Testing the Use of Multilateral Netting for Payment Transactions Without Disclosure
- Peter Johnson
- Dec 28, 2023
- 3 min read
This experiment is occasionally proposed with the intention of achieving netting without exposing underlying transactions. To me, it resembles a zero-knowledge proof, but one that uses decrypted data instead of encrypted data.
The experiment is investigating whether Money Transfer Operators (MTOs) can be used, whereby they specialize in international fund transfers using either their own resources or a cross-border value transfer system. This type of payment service is commonly referred to as a remittance.
MTO's payment service is based upon the traditional transnational commercial banking communication network called Society for Worldwide Interbank Financial Telecommunication (“SWIFT”). This is essentially a giant switchboard which allows commercial banks around the world to communicate with each other to initiate value transfers in a secure, confidential manner.:
The payment services firm recognizes that the existing network is inadequate for the requirements of small-value retail transfers. They identify three main weaknesses:
In order to address the structural issues, MTOs with existing B2B connections have begun to coalesce into semi-official networks, with the aim of decreasing the dependency and costs associated with commercial banking networks. The intent of these networks is to find a way for the MTOs to net off the payments they owe each other, so that payments can be processed on net terms. This process is similar to how trusted entities such as central banks, when establishing reserve levels for commercial banks, or CLS, when determining payment obligations between central banks, operate.
Netting could drastically lessen the liquidity stress on participants, thereby making them more productive in processing payments. Accordingly, the MTOs believe that, taking this into consideration, they can attain a similar efficiency through their own semi-formal network.
Nevertheless, in order to handle netting, the MTOs would have to disclose their underlying transaction details, and to some extent there is some trade sensitivity to openly sharing such information, even when the relevant parties are open to cooperation. It has been suggested to appoint a reliable and chosen entity to perform the payment obligations netting, but they cannot accept having any one of the MTOs undertake the task on a rotating basis due to the very same reason.
Having evaluated their options, they logically determined that (1) a neutral third-party should evaluate the transactions in order to facilitate netting; and (2) the netting process must be executed according to the same guidelines in each round.
Without the ability to name a peer MTO as a respected entity, the payment service provider is examining if Distributed Ledger Technology (“DLT” ) and Secured Execution Environment (“SEE”) can be utilized to execute multilateral netting.
The rationale for selecting these two technologies is that they are able to conceptually tackle the trust issue experienced by MTOs in this situation.
For this experiment, the payment service provider sought to bring peer MTOs together onto one DLT network, all while coding a netting algorithm based on modern business practices for multilateral netting between MTOs. MTOs can upload an encrypted dataset of their payment commitments in the specified format, which will be decrypted with the private key provided during the on-boarding process. conduct the settlements between the parties.
Once all of the MTOs had supplied the dataset, the payment service provider began to initiate the netting program, which would finish the settlements between the parties.
If the experiment succeeds, it can show that distributed ledger technology (DLT) and smart execution engines (SEE) are viable to substitute for a central, dependable agent in multilateral netting. If implemented in a production environment, payment service providers may be able to create their own cross-border payments system without being based on traditional bank-controlled payment networks.
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