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What are cross-border payments and how do they work?

Features of cross-border payments on the blockchain

Cross-border payments are widely used around the world to make quick, easy, and low-cost money transfers that are available to all users, regardless of their nationality, residency, or social status.

  • 	<p dir="ltr"><strong>As blockchain and decentralized finance (DeFi) develop and become more widespread, the need for cross-border payments is also increasing. They are widely used in Web3 products, which are increasingly popular and in demand.</strong></p>

Traditionally, cross-border payments have been conducted by banking and financial institutions. This required the involvement of a huge network of intermediaries, such as correspondent banks and clearing houses, which dramatically raised transaction fees, increased payment processing time, and made the transfers difficult or impossible to trace and verify.

  • 	<p dir="ltr"><strong>Blockchain-based cross-border payments significantly eliminate the number of intermediaries, reduce costs, and increase the speed and security of transactions.</strong></p>

Blockchain provides transparency of payments and improves transaction security. Transaction information is stored on a decentralized blockchain network that is protected by cryptography. This reduces the risk of fraud and improves control over the passage of financial transactions at all stages of their realization.

By using cryptocurrency, money can be sent and received anywhere in the world without the need to convert currencies, reducing the cost of currency exchange and speeding up the payment process.

Operation of cross-border payments using blockchain technology

Blockchain provides increased security for cross-border payments through the use of cryptographic algorithms that protect transaction data and ensure its confidentiality. Blockchain networks operate 24/7, making transactions available at any time.

  • 	<p dir="ltr"><strong>Blockchain-based cross-border payments have low fees compared to traditional methods of sending money between countries. Blockchain eliminates the need for intermediaries and simplifies the transaction process.</strong></p>

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is used by traditional banks and financial institutions around the world to exchange and transfer information securely and quickly. But SWIFT faces problems such as high cost, limited transparency, restricted access, and centralized control.

Unlike SWIFT, smart contracts automatically ensure that cross-border payments are executed on the blockchain according to the rules they specify. Eliminating intermediaries leads to instant transactions with full transparency.

  • 	<p dir="ltr"><strong>Blockchain-based cross-border payments are an innovative way to send money between countries that offers speed, transparency, security, and savings.</strong></p>

Blockchain technology is revolutionizing traditional approaches to financial transactions and opening up new opportunities for businesses and individuals in international transactions.

Advantages of cross-border payments on the blockchain

Blockchain technology improves access to new markets and makes payment transactions more efficient, especially for countries with underdeveloped financial infrastructure. 

Blockchain simplifies the currency conversion process because cryptocurrencies can be used as intermediary assets.

Blockchain technology is constantly improving and evolving, over time eliminating inherent drawbacks such as the ability to process only a limited number of transactions per second and the risks of volatility in cryptocurrency rates. 

New solutions for faster and cheaper transactions appear, and over time cryptocurrency becomes even more stable than some national currencies, and the use of stablecoins makes cross-border payments more popular.

  • 	<p dir="ltr"><strong>Thus, the use of blockchain technology for cross-border payments promises to become one of the most promising trends in financial technology and continues to attract the attention of businesses and governments alike.</strong></p>

Types of cross-border payments on the blockchain

  • 	<p dir="ltr"><strong>Both stablecoins and cryptocurrencies are used to make cross-border payments. Payments are made between companies as well as between individuals across international borders.</strong></p>

Specialized networks such as Ripple and Stellar provide services for cross-border institutional payments with advantages such as high speed, automation, payment security, and access to new markets.

  • 	<p dir="ltr"><strong>Transactions between individuals include sending money to friends or family members, paying for goods or services, or other financial transactions.</strong></p>

Centralized and decentralized cryptocurrency exchanges (CEXs and DEXs) greatly facilitate the process of making payments between people with specific tools, providing limitless access to finance and ensuring the security and immutability of blockchain technology.

Blockchain simplifies the process of currency conversion because cryptocurrencies can be used as intermediate assets. This significantly reduces transaction processing time and costs, especially when transferring money to countries with a low level of financial infrastructure.

Options for using cross-border payments

  • 	<p dir="ltr"><strong>One of the most prominent players in cross-border payments is Ripple.</strong></p>

Using distributed ledger technology, Ripple enables banks and financial companies to transfer money in different currencies in seconds, not days or even weeks, as traditional banking entities do for international payments.

XRP, Ripple's native currency, is used to make international transfers between different currencies. Funds are first converted to XRP and then back to the target currency. This provides instant transfer and eliminates unnecessary intermediaries.

  • 	<p dir="ltr"><strong>Stellar's blockchain also allows cross-border digital currency transfers using the network's native Lumens Cryptocurrency (XLM) as an intermediate currency.</strong></p>

Onyx, launched by JPMorgan in October 2020, uses blockchain technology to improve wholesale payment transactions while maintaining high efficiency, speed, and security in financial services.

Security of cross-border payments

Cross-border blockchain payments use the principles of cryptography, ledger technology, and decentralization. It provides a high level of security.

The use of ledgers to record transactions means that every participant in the network has a copy of the ledger. Еach cryptocurrency transaction is verified through a consensus mechanism before being added to the ledger. 

  • 	<p dir="ltr"><strong>This makes it impossible to manipulate the registry data or change transactions that have already been written to the blockchain.</strong></p>

Most blockchains use encryption to protect user data and private keys needed to access user wallets and transfer cryptocurrency. 

This increases security by making it more difficult for hackers to gain control of sensitive information.

  • 	<p dir="ltr"><strong>Cryptocurrency users are fully responsible for the security of their private wallet keys and should take appropriate measures to protect them. </strong></p>

They should also use secure passwords, two-factor authentication, and multi-signatures to increase the level of security and ensure the safety of cryptocurrencies in wallets and exchange accounts.

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