of irreversible ailments that ruin our long-term health.

So how to get good sleep. If you have trouble getting good sleep, what can you do? Not much but a few things help.

Keep a regular sleep schedule
Exercise helps
Limit Caffeine and alcohol, if unavoidable, don’t drink too close to sleeping time
Turn off lights and keep the room as dark as possible.
Keep mobiles away – even if you are only browsing it, the light from the mobile is troublesome.

Your life is a reflection of how you sleep , and how you sleep is a reflection of your life!. If you sleep well, you live better. So wake up to sleep facts my friends. Lack of sleep can kill!!!

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Oct

2022

The kill switch!

To listen to an audio version of this article, please press the play button above.

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Let’s start with answers to the questions posed in the previous article.

Q1: In this entire chain of cross-border payment transaction- where a company in India paid a company in Saudi Arabia, in which leg did the money actually move?

A: Money actually moved from one bank in the US to another in US. It did not cross any border!

But wasn’t this supposed to be a cross border payment? Money from India to Saudi?

Indeed! But because the payment was in USD, the transfer happened between two NOSTRO accounts in the US itself.

But what crossed borders, if money didn’t?

Messages! Yes just messages went beyond borders.

So if Adam Savage (of the popular TV show “Mythbusters”) were to investigate this, he would proudly proclaim – Busted!!

Contrary to popular perception in cross border payments, money doesn’t cross borders, only messages do.

But the companies in India and Saudi didn’t have USD accounts, they had INR and SAR accounts. Surely there must have been some conversion that must have happened?

Yes, that’s brings us to question no 2.

Q2: Where exactly did the currency conversion from INR to USD or USD to SAR happen?

In their respective countries.

INR- USD was done by SBI Mumbai and USD -SAR was done by AL Rajhi bank, Riyadh.

The banks in US don’t determine the exchange rate for any of the legs of this particular transaction.

Q3: Which countries’ compliances and regulations had to be applied in this transaction?

It is easy to guess that the compliance of governments in India and Saudi Arabia apply to these transaction as the buyer and seller are in these respective countries.

But here is the kicker. Just because the payment passes through banks in US, the compliance rules of the Govt. of the US of A also apply to this transaction.

If we zoom out of this single transaction and have a satellite’s eye view (a bird wouldn’t have so much of a span for our purposes), since most international trade happens in USD, ALL (yes all!) of those transactions have to comply with the rules of the Govt. of US of A.

-we can say that, just because USD is the world’s popular trade currency, central banks around the world buy and store it as a major reserve currency, thereby increasing the demand for USD perennially.

-the US govt is able to apply it’s writ on international transactions between two random foreign entities that are thousands of miles away from the shores of US, despite the fact the goods don’t come anywhere near the US.

Is this a good thing or a bad thing? Depends!

Depends on where you stand or how friendly one or both of the trading countries are with the US of A.

Let’s take just two examples to see the impact of this.

FATCA. Citizens of almost all countries around the world had to declare their FATCA status with banks around the world. Why? Because the US govt said unless each bank (called an FFI – Foreign Financial Institution) in every country collected and reported relevant data to the US on their FATCA status, US govt will withhold 30% of the value of bank’s qualifying (this is a subset of all txns) transactions going through US, done for FATCA non-compliant customers living in a foreign country. Considering almost all major banks around the world need to have USD NOSTRO accounts with banks in US, they have no choice but to comply.

FATCA (Foreign Asset Tax Compliance Act) is a US law since 2010 to track the income from the foreign assets of US citizens, living and maintaining accounts abroad. These assets could be Savings or fixed deposits in banks, Mutual Funds, Insurance products, real estate etc. As an example, if a US citizen has an account in Italy, the US govt wants to know. While most govts ask their citizens to declare their foreign assets and income voluntarily, the US govt goes one step further. It asks the banks’ and financial institutions of other countries to report, if any of the accounts they service for their customers, are for US citizens. To know this, the banks need to ask ‘every’ account holder to give a declaration of their US citizenship status.

With the US Dollar’s unique position of being an international trade currency, US was able to enforce compliance on every financial institution in 90 countries of the world, for an internal tax program. Who bears the operational costs and inconvenience of this compliance? – the respective banks. Who will the banks recover this cost from? Their respective customers. So here is an internal tax compliance program of the US govt, being paid for and complied with, by citizens of other countries around the world.

The second example is what happened as part of sanctions on Russia following the Ukraine-Russia war. US was able to successfully stall all (well, almost all) international trade if one of the trading partners was a Russian entity.

