Banking on Blockchain: Ukraine’s First Instant Payments Rail

Welcome to Fintech Beat, where finance, technology, and policy come together. I'm your host, Chris Brummer, and the future of finance is now. Welcome all to Fintech Beat. This episode is brought to you by my company, Blueprint, the crypto disclosure firm.

Are you looking to comply with rules like Mika or building regulatory compliant tools on chain? If so, reach out. That's Blueprint, B-L-U-P-R-Y-N-T dot com. Today we're diving into an interesting development in the world of payments and in a part of the world that is on everyone's mind nowadays, Ukraine.

Now you've probably heard of instant payment systems like Brazil's PIX or Zelle in the United States. But what if a similar system existed on a public blockchain, offering the same speed and convenience, but with the transparency and accessibility associated with distributed ledgers? Well, that is exactly what Stellar is aiming to achieve with its new Transparent Network, or TPN, a project supported by various stakeholders, including the Independent Association of Banks of Ukraine and prominent Ukrainian businesses like Rosetka and Kiev Digital.

Now, for decades, payments infrastructure has long been dominated by big banks and large financial institutions that can at times crowd out the smaller players looking for networks and positive network effects. Stellar's TPN is trying to change all of that by offering an instant payments infrastructure that could potentially compete with traditional rails with all the convenience and features of the mighty global heavyweights. But can blockchains really serve as instant payments rails in formal banking systems?

And if so, what does this kind of system mean for traditional finance, and for that matter, international messaging systems like SWIFT? Will there be a hostile takeover, an uneasy cohabitation, or something else? Well, to help us unpack it all, we are joined by Paul Wong, who is heading special projects at the Stellar Foundation. The Steller Foundation has worked closely with me at Blueprint to support our work aimed at transforming disclosure in capital markets, so stay tuned for some announcements.

But in this episode, we're going to explore how blockchains go to market in banking and whether they really have the potential to compete with established players on terms very different from the early ages of crypto. Paul, it's so great to have you on the show. Thanks for making it. Thank you, Chris, for having me.

It's a pleasure to be here. And it's a real privilege to be chatting with one of the great thought leaders in the blockchain space. My, my, my, Paul, you are setting expectations unreasonably high, but my friend, we will try our best. But let's jump right into it.

So why do TPN now? And maybe you can just educate us a bit on the gaps in the payments ecosystem that you're trying to fill. Absolutely. The launch of the Transparent Network or TPN by our ecosystem partners, DCM and the Independent Association of the Banks of Ukraine represents, as you noted, a milestone for the blockchain community.

Our ecosystem partners, DCM and the Independent Association of the Banks of Ukraine, which is an association of commercial banks, launched this solution last month to provide instant payments to the Ukrainian economy. What the system does is effectively allow for instant transfers between people, between businesses in real time. It allows for transparent, traceable, and audible payments. For us, what this does is it allows us to support all of those countries that don't have an affordable instant payment solution.

So, you know, this is pretty interesting. I mean, you're building this in Ukraine. I mean, what was the logic behind it? You know, how did you get this idea going forward?

So Stellar has been active in Ukraine since 2021. Stellar had been working with the Ukrainian Central Bank and the Ministry of Digital Transformation on a central bank digital currency project. Because of the invasion of Ukraine, we pivoted or our partners pivoted. And as a result of that pivot, they've been working on developing an instant payment system for Ukraine.

This is Ukraine's first and only instant payment to date. So as you can imagine it received significant attention in terms of its ability to transform the Ukrainian pain in its landscape Well that really interesting You know before going further perhaps it useful to break down the terminology here When you say instant, what do you mean? And what is the problem that you're looking to solve? Instant payments mean that when you receive a credit, when someone sends you a payment, you receive that immediately.

In many cases, like an ACH or a check, you don't actually receive that immediately, right? So systems like Venmo, PayPal, Zelle, RTP, Pix, all of those systems basically credit your account immediately once you receive the payment. Blockchain allows us to do this more efficiently than existing systems. On the blockchain, you can see when the payment was made and when it was credited to your account.

