10 Risk Factors Impacting Cross Border B2B Payments – Post 2

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The following post is written by Leslie Stroh, former editor and publisher of The Exporter.  Leslie Stroh is now involved in two bockchain start-ups, and sits on the advisory board of the Weissman Center for International Business, Baruch College, CUNY.

As most of us know, sending a payment across borders through banks can be both time consuming and expensive. I can travel from Vancouver, Canada to Barcelona quicker than money can get there. In fact, we know that if I send $100, the receiver will get something less, and neither of you know how much less depending on how many hands are in the pie taking a piece. The quest for real-time B2B cross border payments can seem like the search for the holy grail.

Yesterday we looked at five risk factors to address with cross border B2B payment systems. Today we look at five more:

Security/Privacy

The idea of a public record of transactions strikes at the very heart of privacy. Security is the base of privacy. A hack is nothing more than breaking and entering, which has existed as a legal concept of home protection for a long time.

The only people/organzations who need to know about a transaction are the buyer and the seller with their network participants and the legally constituted regulatory authority within their sovereign jurisdiction however defined.

Inter-operability/Inter-connectivity risk

Interoperability is like making a blood transfusion from your arm to the recipients arm. Inter-connections allows for the collection in one place and the distribution in another.

Inter-operability means putting a foreign body in your body to harmonize the functions of your operating organs. That is a long way away. Inter-connectivity is a much more achievable goal. With 200 sovereign nations and 3,400 crypto coins the likelihood of a new gold standard evolving, with attendant problems, is remote—well beyond six sigma.

In other words, the cobbled together legacy systems of banks are not likely to evolve as an inter-operable whole.

Trigger risk

Ask yourself, what triggers a payment? How do you define it? How does a smart contract define it? How does applicable court precedent define it—acceptably in both cross border jurisdictions. Enforcement risk is the by-product of payment trigger risk.

By definition new smart contracts do not yet have a legal history.

Reconciliation risk

Reconciliation depends upon record retention. Blockchain is essentially a sealed bankers box, or evidence envelope that has a pre-determined audit trail. Courts have been dealing with evidence trails for years. Blockchain is a technological solution, amongst other solutions. All evidence solutions depend upon judicial acceptance.

This gets at the very simple point. If the payor (risk 1.) wants to pay, they will. If they don’t want to pay, the cost of enforcement may outweigh the profits on numerous successful transactions.

 Technology vs Experience

Hawala and other payment systems have evolved over thousands of years through experience. Human nature hasn’t changed. At the end of the business day, people make decisions. It is the height of hubris to try to eliminate the impact of people.

In Kanesh, 2,500 BCE, they sealed contracts in clay evidence bags, and stored them in a sealed room. They also had a functional adjudication system for dispute resolution. The key difference was that inheritors inherited liabilities as well as assets.

Risk 1 (payor risk) and Risk 10 (reconciliation risk) expressed as crypto currency index and blockchain are the proposed as the basis for a technological revolution, without incorporating mitigation of all the other risks inherent in a cross border business transaction.

This is nuts.

And the idea that competing businesses will adopt one inter-operable (instead of inter-connected) system is Alice in Wonderland (with apologies to Alice).

Business is a culturally defined social network operating at many levels. The technologists have too few assumptions in their business model.

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