How is this even possible? Recall the organisation and messaging platform called SWIFT? And that it is owned by banks across Europe and US. (you can read more about SWIFT here). Also, if you recall the details of the SWIFT message in this article, you will know that every SWIFT payment message contains information on who originated the payment and who the beneficiary is. Combined with the fact that each USD transaction will have to go through banks in the US, it is easy for banks in the US to know who are the entities in an international transaction. As a result, the enforcement of this ban was quick, because US banks had a switch to identify and kill transactions, if one of the trading parties was Russian.

We need not get into the merits of the war or the sanctions. But if you look at it purely from a risk manager’s point of view, any country is at risk of immediate suspension of its international trade if they fall out of favour of the US. In that sense, the kill switch to the world’s international trade is in the hands of a few western nations.

Isn’t this a risk for other behemoths of international trade? like say – China? Yes and that’s why they try to wean away their international transactions from USD and are promoting Yuan based transactions. Or even trade based on bilateral currencies between China – Saudi Arabia, China- Iran, China- Russia (that’s no surprise). But it is not easy, because it is not just in the realm of economics or trade, but a matter of geo-political dominance. This game has had its players and many haven’t lived to tell their story.

There has been a recent challenger to this – albeit a tiny one- having some acceptance across countries, including the USA. You must have heard about Bitcoin and its cousins. These are & will be limited to miniscule, marginal, esoteric or arcane transactions and will not enter the mainstream as a force to reckon with.

But a bigger challenger is on the slow brew. The war that has already started in eastern Europe, and more wars that are about to start, are a reaction to it. Lets cover that in the next article.

Click on the urls below the images below to view the previous and next articles in this series

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Oct

2022

Show Me My Money!

Let’s see at a high level how an international transaction happens. This time, we will use the most popular commodity transaction -oil — in our illustration.

The trade:
In our example, the largest private sector refiner in India — Reliance Industries Ltd. (RIL hereafter) buys oil from Saudi Aramco of Saudi Arabia (we will refer to this as Aramco from here on). RIL banks with SBI, Fort branch, Mumbai and Aramco with Al Rajhi bank in Riyadh.

Most oil in the world gets sold in USD for the various reasons we saw in this article. Which means both buyer and seller will have to necessarily settle through a bank in US of A, irrespective of where they are. In our case, even though the seller is from Saudi Arabia and the buyer is from India, and the oil they exchange will never touch the shores of US of A, the commodity is priced in USD.

We can recall that the transaction will most likely be under the “letter of credit” and will involve the below parts.

LC Process: Before placing an order with Aramco, RIL will approach SBI to “Open” an LC favouring Aramco. Aramco will furnish it to its bank Al Rajhi and ask if the LC is trustworthy. If Al Rajhi is not comfortable with SBI’s trustworthiness or if their bilateral limits are exhausted, Al Rajhi can ask another bank to “confirm” SBI’s trustworthiness. By confirming this LC, this intermediate bank (say Citibank Riyadh) acts as a guarantor for SBI.

Since the transaction is to exchange Oil for Money, there are two Settlements. Since we have already seen the goods settlement in detail in the previous article (linked here), we will see how the money settlement happens in more detail here:

Goods settlement: When the ship calls on the port and unloads to the customs’ warehouse / oil farm, RIL, by sending an “acceptance” through SBI, gets the title for goods in the port / and lifts the goods. The payment terms can be on “Sighting” the goods — i.e pay the money and take the goods, or agree to pay x days after “accepting” to pay. The payment terms are as agreed upfront between the trade partners RIL & Aramco.

Money settlement: Since the transaction is in USD and as both SBI Mumbai and Al Rajhi, aren’t present in USD settlement zones, both of them need correspondent banks in the US of A to settle their transaction.

What are correspondent banks? These are banks where other banks maintain accounts — most often in a foreign country and in the currency of that country. So in our example, let’s say SBI Mumbai’s USD correspondent bank is SBI New York and Al Rajhi’s is JP Morgan Chase NY. By design these correspondent banks will be in US of A because that is where USD settlement happens. This correspondent relationship is not a transient one for ‘a’ particular transaction but are pre-established relationships between banks for long term. In fact, correspondent banks are listed publicly in a bank’s website and also figure in directories bankers use among themselves.

