Are cross border payments more secure with blockchain?

Cross-border payments have always been a complex process.

Making one cross border payment may have the involvement of numerous parties, including banks, financial institutions, and payment processors, which leads to a lot of intermediaries and high transaction fees.

One would not think to question the security of cross border payments with the involvement of so many numerous parties and use of advanced technology, but cross-border payments are also vulnerable to fraud and cyber-attacks.

There have been several high-profile cases of fraud and cyber-attacks in cross-border payments in recent years. One such example is the 2016 Bangladesh Bank cyber heist. In this attack, hackers gained access to Bangladesh Bank's SWIFT (Society for Worldwide Interbank Financial Telecommunication) credentials and transferred $81 million from the bank's account at the Federal Reserve Bank of New York to several accounts in the Philippines. The attackers used the SWIFT credentials to send fraudulent transfer requests to the Federal Reserve Bank of New York, which processed the requests without verifying them with Bangladesh Bank. The cyber-attack was a wake-up call for the banking industry, highlighting the vulnerabilities of traditional cross-border payment systems and the need for more secure and resilient systems.

If you are a payment enthusiast you may have probably wondered, would the blockchain offer a more secure cross border payment option?

In recent years, the blockchain has definitely been highlighted as a solution to these issues, promising more secure and cost-effective cross-border payments.

Because blockchain networks allow multiple parties to participate in transactions without the need for intermediaries, providing better transparency, immutability, and security to transactions, it is an ideal solution for cross-border payments.

Traditional cross-border payments involve multiple intermediaries, such as banks, financial institutions, and payment processors. These intermediaries charge high transaction fees and take several days to settle the transactions. Moreover, these intermediaries also increase the risk of fraud and cyber-attacks. The intermediaries are responsible for verifying the authenticity of the transactions, which makes the system vulnerable to attacks. The blockchain eliminates the need for intermediaries, making cross-border payments faster, cheaper, and more secure.

One of the key benefits of blockchain as highlighted earlier, is transparency. All parties involved in a transaction can see the transaction history, which makes the system more transparent. Moreover, blockchain technology uses cryptographic algorithms to secure the transactions, making it difficult for attackers to alter the transaction history. This has contributed to making blockchain-based cross-border payments more secure.

Once a transaction is recorded on the blockchain, it cannot be altered or deleted eliminating the tampering aspect of the transactions, this reduces the possibility of including fraudulent transactions.

Another aspect of the blockchain technology that can strengthen the security of blockchain based transactions is the use smart contracts to automate the payment process.

Smart contracts are self-executing contracts that automatically execute when certain conditions are met. This means that the payment process can be automated, reducing the need for intermediaries and making the process faster and more cost-effective. Moreover, smart contracts also provide an additional layer of security, as they eliminate the need for manual verification of transactions.

However, there are also some challenges associated with blockchain-based cross-border payments. One of the challenges is scalability.

Blockchain technology is still in its early stages, and it is not yet capable of handling a large number of transactions. As more participants join the network, the system may become slower and less efficient. Moreover, blockchain technology is still not widely adopted, which means that there are not enough participants in the network to support cross-border payments on a large scale.

Blockchain also operates in a decentralised network, which makes it difficult to regulate. Moreover, different countries have different regulations regarding cross-border payments, which makes it challenging to ensure regulatory compliance. This means that there is a need for a regulatory framework that can govern blockchain-based cross-border payments.

Blockchain has the capacity to enable more secure cross-border payments and it is an Ideal solution that offer several other benefits over the current traditional cross-border payments, but perhaps the solutions still needs further development and further study and isights in order for it to overcome the challenges associated with using it.

There are already several initiatives underway to develop blockchain-based cross-border payment systems. For example, Ripple, a blockchain-based payment protocol, is working with banks and financial institutions to develop a global payment network. The network uses Ripple's XRP cryptocurrency to facilitate cross-border payments, providing faster and cheaper transactions than traditional payment systems.

Several central banks are exploring the use of blockchain technology for cross-border payments. The People's Bank of China (PBOC) is developing a digital currency that uses blockchain technology to facilitate cross-border payments. The digital currency is expected to provide faster and cheaper transactions than traditional payment systems, while also providing greater security and transparency.

Startups are emerging, offering innovative solutions for cross-border payments. For example, BitPesa, a blockchain-based payment platform, offers a low-cost solution for cross-border payments in Africa. The platform uses blockchain technology to eliminate the need for intermediaries, reducing transaction fees and increasing the speed of transactions.

As more participants join the network and regulatory frameworks are developed, blockchain-based cross-border payments are likely to become the norm, replacing traditional payment systems.