Anil Kumar NayakPrincipal Consultant

Ripple (payment protocol) for Settlements on Blockchain

Anil Nayak 1

Takeaways : Introduction to Ripple

• What is Payment?

• Current Payment Infrastructure and Participants

• How can Blockchain disrupt current way of achieving end goal?

• Introduction to Ripple Blockchain

• Introduction to Consensus

• How to use Ripple Blockchain to achieve Consensus and make payments?

What is Payment

Debit Credit

Account 1 Account 2

Payment

Payment For ?Cross Border FX … ?Instrument Used ?Processing and Clearing, how ?Finally the Settlement

SubmissionBank’s Internal

ProcessingClearing

Interbank Settlement

Bank’s Internal Processing

Information and Communication

Backend is Changing

Capital Markets: Delivery versus Payment (DvP)

• Delivery versus payment or DvP is a common form of settlement for securities.

• The process involves the simultaneous delivery of all documents necessary to give effect to a transfer of securities in exchange for the receipt of the stipulated payment amount.

Current Payment Infrastructure and Participants

Real Time Gross Settlement

Designated Time Net Settlement

HybridSystems

Country/Area System Type

Large Value Payment Systems

Euro Area TARGET2 RTGS

Euro Area EURO1 Multilateral Netting (MN)

Canada LVTS Multilateral Netting (MN)

Japan BOJ-NET RTGS

Japan FXYCS RTGS

United Kingdom CHAPS RTGS

United States Fedwire RTGS

United States CHIPS MN/BN/BA

Global CLS RTGS

Retail Payment Systems

Euro Area STEP2 Batch Settlement (BA)

Euro Area CORE, RPS Multilateral Netting (MN)

Euro Area Equens MN/BA

United Kingdom VOCA (Formerly BACS) Netting (N)

United States FedACH Batch Settlement (BA)

Canada ACSS Multilateral Netting (MN)

Japan Zengin System Multilateral Netting (MN)

IMPS, etc.

SWIFT (Society for Worldwide Interbank Financial Telecommunication )

MT 1XX Customer PaymentsMT 2XX Financial Institution Transfers

MT 103 message details . These fields are referred to as tags.

Field Field Name

:20 Transaction Reference Number

:23B Bank Operation Code

:32A Value Date / Currency / Inter bank Settled

:33B Currency / Original Ordered Amount

:50A, F or K Ordering Customer (Payer)

:52A or D Ordering Institution (Payer's Bank)

:53A, B or D Sender's Correspondent (Bank)

:54A, B or D Receiver's Correspondent (Bank)

:56A, C or D Intermediary (Bank)

:57A, B, C or D Account with Institution (Beneficiary's Bank)

:59 or 59A Beneficiary

:70 Remittance Information

:71A Details of Charges (OUR/SHA/BEN)

:72 Sender to Receiver Information

:77B Regulatory Reporting

Directive on Payment Services (PSD)

• Standardisation and The Directive on Payment Services (PSD) provides the legal foundation for the creation of an EU-wide single market for payments.

• Directive on Payment Services (PSD2). Standardise and make interoperable card, internet and mobile payments. Reduce barriers to entry, in particular for card and internet payments.

• Why ?

• FinTech and Technology is changing the Industry

Payment Works: Present

1. SWIFT Messaging as communication2. Reconciliation (Nostro Vostro) – Network

management3. Settlement4. Payment

Commit then validate by ReconciliationOne challenge with the existing model is it still relies on the need to maintain and reconcile two separately held versions of the account statement (i.e. the Nostro account holder maintains their own mirror ledger). A number of challenges ensue, including:• poor payment transparency, for both banks and customers;• onerous reconciliation activities and investigations;• delays in advising of fund disbursement; and• inefficiencies in management and usage of liquidity and funding.These issues could be largely addressed if the industry were able to trust a single record of account, to be shared and maintained by multiple correspondent banks.

Automation and Efficiency

• Risk and fraud opportunities are a strengthening headache when it comes to instant payments. Due to the time taken to clear and settle the transactions, risk and fraud management

• Automation: RPA (Robotics Process Automation)

• Efficiency & Automation : Artificial Intelligence

• NEXT PROCESS ….

