Future-Ready Payments Processing

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Payment Processing Platforms

At Consult Hyperion we spend a lot of our time looking into payments processing platforms for our clients. Over recent months we’ve delivered;

  • technical due diligence, assessing their capabilities
  • security and vulnerability analysis on networks and products
  • designed fundamental security architectures for new payments solutions
  • advised clients on the selection of payment platform solutions 
  • and helped design new platforms or extended the capability of their existing platforms

It’s fair to say we have a comprehensive understanding of payments processing.  The products and solutions offered by Fintechs, Banks, Neobanks etc. rely on the capabilities of the underlying payments platform(s). 

Still arguing about the blockchain

I’d been along to the first European Bitcoin conference, I’d asked our guys about the different aspects of the technology, I’d looked at the functionality that Bitcoin delivered. I came to the conclusion that the technology behind Bitcoin (the blockchain) was much more interesting than the new digital currency and this is what I told our clients and, later, blog readers. Here’s what I wrote back in 2011:

The best strategy is to learn, and to think about ways that the cryptography at the heart of Bitcoin can be used to deliver new kinds of services in a connected environment. I don’t think cash will be one of them.

[From What should the “mainstream” think about Bitcoin?]

I still don’t. And just to save time and e-mails, yes I know that technically you can’t use the Bitcoin blockchain without technically having to use Bitcoins but I don’t seeing using the smallest possible divisions of bitcoins that there are (known as satoshis – there are 100,000,000 sastoshis to one Bitcoin, making them worth around one ten-thousandth of a cent) as transport vehicles for digital assets as the same thing as using Bitcoin as money and certainly not as a currency. And it’s only one way of building a blockchain anyway. But back to the point.

Interest in bitcoin has waned.. Interest in the underlying mechanics of the currency, however, has continued to grow. The technological breakthroughs that made bitcoin possible, using cryptography to organise a complex network, fascinate leading figures in Silicon Valley. Many of them believe parts of Mr Nakamoto’s idea can be recycled for other uses.

[From Blockchain: The next big thing | The Economist]

Some of them are pretty serious people, too. Wim Raymaekers, who manages SWIFT’s Banking and Treasury Markets worldwide and is responsible for the evolution of its core banking value proposition, had this to say about Bitcoin earlier in the year [Raymaekers, W. Cryptocurrency Bitcoin: Disruption, challenges and opportunities. Payments Strategy and Systems 9(1): 22-29 (2015)]:

Banks should look at the technology underlying cryptocurrencies as a potential generic new way to transfer ownership of value in the longer term.

This is essentially the same thing that we said four years ago, so I was happy to see a serious player coming to the same conclusion from a different perspective. And I can assure that SWIFT is not the only serious institution thinking this way. One of the first blockchain-centric assignments for a financial services customer that Consult Hyperion worked on was to look at the idea of using blockchain technology in certain kinds of trading environment and this particular use of the blockchain appears to be gaining momentum.

[Overstock.com] filed a prospectus with the Securities and Exchange Commission that indicates it may issue up to $500 million in stock or other securities using technology akin to the online software system that underpins bitcoin.

[From Overstock Files to Offer Stock That Works Like Bitcoin | WIRED]

Hence I was very interested to see that Nasdaq are going to do an experiment in just that space. To have one of the world’s most important exchanges use the technology for trading would certainly be a confirmation that there is something to the idea that the blockchain is a new way of doing things and a genuinely novel solution to an old problem. So how are they going to do it?

Nasdaq will initially leverage the Open Assets Protocol, a colored coin innovation built upon the blockchain.

[From Nasdaq Launches Enterprise-Wide Blockchain Technology Initiative – NASDAQ.com]

Colored coins? Well, they’re not really coloured (just like quarks aren’t really red, green or blue).

…bitcoins can be selectively “colored” or marked with extra information to represent something else, such as a stock, but it still retains all the information needed to still use it as a bitcoin. If the stock fails for that colored coin, or the holder wants to abandon the stock and use the bitcoin instead, the “stocks” that the user received as fractions of a bitcoin can be spent as a normal bitcoin without any problem.

[From ELI5: What’s the difference between sidechains and colored coins? : Bitcoin]

Now, a blockchain is a computationally expensive mechanism for maintaining a distributed ledger. It’s worth doing for Bitcoin because the design goals for Bitcoin include cash, and cash must be resistant to double spending and counterfeiting and open to use by anyone. Is it worth doing for, for example, equities? That depends on how cash-like you want to make them. Remember Edward de Bono and his “IBM Dollar”? I was thinking about this while I was listening to Angus Scott from Euroclear (which makes Visa look like a picnic – it settles more than a trillion euros every week) talk at the recent Payments Forward event on cryptocurrencies that my colleague Steve Pannifer commented on last week. Angus was talking about “collapsing” the data flows around clearing and settlement, which I thought was a useful way to think about the impact of the blockchain on the activities.


So – in the absence of any actual knowledge of what they doing – Nasaq will (I’m guessing) use coloured satoshis as a mechanism to maintain a distributed ledger as a means to affect trades without clearing: if I want to move one of my IBM shares from me to you, I simply send you the satoshi with the IBM share in it to you and it’s yours. Done. All of the asymmetric, error-prone, costly data flows associated with the trade are thus collapsed. It’s certainly an interesting experiment although it’s not to my mind an indication that Nasdaq will any time soon cut over to the Bitcoin blockchain or, indeed, a blockchain of any description.

Note that this is not THE Nasdaq market. Nasdaq is only testing with a special tiny little private market that was previously tracked by hand. This is just an experiment that might not go anywhere.

[From Wall Street is using Bitcoin, not just the blockchain. : Bitcoin]

Yes, absolutely. But like all well-designed experiments, even if it goes nowhere we will all learn something from it. I’m not smart enough to predict what is going to happen here, and my hunch is that coloured coins are not the optimal implementation for this sort of thing and that something like Ethereum would be better (because I think that “smart contracts” have a key role to play). But that’s just my opinion. In the meantime, the more experiments the better as far as I am concerned.

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