How to organize transaction clearing based on blockchain technology

Blockchain technology, the foundation of the distributed registry system underlying Bitcoin cryptocurrency, is recognized as a potential source of accelerating cash flow in almost every sector of the financial industry. In the process of developing the Wirex blockchain service , we always follow interesting materials from foreign sources and strive to learn something new about how the blockchain allows financial systems to interact with each other, significantly increasing the efficiency of existing processes.

This is especially true due to the fact that in our service the Bitcoin blockchain is used for money transfers between accounts and for their integration with digital wallets. Conversion into dollars within the account occurs by comparing the opposite orders for currency exchange on the domestic exchange.

Below we publish the translation of an article from the LTP publication devoted to the blockchain technology capabilities in organizing transaction clearing.


Central banks, financial organizations and technology companies are paying close attention to various blockchain platforms, assessing possible use cases, as well as exploring their potential and difficulties on the basis of current pilot projects.

For example, in the payment sphere, the blockchain is able to increase the efficiency of settlement and clearing operations (in networks based on Visa and MasterCard). At the same time, this solution does not imply a reduction in the role of central payment networks when conducting settlement transactions.

The task is to propose various ways to more efficiently organize settlement and clearing operations between issuers and acquirers within the framework of the existing quadrilateral payment networks using an ordinary blockchain layer, in which the payment network still plays an important (but slightly modified) role. This should, at a fundamental level, eliminate the need for costly reconciling files when closing the day. Remove the delays that occur in connection with the discrepancies found and allow acquirers to make payments on the day of the sale. In addition to the possibility for acquirers to pay sellers on the same day, the greater efficiency of the clearing and settlement processes can also reduce the operating costs of payment networks and card issuers,

Description of the process of settlement and clearing transactions

Let's immediately analyze the use cases and see how VIsa and / or MasterCard (also applicable to Interac and other national payment systems) may in the future use blockchain technology to conduct settlement and clearing transactions between issuers of payment cards almost in real time and merchant acquirers. We will try not to descend to the level of specific solutions and existing blockchain platforms. The concept itself is quite versatile. As such, it can be implemented on the basis of any popular blockchain platform.

Suppose, solely for scalability, that the underlying blockchain platform system “permits” only payment networks, acquirers and card issuers - associated members of payment systems - to operations. It is also reasonable to assume that in such a blockchain network a consensus can be easily and reliably established between one trade acquirer and one issuer who participate in the execution of each payment transaction. Obviously, there is no need to involve all acquirers and issuers to confirm a payment transaction involving a single acquirer and a single issuer, as this will unnecessarily complicate and slow down the conditioned process of achieving consensus without additional benefit. The complex of the mining nodes of the payment network will simply “listen” to the already proven blockchain transactions between issuers and acquirers and merge them into final blocks supporting a highly efficient consensus. Assuming such a system design, the overall performance of clearing and blockchain operations can be kept equal or close to the performance of the existing payment card authorization system. To increase productivity, it is necessary to maintain maximum simplicity, while not sacrificing immutability and security.

In addition, it is necessary to assume that the payment network is fully responsible for issuing its own cryptocurrency, which is based on an asset (token) linked to fiat currency, to ensure real-time clearing between issuers and acquirers using blockchain technology. Call this cryptocurrency pnCOIN. In the case of Visa, it can be called vCOIN, for MasterCard - mCOIN, etc. For such an implementation, blockchain miners are not required, as in Bitcoin or Ethereum systems.

Cash-out process at day open

At the beginning of any business day (whatever it is in a particular case), each participating card issuer and merchant acquirer will “acquire” a certain amount of pnCOIN cryptocurrency in the payment network. In fact, the payment network confirms a set of blockchain transactions and transfers ownership of the acquired pnCOIN to each acquirer and card issuer. Thus, each participant prepares himself for bilateral clearing of daily settlement transactions that take place almost in real time via the blockchain. Let's call this process of converting fiat currency into pnCOIN “cash-OUT”. The currency received from participating issuers and acquirers is stored in a special operating account under the control of the payment network.

Day clearing process

When making a transaction with a payment card (or NFC) during the day (in a store or online), authorization proceeds normally through the usual payment network infrastructure just as it does now. This process remains intact. However, the card issuer and the acquirer participating in the original payment transaction now agree on a separate “clearing purchase” through the blockchain transaction, which is transmitted to the “clearing” blockchain network by the card issuer. Such a transaction simply transfers ownership (payment amount minus required fees) by pnCOINs from the card issuer to the acquirer. As a result, the personal UTXO of the acquirer increases, and the issuer's UTXO is reduced by the same pnCOIN value.

The blockchain-transaction "chargeback clearing" (initiated by the issuer) allows for the return transfer of ownership of a given amount of pnCOINs from the acquirer to the issuer and is displayed as its own clearing blockchain transaction. Similarly, the reverse clearing operation will be used for clearing returns and confirmed by acquirers, etc. All these “clearing” blockchain transactions occur in parallel with regular authorization / chargeback / return transactions during the day.

Cash-IN process at the end of the day

At the end of a business day, each acquirer and card issuer can now make a “Cash-IN” of their accumulated pnCOINs (ie, individual UTXOs) in the payment network. The Cash-IN process allows you to transfer ownership of the pnCOIN UTOX payable from each issuer and acquirer back to the payment network. Instead, they receive the equivalent amount of fiat currency from the payment network. In the ideal case, at the end of the Cash-IN process, the “balance” of the pnCOIN UTXO of each particular acquirer and issuer drops to zero, and the balance of the operating account of the payment network becomes zero. Taking into account the funds received from the payment network, each acquirer can immediately make payments to sellers for the sales made (of course, minus the applicable discount rates).

Due to the unchanged basis of clearing blockchain chains of the distributed registry platform (with a highly effective two-way consensus between the acquiring and issuers conducting financial transactions), the need to resolve final daily clearing and settlement transactions between acquirers, issuers and the payment network is eliminated. The state of clearing blockchain-distributed transactions at the end of a business day should be considered final and agreed with the participants and parties to the transaction.

Such an implementation implies using only the basic features of the blockchain platform (the ability to transfer Bitcoin-like assets, supported by a much simpler consensus algorithm) without the need for complex, insufficiently developed and error prone turing-full multi-purpose smart contracts.

Conclusion

This is just one example of how basic blockchain technologies can be used in practice by the payment system industry to improve the efficiency of existing settlement and clearing transactions for transactions by eliminating costly approvals between participants when closing the day. Of course, this description is in no way a complete solution, since it does not consider settlement and clearing cross-border transactions with different currencies, but despite this, it can be used as a basis and developed to cover more complex real cases.

This model can be easily adapted and applicable in a similar manner to post-trading settlement and clearing operations in stock markets (over-the-counter trading immediately comes to mind) with the replacement of the role of the payment network by the central counterparty.