Blockchain technology might hold the key to resolving a $2.2 trillion foreign exchange risk that has persisted for five decades. Despite efforts to expedite cross-border money transfers, the existing system’s settlement process remains laden with challenges. Customers now demand nearly instantaneous international transactions, mirroring the speed they experience within their national borders.
The era has come to move past a $2.2 trillion quandary left by Bankhaus Herstatt—a predicament lingering since its collapse fifty years ago.
On June 26, 1974, just before the New York money market opened, liquidators shut down the Cologne-based midsize lender. This closure halted the release of dollars for numerous currency trades where the bank had already received Deutsche Marks. The resulting turmoil on both sides of the Atlantic prompted the establishment of the Basel Committee on Banking Supervision. However, the Herstatt risk, leaving one party holding a claim after fulfilling its obligations, endured.
In 2020, Barclays Plc transferred $130 million to the foreign exchange division of Bavaguthu Raghuram Shetty, an Indian tycoon in the United Arab Emirates, yet the funds never reached their intended recipients.
While this incident was relatively minor, the potential for more significant mishaps looms. Nearly a third of the $7 trillion deliverable foreign exchange turnover daily is susceptible to settlement failures. A significant portion of this risk lies in emerging markets, where currencies increasingly stand against the dollar, euro, yen, or pound. Only 18 currencies benefit from the payment-versus-payment safeguard provided by CLS Group Holdings AG, a pivotal market infrastructure owned by major banks worldwide.
Now, a collaborative endeavor named Partior—Latin for “to distribute and share”—is tackling the challenge. Leveraging distributed ledger technology, the platform operates 24/7 and ensures trades are “atomic”—both legs of a transaction occur in sync, or neither does. This approach mitigates counterparty risks, particularly for offshore Chinese yuan, Indian rupee, Indonesian rupiah, and various other emerging-market currencies.
