From Banks to Blocks: How Blockchain is Powering the Future of Real-Time Gross Settlements (RTGS)

People say bankers sleep easy, knowing their funds are safe. But what do they dream about? Paper trails? Endless transactions? Not anymore. These days, they dream in code.

Yes, the people who once relied on pen, paper, and ancient computer systems are now having vision of blockchain-self executing contracts that never sleep, funds zippering across borders faster than an email, and a world where the word ‘delay’ is extinct. Welcome to the new edge of Real-Time Gross Settlement (RTGS), where old money meets new technology and redefines how the world moves its wealth.

In this space, it’s not about moving money faster --- it’s about the reinvention of trust. RTGS has long been the unsung hero of high-value payments, ensuring millions, if not billions, change hands without a hitch. But even heroes age. What happens when you integrate blockchain --- the rebel, the disruptor --- into the core of traditional finance.

The integration introduces a financial landscape where intermediaries shrink, costs decrease, and liquidity become more fluid. It’s a step towards frictionless finance, one that carries the weight of transforming the global economy.

Understanding RTGS: The Conventional Model

Real-Time Gross Settlement (RTGS) is a system where transactions are settled individually, in real time, and without the involvement of netting. This model is typically employed for high-value, time-critical transactions between financial institutions. In the traditional framework, central banks operate RTGS systems, ensuring liquidity management, real-time transfer, and settlement risk mitigate.

Although RTGS systems offer fast, conclusive transfers, they depend on centralized structures that require significant resources. They also operate within specific business hours, meaning transfers can only be made within established cut-off times and often incur substantial costs. These limitations, including their dependence on centralized control, time-zone constraints, and fees, suggest that blockchain technology could transform RTGS systems by enhancing accessibility, transparency, and cost-effectiveness.

The concept of RTGS originated in 1985 with the Bank of England as a quicker approach to bank settlements, and while the system has evolved to support significant transaction volumes, certain inherent limitations still remain.

Blockchain: The Turbo Engine RTGS Never Knew It Needed

Blockchain technology presents a decentralized alternative to traditional RTGS by enabling real-time, peer-to-peer transaction settlements using distributed ledger technology (DLT). This eliminates the need for a central authority, thus reducing counterparty risk, cutting operational costs, and enhancing overall transaction efficiency.

Key Technical Aspects of Blockchain-Based RTGS:

1. Consensus Mechanisms:

In a decentralized RTGS model, consensus protocols—like proof of work (PoW) or proof of stake (PoS)—play a critical role in validating transactions. These protocols allow network participants to verify and confirm transactions, replacing the need for a central authority while preventing issues like double-spending. The move from PoW to PoS holds particular importance here, as PoS offers faster settlement times and requires less energy, making it more suitable for high-speed financial transactions.

2. Smart Contracts:

Smart contracts can automate the settlement process by executing transactions based on predefined criteria. In a blockchain-based RTGS, these contracts help verify fund availability and initiate settlements, streamlining the transaction process and reducing the need for manual intervention. By reducing the potential for human error and fraud, smart contracts add a layer of security and efficiency to settlements.

3. Security and Cryptography:

To secure transactions, blockchain employs robust cryptographic techniques, such as public-key cryptography, ensuring that transactions are only accessible to authorized parties. Transactions are encrypted and remain tamper-proof due to blockchain’s immutability, meaning that once they’re added, they cannot be altered or removed. This ensures a secure, non-repudiable environment, safeguarding RTGS transactions from fraud and unauthorized modifications.

4. Scalability:

While scalability remains a challenge, Layer 2 solutions and decentralized protocols are being developed to increase transaction throughput, allowing blockchain to support the high frequency demands of real-time settlement systems.

With these advancements, blockchain-based RTGS could redefine real-time settlements by making transactions more accessible, cost-effective, and resilient.

Advantages of Blockchain-Enhanced RTGS:

• Accelerated Settlement: Blockchain technology enables near-instant transaction processing, minimizing the delays associated with conventional RTGS systems. This rapid settlement is particularly advantageous for time-sensitive payments like securities trading or large corporate transactions.
• Cost Efficiency: By cutting out intermediaries and reducing reliance on centralized infrastructures, blockchain can significantly lower transaction costs. This makes RTGS more affordable for smaller financial institutions and may even enable access for retail clients in the future.
• Transparency and Traceability: With each transaction recorded immutably on the blockchain, a clear and comprehensive audit trail is maintained. This transparency enhances regulatory compliance with AML (anti-money laundering) and KYC (know-your-customer) protocols.
• Continuous Operation: Unlike traditional RTGS systems that adhere to business hours, a blockchain-based RTGS can operate around the clock. This allows real-time transactions regardless of time zones or geographic constraints.
• Robust Security and Fraud Resistance: Blockchain’s decentralized structure and cryptographic security make it highly resilient to fraud and cyberattacks. While traditional RTGS systems’ centralized nature presents a single point of vulnerability, blockchain’s distribution across numerous nodes makes manipulation or disruption far more difficult. Each transaction undergoes verification through consensus mechanisms, adding additional layers of protection.
• Enhanced Liquidity Management: Traditional RTGS systems often face liquidity challenges, especially in cross-border transactions where funds may be held for extended periods. Blockchain enables real-time fund transfers, helping free up liquidity that would otherwise be restricted in the settlement process. This can also reduce the necessity of pre-funding accounts across different regions.

Blockchain’s integration into RTGS systems stands to make financial settlements faster, safer, more transparent, and globally accessible.

Real-World Use Cases: RTGS Meets Blockchain

Numerous financial institutions and central banks are actively exploring blockchain-based RTGS systems, demonstrating blockchain’s potential to transform the settlement process.

• Bank of England’s RTGS Renewal Initiative:

The Bank of England is investigating how distributed ledger technology (DLT) can enhance its RTGS system. This initiative aims to develop a secure, resilient platform that can address future demands and improve interoperability with blockchain-based systems, potentially opening doors to a more decentralized RTGS model.

• Canada-Singapore’s Jasper-Ubin Project:

In a partnership with the Monetary Authority of Singapore (MAS), the Bank of Canada launched the Jasper-Ubin Project to test blockchain’s ability to facilitate cross-border RTGS transactions. The pilot program showed that blockchain can enable real-time settlement between financial networks, cutting down the expense and complexity of global payments.

Another shining example of real-time settlements using blockchain technology is Zeebu, which has pioneered transformative advancements in the telecom industry, modernizing the settlement process and redefining the experience for players.

Accelerating Settlements with Zeebu:

Zeebu, a Web3 platform set out to transform B2B transactions by harnessing the power of blockchain. Acting as a conduit between traditional financial systems and decentralized finance (DeFi), Zeebu streamlines the handling of large, time-critical payments for businesses and institutions, effectively tackling the core limitations seen in conventional methods and cross-border payment processes.

Ready to see how Zeebu is transforming telecom payments? Click here to learn more and stay tuned – exciting updates are on the way!