The future of cross-border payments in Asia is atomic

Written by Kapronasia || April 04 2023

Defining atomic settlement

Atomic settlement refers to exchanging assets between two parties in a single transaction, typically instantaneously and often without intermediaries. This can be particularly useful in cross-border payments, as it allows for faster and cheaper transactions compared to traditional methods that rely on a more comprehensive network of correspondent banks or other financial institutions to facilitate the transfer.

In the future, atomic settlement will likely become more widely adopted in cross-border payments, as it offers several benefits over traditional methods. One of the main advantages is the speed of the transactions, as atomic settlement can be completed in a matter of seconds or minutes, compared to the days that may be required for traditional methods. This can be especially useful for businesses that need to make frequent or large cross-border payments, as it can save them time and money on each transaction.

Another benefit of atomic settlement is reduced cost. Because fewer intermediaries are involved, the fees associated with traditional methods can be avoided. This can be especially useful for smaller businesses or individuals who may not have the resources to pay the higher fees associated with conventional methods. Atomic settlement also has the potential of reducing liquidity issues for banks, although this remains to be seen, as we will discuss later.

Atomic settlement in Asia

In Asia, atomic settlement is already being used in several different ways. For example, in mainland China, the e-CNY settles in near-real time. Digital currency is being developed in China as a way to improve the efficiency of the country's financial system and to reduce the reliance on traditional intermediaries.

Outside mainland China, several regional players are looking to provide atomic settlement solutions for cross-border payments. One example is the Hong Kong Monetary Authority (HKMA), which is working on the Multiple Currency Settlement Platform (MCSP) project. The MCSP is a blockchain-based platform that allows for the atomic settlement of transactions in multiple currencies, including the Hong Kong dollar and the Chinese renminbi.

Private players are also looking at blockchain-based atomic settlement solutions. One is London-based Fnality.

Fnality's main product is a platform called "Utility Settlement Coin" (USC), which is designed to facilitate the atomic settlement of transactions between banks and other financial institutions. USC uses blockchain technology and smart contracts to rapidly exchange assets between parties, without the need for intermediaries.

According to Fnality, USC has several key benefits over traditional methods of cross-border payment settlement. These include faster transaction speeds, reduced costs, and increased transparency and security. USC is designed to be highly scalable and can be used for transactions of all sizes, from small retail payments to large corporate transactions.

In addition to USC, Fnality is also working on other products and services related to atomic settlement. For example, the company is developing a range of APIs (Application Programming Interfaces) that will allow other businesses and organizations to integrate atomic settlement capabilities into their systems and processes.

Singapore-based Partior is another startup focused on developing atomic settlement solutions for cross-border payments. One of the company's main offerings is "Atom," designed to facilitate the atomic settlement of transactions between banks and other financial institutions. Atom uses blockchain technology and smart contracts to enable the rapid exchange of assets between parties without the need for intermediaries.

The future

Over the past few years, due to intense competition, cross-border payments have indeed become better, faster, and cheaper for both retail and business. While the idea of atomic settlement is appealing, it's still uncertain as to how this all shakes out.

Firstly, it is unclear that blockchain is even needed for these transactions. Right now, the private firms creating atomic settlement solutions primarily rely on settlement banks that sit in the middle and serve as gateways. With that structure, could a simple database accomplish the same thing?

Secondly, the purported benefits are also not entirely sustainable. An argument for atomic settlement is that it frees up liquidity for banks. While this is somewhat true, banks still need to have money on deposit with the gateway banks - that requirement doesn't just disappear because the transaction is atomic.

Nevertheless, atomic settlement will be a crucial part of the story in 2023, and continued private, and public focus on space will undoubtedly be high. Yet, the question if reality will match the hype remains to be seen.