Cross-Border Payments: What Are They, And How Do They Work?

The rise of blockchain technology and decentralized finance (DeFi) paved the way for the growing need for cross-border payment solutions in the Web3 space. With more businesses and individuals looking to settle their transactions through digital assets, the demand for cross-border payments is at its highest.

Blockchain Cross-border Payments

Cross-border blockchain payments are transactions involving two entities in different countries facilitated via blockchain technology. In their traditional form, cross-border or international payments are processed by banks and other financial institutions.

Their operations involve the interaction of a complex web of intermediaries like corresponding banks and clearing platforms. As a result, this comes with high transaction costs, a longer payment processing time, and a need for more transparency.

Unlike the traditional process, blockchain-based cross-border transactions do not involve third parties and are affordable, fast, and with a robust financial security framework. The most widely sought-after international payment method is blockchain-based cross-border transactions because they make faster payments between businesses and individuals.

Experts believe blockchain technology is a game-changer in the global fund transfer ecosystem.

How Blockchain Cross-border Payment Works

The design behind blockchain technology is the critical reason blockchain-based cross-border payments will always trump the conventional international money transfer system. In the case of the traditional international payment system, a series of networks connect the sender and receiver, including but not limited to banks, credit unions, and clearing houses.

This often complicates things and slows down the process of sending and receiving money. One such entity traditional banks use to process international payments worldwide is the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

So far, SWIFT has provided safe and secure financial transactions worldwide by exchanging information with governments to ensure transparency. However, SWIFT is also facing the challenges of high transaction costs, limited security coverage, access, and having a centralized controlled system.

In contrast, smart contracts enable swift settlement of blockchain cross-border payments because these smart contracts are decentralized with no intermediaries, have high transparency, and have low transaction fees.

Advantages Of Blockchain-Based Cross-Border Payments

Unlike the conventional method of sending funds powered by SWIFT, blockchain-enabled cross-border payments offer several merits than the former. Some of the benefits of blockchain-based cross-border payments include the following:

• Faster processing time
• Low fees
• Automated data records
• Better security of finances

Multinational corporations find blockchain money transfer efficient and timely, and small enterprises and individuals benefit from similar advantages.

Types Of Blockchain Cross-Border Payments

Business-to-business cross-border payments involve transactions between two parties via blockchain technology, often from different countries. The transactions are primarily payments for goods and services, products, or other financial transactions.

Often, they are commonly processed using stablecoins or other crypto assets. Networks like Ripple and Stellar are the two platforms that provide cross-border blockchain payment services to institutions or individuals.

The other type of blockchain cross-border payment is the person-to-person transactions between two individuals in different countries through smart contract technology. These transactions are made possible by centralized and decentralized crypto exchanges.

Cross-Border Payments Use Cases

With distributed ledger technology, Ripple, one of the leading blockchain payment platforms, enables financial institutions to send and receive funds in various currencies within seconds. Hence, eliminating the need to wait weeks or months to complete transactions as it is obtainable with traditional platforms.

Unsurprisingly, Ripple’s governance token, XRP, is the token utilized to facilitate international financial payments involving different fiat currencies. Another decentralized open-source blockchain platform is Stellar, which facilitates borderless transactions through its native asset Lumens (XLM).

JPMorgan’s Onyx platform also leverages blockchain technology to facilitate efficient and speedy cross-border payments. Meanwhile, blockchain-based cross-border payment systems are susceptible to risks like other payment solutions.

Hence, experts warn users to take appropriate safety measures to avoid losing their funds.

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