RCBC joins the blockchain party
Ben D. Kritz
RIZAL Commercial Banking Corp. (RCBC) recently announced it would launch a blockchain-based remittance service between Japan and the Philippines sometime before the end of the year, a bold step for the bank still living in the shadow of the still unsolved Bangladesh Bank heist of 2016.
The project is actually a live test by IBM of a blockchain system it’s developing. RCBC is one of 15 banks worldwide selected for the pilot program. RCBC’s partner on the Japanese end will likely be Resona Bank Ltd. IBM has enthusiastically embraced the blockchain concept, and is exploring various real-world applications of the technology. One of its other major projects is a container management system, which it’s developing with shipping giant Maersk Lines.
What’s appealing about the blockchain application in remittance services is that it eliminates intermediaries, and most particularly, as RCBC pointed out in earlier comments to the media, the SWIFT messaging system used for most money transfers between banks. “SWIFT” might be a synonym for “misery” as far as RCBC is concerned. The system was used to send $81 million in spurious transfers from Bangladesh Bank to RCBC in February 2016, and mishandling of subsequent SWIFT messages within the bank allowed the conspirators in the heist time to extract the funds from the accounts where they had landed. Besides, as the unnamed RCBC official added, the SWIFT service is expensive. Using a faster, more direct blockchain system will allow the bank to reduce fees it charges for remittance handling.
No details about how the IBM program would work have been disclosed, but it will likely be a relatively simple system. Money deposited in Japan by a remitter would be credited to an electronic wallet, and a transfer between that wallet and one belonging to the remitter’s intended beneficiary in the Philippines is carried out. That transaction is recorded in a block of data in a distributed ledger (i.e., the blockchain) available to everyone connected to the network. Once confirmed, a process that should only take a few seconds, the recipient can withdraw the funds here.
The only time-consuming part of the entire process would occur on the back end, as the actual transfers of money among bank branches and remittance services outlets are resolved. If the system is token-based, some time in this part of the process could be saved by adding an extra step to the person-to-person remittance transfer on either end, having the funds move between electronic wallets belonging to the send and receive points, and then transferred to the customers’ wallets.
The risks involved in the system are mainly technical in nature, and aren’t particularly severe. Perhaps the biggest one is that the entire electronic wallets could be lost due to the way a blockchain works. The owner of any wallet has to have an electronic key, or passcode, in order to make a transaction, and the system is designed in such a way that these passcodes cannot be stored. If the electronic key is lost by the wallet owner, the wallet and anything in it are irretrievably lost as well. A likely workaround – something that would probably be required by anti-money laundering and “know your customer” protocols anyway – would be to associate wallets with their owners. That would require the creation of a secure database outside the blockchain, however, with all the implied cybersecurity risks. The alternative would be to create a new single-use wallet for each transaction, which is feasible but would probably become unwieldy very quickly as use of the system expands.
And of course, operation of the system, at least at the receiving end, will be at the mercy of the Philippines’ internet infrastructure, whose reliability at present is questionable at best.
If successful, the new remittance system would provide a welcome reputational boost for RCBC, which is trying to distance itself from the lingering questions over the Bangladesh Bank incident and whose remittance services, on the infrequent occasions they have come to the public’s attention, have usually been the subject of bad news.
For instance, in December 2012, RCBC was fined 22,000 euros by the Bank of Italy for having insufficient internal controls against money laundering in its remittance operation there. In late February 2016, in the wake of the Bangladesh Bank scandal, Bank of Italy revoked RCBC’s license to operate completely, although to be fair, by that point RCBC was among the Philippine banks (including BDO, BPI, Metrobank, PNB, and Landbank) that had decided doing business in Italy was more trouble than it was worth.
The project will also serve as a cost-effective way to study the application of blockchain technology to a front-end operation as far as other banks in the Philippines are concerned. If RCBC’s role as the guinea pig has productive results, the launch of similar systems will probably follow within the next couple of years.
ben.kritz@manilatimes.net
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