Blockchain and Crypto
Inside Santander’s plans to digitize money
- Santander isn't onboard with cryptocurrencies but is optimistic about the idea of digitizing central bank currency using Ripple's technology
- The Spanish banking giant recently launched the first blockchain-based mobile payment service for retail customers
Many banks focus their blockchain efforts on post-trade processing or bank-to-bank payments, but Santander is working on tokenizing payments for retail customers.
The Spanish banking giant’s U.K. arm recently launched One Pay FX, a mobile payments service for its U.K. debit card holders that want to send payments to people in Euro Zone countries and the U.S. It’s the first market-ready product built on blockchain technology, Ripple’s xCurrent protocol, for retail customers. It had been running as a pilot for employees for the last 18 months.
“This idea of tokenized money is something we’re investing in a lot,” said Julio Faura, head of research and development for the bank's blockchain practice, at a recent industry conference in New York. “We’re thinking of using it … for more retail uses like creating commercial bank-backed digital money to do payments and liquidity management.”
Ripple’s xCurrent product does not use XRP, the native currency of the Ripple platform.
“Tokenizing payments” means Santander effectively creates a digital representation, or token, of money sitting in a bank account. That token lives on a smart contract within a single ledger that would ideally be shared with several banks that can trade those tokens with each other over the blockchain, allowing the banks involved to initiate and settle payments in real time “if you think the tokenization and detokenization processes are well done,” Faura said.
The partnership between Ripple and Santander goes back to 2015, when the bank invested several million dollars in the startup, which began as an open-source, peer-to-peer software project similar to bitcoin but later began pitching its technology to financial institutions to use behind the scenes to rival other global payments messaging systems, namely, Swift. Ripple allows banks to pay each other directly, thereby eliminating processing fees that come with operating through correspondent banks. It also allows cuts operational costs.
Santander, one of the founding members of R3 CEV, a prominent consortium of banks investing in the company’s blockchain technology for financial applications, soon became one of the first members to exit the group as it concentrated on other payments-focused group work like the Utility Settlement Coin — “a tokenized version of central bank money,” in Faura’s words — and the Global Payments Steering Group.
Even though faster payments are one of the more prominent use cases for blockchain technology among banks, Faura said the holy grail of blockchain applications is in capital markets uses.
“The problem is that it’s too complex,” he said. “There are too many systems, too many things that need to talk to each other, and it’s very difficult to tackle just one part” at a time.
The uses of digital money will go beyond customers’ international mobile payments, though. Ideally, they’ll soon be able to use “digital money” to make micropayments, ESCROW payments and utility payments, among other things — which is part of the reason Santander is participating in the Alastria network of more than 200 companies including Spanish banks, energy companies, telecom companies, startups and public administration organizations.
“Once we create this digital money, it’s like [using] a prepaid card,” Faura said. “Instead of using a proprietary database we use a smart contract that lives on” a shared ledger. And “with those digital representations of money we’ll be able to do settlement for other instruments” like equities and bonds.
Santander doesn’t have plans to implement cryptocurrencies. Bitcoin is still the best use case for cryptocurrencies — but because of the speculation and long-term savings opportunities, not any payments prospects.
And as long as cryptocurrencies’ values move based on speculation, they’ll always be volatile, “unless we fix the price, but price is essentially tokenizing money — it’s just pegging value.” That’s why Santander sees tokenizing existing fiat currencies as the way toward a digital future.
“I don’t understand why we should create that market risk and have that store of value to exchange value when we can do it with something we know and can hedge against and is the currency through which we mediate all our economic activity.”
“This idea of tokenized money is something we’re investing in a lot,” said Julio Faura, head of research and development for the bank's blockchain practice, at a recent industry conference in New York. “We’re thinking of using it … for more retail uses like creating commercial bank-backed digital money to do payments and liquidity management.”
Ripple’s xCurrent product does not use XRP, the native currency of the Ripple platform.
“Tokenizing payments” means Santander effectively creates a digital representation, or token, of money sitting in a bank account. That token lives on a smart contract within a single ledger that would ideally be shared with several banks that can trade those tokens with each other over the blockchain, allowing the banks involved to initiate and settle payments in real time “if you think the tokenization and detokenization processes are well done,” Faura said.
The partnership between Ripple and Santander goes back to 2015, when the bank invested several million dollars in the startup, which began as an open-source, peer-to-peer software project similar to bitcoin but later began pitching its technology to financial institutions to use behind the scenes to rival other global payments messaging systems, namely, Swift. Ripple allows banks to pay each other directly, thereby eliminating processing fees that come with operating through correspondent banks. It also allows cuts operational costs.
Santander, one of the founding members of R3 CEV, a prominent consortium of banks investing in the company’s blockchain technology for financial applications, soon became one of the first members to exit the group as it concentrated on other payments-focused group work like the Utility Settlement Coin — “a tokenized version of central bank money,” in Faura’s words — and the Global Payments Steering Group.
Even though faster payments are one of the more prominent use cases for blockchain technology among banks, Faura said the holy grail of blockchain applications is in capital markets uses.
“The problem is that it’s too complex,” he said. “There are too many systems, too many things that need to talk to each other, and it’s very difficult to tackle just one part” at a time.
The uses of digital money will go beyond customers’ international mobile payments, though. Ideally, they’ll soon be able to use “digital money” to make micropayments, ESCROW payments and utility payments, among other things — which is part of the reason Santander is participating in the Alastria network of more than 200 companies including Spanish banks, energy companies, telecom companies, startups and public administration organizations.
“Once we create this digital money, it’s like [using] a prepaid card,” Faura said. “Instead of using a proprietary database we use a smart contract that lives on” a shared ledger. And “with those digital representations of money we’ll be able to do settlement for other instruments” like equities and bonds.
Santander doesn’t have plans to implement cryptocurrencies. Bitcoin is still the best use case for cryptocurrencies — but because of the speculation and long-term savings opportunities, not any payments prospects.
And as long as cryptocurrencies’ values move based on speculation, they’ll always be volatile, “unless we fix the price, but price is essentially tokenizing money — it’s just pegging value.” That’s why Santander sees tokenizing existing fiat currencies as the way toward a digital future.
“I don’t understand why we should create that market risk and have that store of value to exchange value when we can do it with something we know and can hedge against and is the currency through which we mediate all our economic activity.”