Imagine you are Goldman Sachs and a client wants to make a 100mm USD wire transfer to one of their accounts at Citibank. How does citibank know that the account at GS has the money to cover this transfer?
Right now, the way this works is essentially through a lot of trust and some guarantees by the fed. This has some downsides: because you need a lot of confirmations, it makes transfers take longer. Also, small players can't really get in on this system, so some regional banks are at a disadvantage.
How do you make this safer and more robust? GS obviously can't send info on all of its clients accounts and balances to Citi. You could imagine a protocol where the client/GS sends Citi a zkp to prove that the client has the money (as long as all inputs are agreed upon).
Of course, you don't really need zkps. You could also have the fed keep a database on all money in all accounts (like they do in Brazil), so that the bank only has to ask the central bank to give you an ok. But that is a whole lot of power in the hands of a central authority, as well as a single point of failure, which is something banking systems should avoid imo
> How does citibank know that the account at GS has the money to cover this transfer?
At the moment this is all handled with Swift, and I’m not sure you what you gain from adding ZKPs. Depending on the transaction you might send a Swift MT799 with a pre-advice letter, a proof of funds letter, or a blocked funds letter. Again depending on what you’re doing you might need a MT760 to send a bank guarantee or some sort of letter of credit, and finally a MT103 to initiate the actual transfer of funds.
At this point your counter party risk lies with the banking institution itself, and their willingness and ability to complete the transactions they have legally committed to, rather than the account holder, and this risk doesn’t go away with the addition of ZKPs.
But Swift is just a messaging protocol, right? It doesn't handle trust at all - like you said, you need an awful lot of documents for a single transfer.
I think what could be gained with a zkp protocol would be timeliness. Not needing to confirm if the client has funds in the other institution manually or from trusting their in house APIs would be pretty nice.
The Brazilian central bank has a system that does essentially that, and wires here (even for very large sums) take seconds to fill, instead of the usual 2 days for US interbank wires.
Swift is a messaging system, but it absolutely does manage trust. Swift messages can be used to transmit contracts and other financial obligations which are nonrepudiatable.
When using Swift, the financial institution crafts the content of the messages, some of which describe the state of their systems (like an account balance). So as a counterparty, you are trusting the institution, the jurisdiction the institution is based in, and the laws and enforcement in that jurisdiction.
If you introduce ZKPs, perhaps you could take the human out of the message authoring for some message types, but those messages would still be based on the state of systems controlled by that institution, and really a lot of the “trust” involved with Swift transaction is the trust that an institution will meet its future obligations (something ZKPs don’t help with at all). So the end result is that as a counterparty, you would still be trusting… the institution, the jurisdiction the institution is based in, and the laws and enforcement in that jurisdiction.
There are other payment systems that don’t have the same features that Swift has (like the ability to send bank guarantees, or proof of funds letters, etc…) like ACH and SEPA. But if those things are needed, you’ll just use Swift, or a different system entirely.
The delay in processing Swift transactions is also a feature not a bug for large institutions. If I send you a Swift payment for $100, unless one of us is on a watch list or something, it’ll just go through without any additional input required from either of us. But if I wanted to send you $1,000,000,000, at that level the banks want the opportunity to scrutinise the transaction for AML and anti-terrorism reasons. There is no definition of what a transaction that is involved in money laundering or financing terrorism looks like, so these checks cannot be automated in any way. If you want your transaction to go through, you have to answer whatever questions the bank officers ask, provide any material they ask for, and this can include literally anything they deem necessary. If the transaction is successfully completed it is not because you met some statutorily defined requirements, or somehow proved you weren’t money laundering or financing terrorism, it is because you convinced the appropriate bank officer that the risk of them being implicated in money laundering or financing terrorism was small enough to be acceptable in relation to processing your transaction. So ZKPs can’t help you here either.
Right now, the way this works is essentially through a lot of trust and some guarantees by the fed. This has some downsides: because you need a lot of confirmations, it makes transfers take longer. Also, small players can't really get in on this system, so some regional banks are at a disadvantage.
How do you make this safer and more robust? GS obviously can't send info on all of its clients accounts and balances to Citi. You could imagine a protocol where the client/GS sends Citi a zkp to prove that the client has the money (as long as all inputs are agreed upon).
Of course, you don't really need zkps. You could also have the fed keep a database on all money in all accounts (like they do in Brazil), so that the bank only has to ask the central bank to give you an ok. But that is a whole lot of power in the hands of a central authority, as well as a single point of failure, which is something banking systems should avoid imo