Blockchain Unit – 04

➢ Cross Border Payments

Cross-border payments are essential for individuals, businesses, traders, institutions and other
international organizations. The use of blockchain in cross-border payments makes the process
simpler and seamless.

With the rise of blockchain technology and decentralized finance (DeFi), there is now a growing
need for cross-border payments in the Web3 ecosystem as more people and businesses look to
transact with digital assets.
Blockchain cross-border payments are transactions that occur between two parties in different
countries and are facilitated through the use of blockchain technology.

Traditionally, cross-border payments were enabled by banking and financial institutions, often
involving a complex web of intermediaries, such as correspondent banks and clearing houses. This
can result in high transaction fees, longer processing times and a lack of transparency in the
payment process.

In contrast, blockchain-based cross-border payments aim to eliminate intermediaries, reduce

costs, and increase the speed and security of financial transactions.

Today, cross-border payments on blockchain enable faster payment solutions for business-to-
business and person-to-person blockchain transactions and are proving to be a game-changing
financial move in international money transfers. This makes cross-border payments and
settlements a prominent blockchain use case.

Cross-border payments using blockchain technology leverage the decentralized and secure nature
of the blockchain to facilitate transactions between parties in different countries and using
different currencies. The benefits of blockchain-based cross-border payments over conventional
transnational payments and settlements are driven by the novel architecture of blockchain- and
ledger-based technologies.

Traditional cross border payments face its own challenges of high cost, limited transparency,
limited access and centralized control. On the other hand, smart contracts automatically enforce
blockchain cross-border payment transactions as per predefined rules. This removal of
intermediaries results in instantaneous transactions with full transparency.

Cross-border payments offer several advantages over traditional international bank financial
transfers:
 1. Near real-time processing: Today, blockchain cross-border transactions have four to six
seconds of the average velocity of money on a 24/7 basis and without intermediaries.
2. Low-cost: Removal of intermediaries and better scaling solutions have allowed for transaction
costs to be drastically reduced on blockchain transfers. However, gas fees vary as per demand
and supply and market dynamics.
3. Automated record-keeping: The immutable blockchain ledger technology enables transparency
and verifiable records as all payment transactions and relevant data are automatically
timestamped and recorded.
4. Secure: Public-private cryptography, data hashing, multi-party authorization and fraud
detection smart-contract enablers provide security in cross-border transactions.

➢ Know Your Customer (KYC)

Know Your Customer (KYC) standards are designed to protect financial institutions against fraud,
corruption, money laundering and terrorist financing.

KYC involves several steps to:

- establish customer identity;
- understand the nature of customers’ activities and qualify that the source of funds is
legitimate; and
- assess money laundering risks associated with customers.
There are 5 stages in KYC:
1. Customer Identification Program (CIP)
The first stage of any successful customer onboarding process is the Customer Identification
Program (CIP). This program is designed to help identify and verify a new customer’s identity
before they can begin doing business with your company. The main goal of CIP is to protect
both your business and your customers from financial fraud, money laundering, and other
illegal activities.

2. Customer Due Diligence (CDD)

The second stage of the onboarding process is Customer Due Diligence (CDD), which is a crucial
part of onboarding for any financial institution. At this stage, the institution is required to verify
the identity of their customer and assess any potential risks involved in doing business with
them. CDD helps to ensure that the institution complies with anti-money laundering (AML) and
counter-terrorism financing (CTF) regulations.
Institutions are required to obtain information about their customers’ identities, including
name, address, date of birth and identification documents such as passports or driver’s
licenses. Institutions must also conduct ongoing monitoring of their customers’ transactions to
detect any suspicious activity. This includes monitoring for unusual transaction patterns or
activities that are inconsistent with a customer’s profile.
 3. Risk Assessment
As part of the Know Your Customer (KYC) process, financial institutions and other regulated
entities must carry out a risk assessment on their customers. Stage 3 of the KYC process is
dedicated to this important task. The purpose of risk assessment is to identify and evaluate
potential risks associated with providing services or products to a particular customer or group
of customers.

4. Ongoing Monitoring
Ongoing Monitoring for KYC is crucial to mitigate potential risks associated with fraudulent
activities in the financial sector. Financial institutions need to ensure compliance with Anti-
Money Laundering and Know Your Customer regulations by continuously monitoring their
customers’ risk profiles. The ongoing monitoring process is one of the final stages of the KYC
process, which involves identifying, verifying, and assessing customers’ identities and
understanding their financial transactions.
Ongoing monitoring is essential because it provides a means of detecting suspicious activities
such as money laundering, terrorist financing, or other forms of financial crimes that may occur
after customer onboarding.

