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Re: Escrow Risk (was Interledger and Privacy)

From: Frédéric Meignien <frederic.meignien@cantonconsulting.fr>
Date: Wed, 28 Oct 2015 12:47:33 +0100
To: public-interledger@w3.org
Message-ID: <5630B5D5.8030404@cantonconsulting.fr>
Hello,

In my understanding, central banks are concerned by 2 main risks:
- safety and security of the payment system: the system must be fully 
trusted in order to protect the consumer and to avoid the multiplication 
of issues between financial institutions: for instance, if there were 
too many transactions with only one leg (the debt is booked and the 
credit is not), this would bring instability and would not be accepted: 
but the "abort" messages are here to cancel any wrong transactions. As 
long as this process is not bugged, things are OK. One more 
consideration about it would be about the system monitoring: who 
monitors the system as a whole and can do the follow-up of issues ?

Another point, already mentionned: abort messages imply that money 
cannot remain in the escrows, so the financial risk is eliminated at 
this level.

- clearing and settlement: it is at this level that may arise a 
financial risk (liquidity and credit): but the interledger does not 
include the clearing process between institutions. Unless we imagine 
that, as well as there is an interledger real-time payment system, there 
would be also a second interledger system dedicated to the clearing and 
settlement phase, real-time too.

Frédéric.

Le 28/10/2015 09:37, Arie Y LEVY COHEN a écrit :
> Thank you Adrian, for both!
>
> Following that explanation, and pardon the harp on risk and the 
> measure of it, would I be understanding well to think it is the escrow 
> agent (connectorI then that might benefit from a rating (reputation) 
> assigned to each of the ledgers?
>
> I reckon some rating standard might help these connectors determine 
> what they will charge for being that connecting bridge between two 
> ledgers.
>
> Now, it was pointed out to me that my question suggested ratings work, 
> when that very system seems to have failed us (e.g. rating of 
> CDO/CMO's). Perhaps, but maybe an opportunity to improve how we rate 
> these ledgers?
>
> -- 
> Heritage & Legacy Advisory | Multi-Generational Wealth Preservation
> Arie Y. LEVY-COHEN
> FINANCIAL ADVISOR | INTERNATIONAL CLIENT ADVISOR
> PRIVATE WEALTH MANAGEMENT | NEW YORK
> ECONOMICS | FINANCE | BLOCKCHAIN
> P: 917.692.6999 <tel:917.692.6999>
>
> On Oct 28, 2015, at 1:40 AM, Adrian Hope-Bailie <adrian@hopebailie.com 
> <mailto:adrian@hopebailie.com>> wrote:
>
>> It was pointed out to me that my reference to the central bank is 
>> misleading. I put it in there because Arie asked about central banks 
>> but it's actually a poor example.
>>
>> So, to be clear, control of when to release or reverse the escrow 
>> sits with the ledger. In the case I was thinking of, the central bank 
>> is a "connector" between two retail banks, (a poor example because in 
>> this case the banks normally hold funds/obligations with the central 
>> bank as opposed to the central bank holding accounts at the retail 
>> banks). I was trying emphasize that the quality of the participants 
>> determines the risk.
>>
>> In reality, where the ledger has ultimate control over if and when to 
>> release or reverse the escrow funds the connectors are the only 
>> entities ever exposed to risk of not being settled. The assumption is 
>> that they will price this into their offers based on which two 
>> ledgers they are connecting and how much they trust those ledgers to 
>> execute the escrow properly.
>>
>>
>>
>> On 26 October 2015 at 17:39, Adrian Hope-Bailie 
>> <adrian@hopebailie.com <mailto:adrian@hopebailie.com>> wrote:
>>
>>     More Arie questions to scratch your head over:
>>
>>     Given the connector ultimately holds the money for however long
>>     in "escrow":
>>
>>           * is there counterparty risk relative to where the escrow
>>             money sits (call it escrow risk??)?
>>           * could central banks play a role here?
>>           * IMF / BIS?
>>
>>     I'd only classify this as counter-party (settlement) risk if
>>     there is a chance that the reserved funds are lost before they
>>     are released (i.e. they weren't really in escrow).
>>
>>     The risk of this happening will differ from ledger to ledger and
>>     connector to connector (e.g. If the connector is the central bank
>>     I'd say the risk is close to zero...) and this is another
>>     characteristic of the ledgers and connectors that a user may
>>     consider in path-finding.
>>
>>     If there is some way for the user to get a guarantee that the
>>     funds are truly in escrow the risk is very low.
>>
>>     Perhaps this would be through some independent certification of
>>     the ledger system if it is a closed ledger?
>>
>>     For a system like Ripple or Bitcoin it is almost non-existent
>>     because the system is open and the user can verify that the funds
>>     are in escrow if they want to.
>>
>>     This topic feels like it has some more questions that are not
>>     immediately apparent...
>>
>>
Received on Wednesday, 28 October 2015 11:48:06 UTC

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