DMI ANNUAL 2024
Using interoperability to empower small business and improve global growth
The development of programmable finance platforms provides more timely and greater access to global capital markets, allowing small- and medium-sized enterprises to grow their businesses, writes Ezechiel Copic, director of digital currency policy, Visa.
Digital financial technology offers tremendous potential to enhance global money movement. But as the number of digital currency networks increases – each with unique design characteristics, governance models, market requirements and compliance standards – it becomes imperative that these disparate systems should interoperate and support cross-border payments in an efficient and effective manner.
Building an interoperable digital financial system is especially important to enable greater access to global capital markets. This is crucial for small- and medium-sized enterprises and ultimately supports the global economy, as SMEs account for approximately 90% of businesses and more than 50% of jobs worldwide, according to the World Bank.
When it comes to financing, SMEs are often subject to localised market structures when negotiating favourable contracts. For example, factoring is a well-known financing method where a small business owner, such as a local farmer, can sell their future receivables at a discount to receive money today to purchase supplies and pay wages. This process often leads to a sizable percentage loss of the farmer’s receivable to the entity providing financing.
To help address issues like this, Visa developed a programmable finance platform as part of its participation in Banco Central do Brasil’s LIFT Challenge, and in partnership with Microsoft. This platform is designed to provide local farmers with more timely and greater access to a global pool of investors for financing, allowing SMEs to get the best price discovery for their goods.
The platform leverages a Visa technology called the Universal Payments Channel, which can interconnect between central bank digital currencies, stablecoins or tokenised deposits to help ensure interoperability between digital currencies across different markets and networks. The programmable aspects of digital currencies not only allow delivery and payment of assets and currencies to be automatically settled only when certain conditions are met, but they also open the door for more efficient capital use and reduced counterparty risks. This process also leverages the security, stability and safety of a central bank liability via CBDC as a reliable settlement currency.
As the payment landscape evolves, the interoperable and blockchain-agnostic nature of Visa’s programmable finance platform allows for new schemes to be easily added to its network of networks. This can be done simply by creating new payment channels within the Visa hub. Combined with the development of international standards to enable greater interoperability between digital currencies and traditional fiat systems, the implementation of regulated programmable finance applications for SMEs will help them maintain and grow their businesses through secure blockchain-based tools and greater access to capital.
By empowering SMEs with additional options to finance their businesses in secure and frictionless ways, Visa’s prototype platform aims to improve existing money movement operations and alleviate pain points by facilitating interoperability between currencies and enabling greater access to global capital markets.