Unlike what happens today with ACH, where I might send you an ACH payment, but you're not going to necessarily receive that immediately. You hopefully will receive it by end of day, but in some cases, it might be the following day or two days later. When you move across from instant payments to other kinds of domestic systems like PIX, what is it about what you're doing that makes this new and different? I think one of the things that makes this incredibly interesting is that you yourself can see it on the blockchain, right?

So again, it goes back to a public blockchain offers transparency, traceability, and audibility in real time. With traditional systems like PIX, I might send you a transaction, but you don't actually You see it until your bank credits your account. And that has always been the challenge with instant payment systems. There's so many systems that are involved, so many legacy systems that things might not necessarily be posted to your account immediately.

Even with Fedwire transfers today, I might send you a Fedwire transfer. The transfer happens immediately at the central bank system on Fedwire. The challenge has always been how do you reflect it on the commercial bank's books in your account? And that's why there's typically a delay.

What blockchain allows us to do is effectively simplify that process and allowed you as the sender receiver to see that transaction recorded on the blockchain. It's pretty interesting. So you actually are bringing in commercial banks directly and doing so on a public blockchain? So what happens today is effectively, for TPN, if I send you a transaction, it's recorded on the blockchain, and those records are transposed to the commercial bank's own ledger.

So in many cases, today, unfortunately, we still have duplicate records, but that's because one of the innovations with this system is that it's integrated into legacy banking systems. That's pretty cool that you're actually building this new infrastructure and retrofitting it for legacy systems. So we've name dropped a little bit about PIX, a little bit about Zelle. How then does TPN compare when it comes to speed and cost?

We've already talked a little bit about transparencies, but what other new features are you bringing to this equation? So TPN provides near immediate settlement finality. So when one sends a payment, that payment is effectively confirmed within five seconds or less, which is on par with different instant payment systems around the world. In terms of cost, because we're using a public blockchain, companies can save a lot of money in terms of infrastructure costs.

So the cost of operating a node is much cheaper than operating three data centers or two data centers. So the cost savings really arises from the use of, one, public infrastructure, two, open source, so that if folks want to develop smart contracts on top of various platforms, they're able to do that. And three, the integration process is much easier because a lot of this stuff is already open source. And then when you think about banks, and I'm sure more than a couple of people's ears perked up, including my law school students, when you think about what a bank is, they are typically some of the most heavily regulated industries.

Lots of talk here in the United States about what that is ultimately going to look like, particularly when you think about that intersection between banks and commercial banks and blockchains. I mean, how is TPN sort of navigating the compliance question, whether or not it'd be the AML KYC requirements or more? And how does it do so in a way that even can maintain benefits of transparency and openness That a great question Chris And we actually spent a lot of time on the regulatory compliance piece One of the things that we done is work with an association of banks.

We're working with a bankers association. TPN is actually operated by a consortium of banks, which is very similar to private sector systems around the world, right? The Clearinghouse, RTP, SWIFT, it's all owned by a consortium of banks. In the case of Ukraine, this solution is operated by a consortium of banks.

Because it is operated by a consortium of banks, it is subject to all of the banking rules that you noted, AML, KYC. So a lot of the compliance issues are handled by banks because it existed within a closed ecosystem. We're hoping to change that someday and hopefully They've changed that quite soon, but in today's environment, it operates within a very well-regulated ecosystem. So things that you talked about are things that are already happening today, and there aren't that many changes.

What TPN is doing is adding an additional banking rail for the country. Well, you're not just introducing a banking rail, you're also creating the only instant payment system in the country. And I can imagine that that kind of project would have a high likelihood of really scaling up. You've got your first mover advantage.

war, I'm sure, has accelerated digital adoption, really priming things for blockchain-based solutions. If TPN offers a better alternative to cash and slow traditional banking transfers, I think you can imagine that adoption could follow quite quickly. But scale and throughput is often a big question with decentralized ledgers and blockchains. How have you guys thought about that particular challenge?

So Stellar is a scalable blockchain. I think the issues around scalability are a little bit overrated at this point. Stellar has a very strong throughput. If needed, it will increase that throughput.

And this is true for most blockchain solutions. I think when a lot of layer ones or layer twos talk about having 100,000 transactions per second, do they need it? No, there's actually not that much volume going through it. Can Stellar scale to 100,000 transactions?

Yes, we have technology on the shelf that will allow us to do this. Has it been implemented? No. And that's partly because we don't really need that type of throughput at the moment.

