What are clearing houses and why will they soon be a thing of the past

If there’s one shining example of redundant bureaucracy in the financial world it is clearing houses. What are they, why are they and why will they be first in line to become ancient history?

Study after study show that consumers don’t trust banks – which is one of the reasons cryptocurrencies have gained so much traction in a short time. But do you know who trusts banks even less?

Other banks. That’s who.

Banks don’t trust other banks for a microsecond when doing transactions. This lack of trust is problematic, to say the least. In order to avoid a perpetual Mexican standoff that would make it impossible to get anything done, banks came up with a system to get over their trust issues. That system is based on clearing houses. Clearing houses are trusted third parties – and trust is really their only added value. Example:

Bank A wants to send money to bank B. They don’t trust the living daylights out of each other so what they do instead of sending money directly is to send the money to bank C – the clearing house. Bank A trusts that bank C will send the money to Bank B. Bank B trusts that they will receive their money from Bank C.

These clearing banks are anything but altruistic institutions, so they charge hefty fees for their services – which are of course passed on to consumers. When we take a few steps back to admire this house of cards we notice that it does exactly two things. One: it makes payments slower. Two: it makes payments more expensive. Well done, everyone.

This system went about unchallenged for decades until October 31 2008. That was the day that someone using the name Satoshi Nakamoto published a white paper called Bitcoin: A Peer-to-Peer Electronic Cash System and with it introduced the first blockchain.

Blockchain technology is a clearing banks’ worst nightmare. It replaces the trusted third party function that the clearing bank had with a trusted distributed data store. All of a sudden bank A can send money directly to bank B without having to worry if those crooks at bank B will honor the agreement. The transfer is right there on the blockchain, visible for everyone to see and cryptographically signed.

This new technology has the capacity to make transfers cheaper, faster and easier. But the question arises why are we still using clearinghouses ten whole years after the introduction of blockchain tech? That’s a fair question – and it is actually the very question that led us to develop Kvantor.

There are numerous projects currently in different stages of development that are trying to disrupt this part of the financial system using variations of blockchain technology. But all of them come with their own downsides. Ripple, for example, is great, but it can’t seem to wait to dutifully submit itself to American regulators. Corda by R3 is well done. But it’s developed by the very banks that have been overcharging you for decades and who are looking for new cash cows to milk. And the list goes on and on.

At Kvantor we see a huge opportunity in this market to position a product that is fast, transparent and honest and on top of that works independently from the traditional frameworks that have up until now formed the foundation of the financial system.

Find out more at www.kvantor.com

(KVANTOR is a platform which facilitates borderless transactions and seamlessly integrates with banks and FinTech providers who are disenfranchised and are looking for alternatives to traditional channels, such as SWIFT.)

Arsen Bakhshiyan: Arsen Bakhshiyan is the CFO Kvantor - http://www.linkedin.com/in/bakhshiyan