AmEx and Ripple Creating Waves with Blockchain B2B Payments

By: Whitney Hosey *| Staff Writer

American Express is partnering with Ripple, a fintech startup, to introduce the option of instant blockchain secured payments between U.S. based businesses and U.K. businesses who bank with Santander UK.

While this explanation is an oversimplification of the process, blockchain technology is essentially a secure ledger database which creates a series of coded blocks of recorded transactions among the connected computer networks via the internet. Each block is protected by a unique block number and is time stamped. Once created, the blocks build upon each other to create a chain. The link between each block is called a hash, which is a unique string of characters created by information in the block. The hash from one block is added to the data in the next block. So when the next block goes through the hash function, a trace of it is woven into the new hash. The inclusion of the previous hash makes it that much harder for potential hackers to break into the chain or even the individual blocks. Before blockchain, secure transactions needed to be verified by a central authority, like the government or third-party payment system. According to Goldman Sach’s “[b]lockchain applications could replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users rather than a single third party.”

AmEx is one of the first major financial companies to endorse the use of blockchain technology in its everyday business dealings rather than just in Bitcoin transactions. The goal is to decrease the amount of time it takes for large transfers to take place while also maintaining a high-security level. Rather than taking days, such transactions can occur in real time via a blockchain application. The incentives for leveraging blockchain are numerous, but among the most important to financial institutions is lower costs. According to AmEx “a report from the Boston Consulting Group estimates that technologies including blockchain could reduce the operational and compliance costs of paper-based trade by 10-to-15 percent.” While it is likely that this technology will not become widespread for at least three years, the key takeaway is that blockchain, much like the internet, is a new technology that could greatly impact the way businesses interact with one another.

As more institutions like AmEx begin exploring the use of blockchain technology, legislation surrounding its regulation is likely to be proposed. It is important to consider, however, exactly what the legislation is attempting. Regulation of a new technology can hinder its ability to grow and develop. As Mohit Kaushal and Sheel Tyle rightly suggest in their article The Blockchain: What It Is and Why It Matters, “[d]isruptive technologies rarely fit neatly into existing regulatory considerations, but rigid regulatory frameworks have repeatedly stifled innovation.” While the SEC has determined that blockchain powered digital tokens can be securities, which means they are subject to regulation. The SEC, however, has not made it clear which tokens are to be regulated and under what circumstances, specifically when a new blockchain company has its “Initial Coin Offering” or “ICO”. As future regulation comes about, the SEC must balance regulation on “tokens used as instruments for sharing profits among investors, [compared to] utility “tokens” that are pieces of future network technology are functional rather than profit-sharing.” These utility tokens work to build the networks and help build innovative new technologies. Such coins should not be overregulated or risk advancing these new technologies.

Whitney is a Second-Year Law Student at Wake Forest University School of Law where she is a staff member on the Journal of Business and Intellectual Property Law. She is a graduate of the University of Virginia where she earned her B.A. in History and Government. Before returning to law school, Whitney enjoyed a career in New York working as an Account Executive in the advertising industry and plans to pursue Real Estate and Intellectual Property Law after graduation.