So in terms of scaling, we can do it. Most chains, I would argue, can do it. One of the things I've learned in technology, Chris, is that technology can do whatever we want it to do. We just need to tell our brilliant engineers what we want it to do.

If and when that time comes that we need to scale up Stellar, or I would argue any blockchain network, it can be done. And I think you've seen it with Ethereum where they're now layer twos. We've seen it with other systems where, you know, at the offset, they can, they claim to be able to, you know, do pretty high throughput. Does Visa need a hundred thousand transactions per second?

No, that's, that's even, you know, that's even more than what Visa processes per second. So, you know, just taking a step back there and, you know, and I love the point of like, we can build, in effect, you're saying we can build whatever we can imagine, right? And, There are little words that you're just throwing around that are circulating around my head a bit. Even you use the word SWIFT, which is kind of an interesting question.

When you think about SWIFT, its role in international payments, what you're trying to build, does the build-out of a system like TPN, what does that mean for systems like SWIFT? like these messaging systems whose functionality ultimately lies in sort of transmitting information, like where along the continuum does a TPN fit? And does it ultimately mean that those kinds of other systems become less important, more important, complementary to TPN? What is the build out of blockchain based ledgers and infrastructures mean here?

I think right now they're complementary systems. So effectively, what we're doing in many parts of the world is adding a new rail. You know, SWIFT has a tremendous network in place, and it's going to be incredibly hard to displace them. Checks, I hate to say this, you know, checks have a purpose.

Its purpose is to serve folks who are not electronic literate It not the right word but those who don want to use technology ACH serves a purpose ACH is great for routine payments for scheduled payments for reoccurring payments And blockchain is fantastic, or public blockchains are fantastic for payments where you want transparency, traceability, and audibility. And I would argue that government payments and government collections would benefit from the use of blockchain. If folks want true privacy, there are other solutions for that.

So I think at least on the TPN side and on the Stellar side, we're offering a different type of rail for certain types of payments and transactions and other digital assets. Yeah, I guess I'll sort of end this question with one that touches on a bit on Ukraine, but really is this larger sort of promise of blockchain-based transactions and what it means in this particular instance, which is this overall question of financial inclusion. Here I'm looking at lots of potential efficiency gains.

It's a different rail for banking. you know, what do initiatives like TPN mean for financial inclusion? Is it sort of setting a building block for other kinds of solutions? Or is it in and of itself something that makes us rethink just commercial enterprise and delivering at lower costs?

That's a great question, Chris. And I think it's all of the above. You know, one of the things I'm most excited about with respect to Ukraine is that TPN is leveling the playing field for banks, right? Banks succeed.

Banks do well or they don't do well based on their network. What TPN allows us to do is break down some of those network effects, right? So one of the interesting things about TPN is that the smallest banks are interested in this solution because it gives them network scale. Some of the biggest banks are the ones that fear this solution because they lose their network effects.

So I am hoping that through this solution that we can effectively create more competition within the Ukrainian banking sector to improve services, to improve financial inclusion. Paul, that's super interesting, particularly that competition question is something that we don't always think about, which is how do we balance opportunities to kind of crack legacy oligopolies at times? And I think that this is a really interesting step in the right direction. Thanks so much for joining the show.

Thank you for having me. As we wrap up today's episode, we're left with some big questions about the future of payments. Stellar's transparent network hints at some changes, not just in technology, but in who gets to control and participate in financial infrastructures. As we've seen, payment systems have been built on centralized rails, with large financial institutions traditionally acting as the governors and gatekeepers.

Now, TPN hints at an alternative, an instant blockchain-based network that doesn't just mimic traditional payment systems, but instead reimagines them in a way that is more, not less friendly for smaller commercial banks. Now, where it all goes is anyone's guess, but one thing is clear. The payment rails of the future are being built today, and whether they are centralized, decentralized, or a hybrid of both, they will define the next era of global finance. Innovation in payments isn't slowing down, and the way we think about speed, transparency, and access to money may be transformed yet again sooner than we expect.

Well, folks, that's the end of another show. And we hope you've enjoyed FinTech Beat. If you have any comments, let us know. I'm on X or Twitter at Chris BrummerDR.

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