Liquidity is essential for every business. It prepares a company for potential and sudden business risks and allows it to respond quickly. According to a US bank study, 82% of businesses fail because of poor cash flow management.
Liquidity management provides insights into a company’s cash position and how short-term and long-term liabilities will impact it. It also outlines the company’s financial health outlook and ensures cash is available.
This also applies to cross-border payments.
Cross-border payments rely on financial networks involving correspondent banks and non-banking players that act as intermediaries between sending and recipient countries. However, the constraints of operating hours and different time zones can delay settlement. There are also FX fluctuations and hidden charges to contend with.
In such situations, banks and non-banking payment service providers may find holding liquidity and collateral in different currencies difficult.
Liquidity bridges can ease the squeeze
Blockchain technology has proven that it can improve cross-border payments, including liquidity management.
However, blockchain platforms tend to exist independently of each other and decentralised exchange networks often operate with their own native tokens and liquidity pools.
Liquidity bridges can reduce this fragmentation by connecting different blockchain or decentralised exchange networks, just like traditional financial networks like Swift, SEPA and CIPS do for fiat currencies.
Liquidity bridges help the various networks talk to each other, allowing users to access liquidity and trade non-native assets.
One example is the mBridge Ledger, a multi-central bank digital currencies (CBDC) platform co-built by the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates.
According to the Project mBridge report, the blockchain platform shows that connecting multiple digital currencies in a single technical infrastructure has “significant potential to improve the current system and allow cross-border payments to be immediate, cheap and accessible”.
In addition, liquidity bridges like mBridge can help international banks, financial institutions, and other PSPs manage their global liquidity management more efficiently.
While liquidity bridges have numerous benefits, making all the features available through a single platform is difficult.
But it is not impossible.
Take Ripple’s on-demand liquidity (ODL) solution, for example. It is a true end-to-end platform built for an entire transaction chain from when an instruction is sent to settlement, reducing the complexity of liquidity management significantly.
ODL
Conclusion
For businesses in the cross-border payment industry, embracing blockchain technology and liquidity bridges can help them streamline liquidity management and ensure financial stability, allowing them to place resources where they should be.
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