Now, back to our transaction. Here are the different parties in payment parlance. Note the banks are identified with their SWIFT BIC (Bank Identification Code, a unique code for each bank + branch combination, which will direct the SWIFT messages to them, like an email is sent to an email address)
• Ordering Customer (the one who initiates the Payment): Reliance
Industries
• Ordering Institution (the bank that sets in motion the payment process within the banking system): SBI, Fort Branch, Mumbai SBININBB689
• Beneficiary of the Payment: Saudi Aramco, Saudi Arabia.
• Account With Institution (the bank where the beneficiary holds an account): Al Rajhi Bank, Riyadh, RJHISARI
• Sender’s Correspondent (the USD correspondent of the bank that sends the payment message): SBI New York, SBINUS33
• Receiver’s Correspondent (the USD correspondent of the bank that receives the payment message): JP Morgan Chase New York CHASUS33

Each of these parties are identified in specific slots (called TAGs) in the respective SWIFT messages. For example the MT 103 message in our example will look like this.

When RIL asks SBI Mum to pay, say USD 300 Mn to Aramco’s a/c held with Al Rajhi, Riyadh, the payment will happen like this.

1. SBI Mum (SBININBB689) will send a (SWIFT MT103) message to Al Rajhi (RJHISARI) saying that it is arranging payment through

the mentioned correspondent banks and that is against specific invoice number 745128. This MT 103 is a “Customer payment message”. Which means there is a customer on behalf of whom the payment is initiated.

2. SBI Mum will “inform” SBI New York (SBINUS33) through SWIFT MT 202COV to pay Al Rajhi’s a/c with JP Morgan Chase New York, with specific account number details.

Couple of clarifications here:

How would SBI MUM know who is Al Rajhi’s USD correspondent
or even the account number? Aramco would have shared this with RIL, which in-turn would relay it to SBI MUM. Even without Aramco telling them, the USD correspondent would be available in commercially available directories in the market that all banks subscribe to. These are like the yester-year telephone directories that give the different correspondent banks of most banks in the world in each currency.

What is this MT202COV? It is a message type to be used when a bank instructs its correspondent bank in a foreign country to move funds from its own account, to complete a customer payment it initiated. This type of payment mechanism is called the ‘Cover” method and hence the “COV” next to the message type MT202.
Banks send similar messages to their correspondents for their own purposes as well. In such cases they will simply use the message type MT202. I elaborate this to highlight how robust the SWIFT system is, which covers different scenarios of business and in-turn promotes its wide-spread acceptance, automation and even
standardisation. To this date, SWIFT is the de-facto platform for transactions among banks across borders.

3. With the above information, SBI NY will transfer the funds to JPMC in the local clearing in US — either CHIPS or FEDWIRE. To inform JPMC that this is an intermediate step in an international payment emanating from India and that both SBI NY and JPMC NY are just cogs in this wheel of international payment, SBI NY will relay the payment details through a SWIFT MT 205 COV message.

MT205 is similar to MT202 except that 205 is sent between banks when the currency of transfer is a local currency for both the banks. Since USD is the local currency in US where SBI NY and JPMC NY operate, MT205 is used.

Now we come to the last leg.

4. Once Al Rajhi sees a credit in its account with JPMC, meant for Aramco, they will pass on the credit to Aramco. Else they will wait for a confirmation message from JPMC. This can come as another set of SWIFT messages — MT 202 COV or a Credit advice (called an MT 910).
Only after this we can say the transaction can be said to have been “settled” i.e the cross-border payment transaction is said to be complete!

The reason I explained the above in detail is to set you thinking. Let me
leave you to ponder over the below questions.

In this entire chain of cross-border payment transaction- where a company in India paid a company in Saudi Arabia, in which leg did the money actually move?
Where exactly did the currency conversion from INR to USD or USD to SAR happen?
Which countries’ compliances and regulations had to be applied in this transaction?

Once you have had time to think and have some responses, I will cover the answers and the impact in the next article.

Photo Credit: Thanks to chukovskaya on Pixabay

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Srikrishnan

Let’s talk mBridge!

The Shifting gears of cross border payments with CBDC

A review of Christopher Nolan’s Oppenheimer

CBDC – A new form of money.

Image by Gerd Altmann from Pixabay.

To listen to this article in audio form, please press the play button above.

The challengers and the challenges with them.

Photo credit: Image by World Spectrum from Pixabay

Citations

World Economic Forum

Coverage of WSJ, Reuters and CNBC on El Salvador

The villains of Yellowstone & your decisions!

Thoughts on the natural world we inhabit.

Why you should lose sleep over your lack of sleep.

The kill switch!

Show Me My Money!

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Image by Gerd Altmann from Pixabay.

To listen to this article in audio form, please press the play button above.

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Citations World Economic Forum Coverage of WSJ, Reuters and CNBC on El Salvador

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