A. General Information
LACCHain cross-border payments project
B. Lessons Learned
The project used the LACChain Blockchain Network to power payments from the IDB’s headquarters in Washington, D.C., to a recipient in the Dominican Republic.
The goal of this PoC was to demonstrate that it is possible to use blockchain technology to accomplish cross-border payments while reducing costs and times as well as increasing traceability of the transactions, intermediaries, and fees.
The IDB sends several thousands of transactions a year from the headquarters (HQ) in Washington DC the Latin American and the Caribbean Region, to fund projects through grants and loans, fund the country offices (COFs), and make payments to local service providers. These transactions usually involve IDB’s Agent Bank, an intermediary Bank that facilitates the currency exchange, and the Beneficiary’s Bank. This leads to high transaction fees, reducible times, and improvable traceability.
Payment
This PoC worked with b-money. Specifically, two stable coins were created, pegged to the US Dollar and to the Dominican Peso, respectively. These tokens were always backed-up by fiat money in bank accounts that is guaranteed by Citi Bank as the Bank Agent and the financial institution providing the liquidity of b-money on the blockchain. This development has been based on an Ethereum Request for Comments (ERCs) that defines a set of rules required to implement tokens for the Ethereum ecosystem: the ERC-2020. The ERC-2020, a set of extensions of the ERC-20, known as the E-Money Token Standard, is “a proposed standard for e-money, bank and central bank money issued tokens, with extended functionalities such as holds, clearance, detailed compliance, funding, and payout”. The E-Money Token is “working with global institutions, such as the International Telecommunications Union (ITU) and the Enterprise Ethereum Alliance (EEA) to become the standard for the use of real financial money on blockchain” and has been recognized in the Technical Report elaborated by the ITU’s DLT Focus Group on August 2019.
LACChain system
Privacy and correlations: one of the main challenges when using blockchain networks as the public ledgers for the exchange of digital assets, and particularly tokenized money, is that transactions are immutably recorded and completely exposed to anyone with access to the public network. Blockchain not only does not guarantee privacy by default but presents very relevant challenges to erase potential correlations and personal identifiable information from transactions made in different contexts by the same blockchain account. Therefore, if the identity behind a pseudonymous account is discovered in one context, the entire transaction history of that identity is revealed because of the public character of the blockchain. One potential solution is the use of mixers. Mixers allow to erase the traceability of blockchain transactions in a way that it is not possible to link the sender with the recipient. Blockchain-based identities: today, digital identity is far from ideal. In general, there are not suitable ways to identify individuals electronically with the maximum level of assurance, which is necessary to provide digital services with all the guarantees. Blockchain networks are not exempt from this. With the aim of overcoming this, a set of standards and tools coming up under the scheme Self-Sovereign Identity (SSI), such as the Decentralized Identifiers (DIDs) and the Verifiable Credentials (VCs) from the W3C are intended not only to improve the interoperability, ownership, pseudonymity, portability, recovery, scalability, and security of the digital identification and authentication of individuals, but to also match real identities with blockchain accounts in a trustable, reliable, and essential way to guarantee compliance with KYC and AML processes when dealing with tokenized money -and other digital assets- living in blockchain networks Key management: key management is one of the biggest challenges when dealing with blockchain tokens of any kind. For large institutions it is easier to use key vaults or HSMs to store the private keys and leverage their corporate solutions for the identification of employees, allowing each individual to use their private keys indirectly when generating blockchain transactions from friendly interfaces. For individuals, it is not straightforward. Digital wallets are the personal and private repositories proposed in the SSI model for this purpose, but there is still some work to be done around developing good mechanisms for things such as authorization to access the wallet authorization to use digital tokens, authorization to use the digital identity to access digital services, and recovery of private keys and credentials in case a digital wallet is lost or compromised. Transaction throughput and fees: when dealing with blockchain networks, transaction throughput and fees can become strong limitations. The number of transactions a blockchain network can process per second is and will always be limited, because of the time required to process them and reach consensus, and the block size. Similarly, incentive mechanisms in certain types of networks -in general permissionless- require paying a fee for each transaction. Shardings and second layer solutions for transaction processing such as state channels and rollups are interesting alternatives under development to guarantee scalability. Permissioned public networks with no transaction fees and incentives based in fixed memberships seem suitable to guarantee affordable costs.
All the transactions sent in the timeline of a month from the IDB HQ bank account to the account in Dominican Republic were accomplished successfully. This PoC was a single-banking effort, involving only Citi Bank as an intermediary. Real cross-border situations will generally involve two, including the sender’s Bank and the recipient’s Bank, or more. These two financial institutions will typically have their own smart contracts for the tokenization of money integrated with the core financial systems. Therefore, when the sender sends digital money minted by one financial institution and the recipient aims to cash out with a different financial institution, settlement is required. We understand that multi-purpose networks that enable payments using tokenized money are not suitable for settlements, as settlement networks require specific regulatory frameworks and governance models. Thus, we think that it might be necessary to develop clearing mechanisms that could also leverage blockchain networks that can be interoperable with commercial blockchain. For instance, two financial entities could provide tokenized money for their customers in a commercial blockchain network and settle payments in another specific purpose blockchain network, as shown.
C. Relevant Standards
The architecture of the PoC was designed and implemented in three layers: front-end, API and back-end, as described below:
- The front-end layer allows user interaction via a web interface that requires user authentication using a key vault. Front-end components include a React.js UI that integrates the Ethereum web3.js collection of libraries enabling interaction with the LACChain network as illustrated in the use cases sequence diagrams.
- The API layer consists of two endpoints, one endpoint exposes the business logic for users, roles and accounts, the other endpoint exposes container-based Citi-API-Proxy that provides transparent access to Citi’s WorldLink API
The back-end layer comprises:
- container-based Java/Spring Boot business logic application Management Service uses a container-based PostgreSQL database to manage users, roles, and account information.
- container-based Go application IDB_Service interacts with the Cross-Border Payments’ smart contracts for operations (Execute transfer, Dollars to exchange, Dollars to pesos, Pesos to recipient).
- container-based Eventeum application listens to the smart contract’s events using geth and JSON-RPC. In the LACChain network topology, writer nodes are the only nodes allowed to broadcast transactions to the network.