5. Reporting Suspicious Activities

As financial institutions continue to strengthen their Know Your Customer (KYC) policies, the
importance of reporting suspicious activities cannot be overemphasised. In an era where
cybercrime is on the rise and fraudsters are becoming increasingly sophisticated, KYC
monitoring provides a crucial first line of defence. However, detecting suspicious activities is
not enough if they are not reported promptly.
Reporting suspicious activities has become mandatory for banks and other financial institutions
as part of their compliance obligations. This means that any activity that appears suspicious or
out of the ordinary should be reported immediately to relevant authorities. Failure to report
these activities can result in hefty fines and reputational damage for institutions.
KYC, or Know Your Customer, is a crucial process in the financial industry to verify the identity of
customers. Here's why it's important:
a. Prevention of Financial Crimes:
KYC helps prevent money laundering, terrorist financing, and other financial crimes by
verifying the identity of customers and ensuring they are not using the financial system for
illicit purposes.
b. Compliance with Regulations:
KYC is a legal requirement in most jurisdictions as part of anti-money laundering (AML) and
counter-terrorism financing (CTF) regulations.
c. Risk Management:
 KYC helps financial institutions assess the risk associated with each customer based on factors
such as their identity, occupation, country of residence, and transaction history.
d. Protection of Customers and Institutions:
KYC protects both customers and financial institutions from identity theft, fraud, and
unauthorized transactions.
e. Enhanced Trust and Reputation:
Implementing robust KYC processes enhances trust and credibility in the financial system.
Customers are more likely to trust financial institutions that prioritize their security and
comply with regulations, leading to stronger relationships and a positive reputation for the
institution.

➢ Food Security
➢ Mortgage over Blockchain
Blockchain mortgage value chain currently faces a lot of fragmentation due to the involvement of
numerous intermediaries. It is fundamentally paper-based and manual which makes it more prone
to errors than other industries that have adapted well to the digital revolution.

Blockchain technology might have the perfect solution to transform the mortgage industry. There
could be a considerable reduction in costs, due to reduction in the paperwork and intermediaries
involved. There could also be increased customer satisfaction and retention due to a smoother
process.

Being a decentralised, contract based transparent transaction management system blockchain

offers a uniquely powerful way to link mortgage origination, initiation and execution. It can reduce
costs, fees, fraud, time and improve efficiency, certainty, reliance and transparency.

Working of Blockchain Mortgage

Let us try understanding a Blockchain mortgage using an example.

A person wants to buy a home and is already pre-qualified for it. They will complete the
application, which will become a block on the blockchain. Every party involved in the process will
have access to the block. This will allow them to easily and quickly verify the information.

If and when the loan is approved, the buyer will receive an encrypted key in order to sign the offer
Their signature will be recorded as a new block to the chain. Then the funds will be transferred on
the blockchain as well, and hence become a block on the chain. This entire process will take mere
days, instead of a month.
 After the mortgage is approved, mortgage servicers can use blockchain to track payments from
the borrowers. Furthermore, any refinancing or selling of the property can be managed easily as
blockchain can be used to verify property ownership.

➢ Blockchain enabled Trade

➢ We Trade – Trade finance network
➢ Supply chain financing
Supply chain finance (SCF) is a term describing a set of technology-based solutions that aim to
lower financing costs and improve business efficiency for buyers and sellers linked in a sales
transaction. SCF methodologies work by automating transactions and tracking invoice approval
and settlement processes, from initiation to completion. Under this paradigm, buyers agree to
approve their suppliers' invoices for financing by a bank or other outside financier--often referred
to as "factors." And by providing short-term credit that optimizes working capital and provides
liquidity to both parties, SCF offers distinct advantages to all participants. While suppliers gain
quicker access to money they are owed, buyers get more time to pay off their balances. On either
side of the equation, the parties can use the cash on hand for other projects to keep their
respective operations running smoothy.

Example of Supply Chain Finance

A typical extended payables transaction works as follows: Let’s say the buyer, Company ABC,
purchases goods from the seller, Supplier XYZ. Under traditional circumstances, Supplier XYZ ships
the goods, then submits an invoice to Company ABC, which approves the payment on standard
credit terms of 30 days. But if Supplier XYZ is in dire need of cash, it may request immediate
payment, at a discount, from Company ABC's affiliated financial institution. If this is granted, that
financial institution issues payment to Supplier XYZ, and in turn, extends the payment period for
Company ABC, for an additional further 30 days, for a total credit term of 60 days, rather than the
30 days mandated by Supplier XYZ.

➢ Identity on Blockchain
Identity management, or identity and access management (IAM), applies to any situation where
someone uses a login process to use an app or website and has specific levels of access to
information, technology, or service. IAM is used for a variety of cases whether an individual is
logging into websites for personal use or an employee using technology to do their job at an
organization.
Because there have been so many problems around the world as a result of older, less secure
identity management systems including data breaches, large-scale hacks, and sharing people’s
sensitive information without their knowledge, there have been increasing regulations about how
personal data is collected, stored, used, and shared.
Thankfully, blockchain identity management technology can effectively solve these problems by
enhancing security, efficiencies, data accuracy, and accessibility. Blockchain identity solutions are
becoming more popular as they offer a safe and cost-effective way to manage digital identities.
Users store their ID data and credentials in a decentralized identity wallet app, and the blockchain
enables this data to be instantly verifiable without having to contact the issuer. ID Wallets provide
users with more control over their personal information.

Identity management is the framework of processes, policies, and technologies to ensure that only
authorized people have access to technology resources, information, or services. Identity and
access management systems are continuously evolving to improve security and the user
experience.