Cash Management, Technology
Bridges into the blockchain world
14 July 2022
More and more companies are testing blockchain applications to automate processes. This is changing the requirements for payment transactions. Treasurers should be aware of the options, says Deutsche Bank’s Christof Hofmann
In many finance departments, automating processes has become a top priority – they need to be faster, more efficient and less prone to error.
The benefit, of course, is cost reduction and released capacity for strategic projects. In addition, this helps with the wider management of global supply chains, which can be digitised. Blockchain technology can help here because data is confirmed within the blockchain on the basis of a consensus principle, and documents are verified.
On the ground, automation is catching on: Pharmaceutical company Roche, for example, recently launched a pilot project with Deutsche Bank to accelerate the ordering process with its suppliers.1 So-called smart contracts are used to automate:
- Receipt of orders;
- Matching of invoices; and
- Release of payments.
Previously, all of this had taken place sequentially and in separate systems.
Payment trigger versus tokens
The Roche experience demonstrated that when companies use blockchain applications to automate business processes, their payment transaction requirements change. After all, at the end of most business activities there is a payment. But how can the new blockchain world be linked to the existing payment infrastructure?
The most obvious and promising option is to introduce so-called payment triggers. This is where payments are triggered directly from the blockchain via smart contracts as soon as predefined criteria are met. Technically, this is usually done via open application programming interfaces (APIs) provided by the bank. In this way, the payment trigger builds a bridge between the new process chains on the blockchain and the existing digital payment systems. Sepa and Swift payments are good examples of this.
The advantage, thanks to API technology, is that this path is already quite easy to implement today. For the vast majority of blockchain applications used by companies aiming to automate business processes, payments can be triggered in this way and a confirmation played back to the smart contract.
On the blockchain
The second option, processing payments directly on the blockchain, is by contrast much more complex because it requires tokenised money, i.e. money on a blockchain that can be triggered via smart contracts. The best-known variants are stablecoins – digital money issued by a private provider or consortium and central bank digital currencies (CBDCs), which can also take various forms.
However, there are significant limitations to these two variants in terms of coverage and regulation. Stablecoins must achieve a certain coverage and be issued by a reputable party. Universally usable tokenised bank deposits are probably still in development. CBDCs already exist in several countries, but for major currencies such as the euro, U.S. dollar, and British pound, it will likely be several years before they are available for commercial applications.2
Payment triggers – the best option
Payment triggers are therefore, for the time being, the best option for treasurers when it comes to supporting payments for blockchain-based applications. This is not only because the financial world is not yet on the blockchain. Companies themselves are also often not yet ready for the blockchain world with their systems and processes. Payment triggers have the added attraction that they build a bridge to the existing enterprise resource planning (ERP) and treasury management system (TMS) landscape.
In short, it’s a case of one step at a time – and let’s not forget that automating the supply chain with the help of blockchain is already a huge step forward.
This article was first published in the print edition of the German treasury publication, DerTreasurer as a guest article by Christof Hofmann on 9 June 2022
1 See How to enable digital business models via payments
2 See Is the crypto party over? and CBDCs: what’s not to love?
Head of Corporate Payment Solutions, Deutsche Bank
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