Blockchain – A Complete new paradigm

Trust a single record of account

A distributed ledger is a consensus of

replicated, shared, and synchronized

digital data geographically spread across

multiple sites, countries, and/or institutions.

Consensus ProcessThe process a group of peers responsible for maintaining a distributed ledger use to reach consensus on the ledger’s contents.

Reconcile then Commit

What is Blockchain (for business network)

1. Shared ledger ( where provenance of information is clear and transparent. Transactions will be immutable (unchangeable) and final)

2. Privacy and confidentiality (Cryptography)

3. Consensus

4. Smart contracts

• It’s a Database where commit is done post consensus

• Ripple is Private Blockchain Platform

• software platform. a major piece of software, as an operating system, an operating environment, or a database, under which various smaller application programs can be designed to run.

Interledger (ILP) and Ripple Connect

ILP Protocol

Interledger Protocol (ILP)All banks and payment providers — from the smallest to the largest — can leverage the Interledger Protocol to securely and efficiently transact cross currency. ILP can work with any new network or system, regardless of its underlying technology. It ensures the payment speed and certainty necessary to service high volumes of all payment types and sizes, while making them cost-effective for customers and profitable for banks.

Ripple ConnectRipple Connect links the ledgers of financial institutions through ILP for real-time settlement of cross-border payments in a way that preserves the ledger and transaction privacy of the financial institution. Additionally, Ripple Connect provides a way for banks to exchange originator and beneficiary information, fees and the estimated delivery time of the payment before it is initiated — providing unprecedented visibility into each transaction.

Settlement on ILP

Settlement on ILP using Banks current Infrastructure

ILP Ledger coordinates fund movement between institution to settle the payments

Liquidity

Payment Initiation

Forex liquidity providers, along with market makers, aim at lowering volatility on the market, providing uninterrupted transactions and optimal price policy, and supporting the volume of transactions.

Coordination

Cryptographic Hold of Fund (Escrow)

Simultaneous ReleaseNo Settlement RiskExecutes or Fails

Ripple

All party are part of Ripple post KYC and it’s a private ledger

ConsensusRipple Protocol Components• Server

• Ledger

• Last Closed Ledger

• Open Ledger

• Unique Node List (UNL)

• Proposer

What is Ripple again

• Ripple is a distributed financial technology that enables real-time fund settlement between banks across currencies, geographies and payment networks via Consensus (DLT)

Ripple as a common ledger to clear and settle transactions

• Ripple is an Internet-based technology for directly connecting banks and payment systems. Banks can use Ripple as a common ledger to clear and settle transactions in real-time at the lowest-possible cost. Ripple structurally alters the payment process by enabling:

• Bilateral settlement: Eliminates intermediaries, midpoint failure, delays, lifting fees

• Real-time funding: Minimizes exchange spreads (basis risk), credit risk, collateral costs

Risk Managed

Ripple: Open source distributed ledger

• A toolbox with entity management, pre-transaction negotiation, payment execution and payment notification functions

• Holds balances of different items of value, which can be exchanged using a path-finding algorithm

• Confirms transactions (without a central operator) in 5 seconds

• Path finds the most efficient way to exchange value (i.e.: execute a currency trade with best liquidity provider)

• Payment Service Provider (PSP) would create a copy of their ledger on Ripple –keeping collateral on its existing ledger – select counterparts, the algorithm selects the more efficient path, the consensus settles the transaction

• Alternative to correspondent banking: would enable real time bank-to-bank cross-currency payments at low cost, not tying up liquidity

Start your Payment Business

Thank You

Please attend the Blockchain Bootcamp as next step …….

BENEFITS FOR SYSTEM INTEGRATORS & TECHNOLOGY PARTNERS

Ability to expand their offering to banks to include a real-time settlement infrastructure solution

Solutions for corporates to address their current difficulties in international payments, with increased speed, certainty and reduced cost through Ripple

Ability to expand their corporate working capital solutions portfolio with access to real-time international payments technology

“Playtime is over, show me the value.”

Appendix

• How Ripple works https://www.youtube.com/watch?v=5e2jDFL1kKI

• Consensus https://www.youtube.com/watch?v=NHvPkS09LAI

• Consensus Technical https://www.youtube.com/watch?v=7abKUs9tYZg

• Other Info https://www.youtube.com/channel/UCjok1uTSBUgvRYQaASz6YWw