Blockchain and the Birth of a New Financial Instrument – CoinDesk

The Emirates Islamic Bank’s announcement last week that it was planning to integrate blockchain technology with paper checks may have left many pondering the incongruity: Why waste such a modern invention on such a traditional payment method? Aren’t paper checks like, you know, so last century?

However, dig a bit deeper and you find that things are not quite what they seem.

One peculiarity of the UAE banking system is the preferred form of security for bank loans: paper checks. The established practice is that the borrower writes the lender a post-dated check for the amount of the loan, plus interest. When the loan is due, the happy lender simply cashes the check. If the repayment is monthly, the lender will often ask for a stack of post-dated checks to cover the individual payments.

This makes the process of lending much easier. With a signed check in hand, the lender can avoid rigorous vetting procedures and confirmation hassles.

Also, banks often ask for a signed paper check to cover the monthly limit before issuing a customer with a credit card. Ah, you ask, but in all the above cases, how do they know the check won’t bounce?

Game theory

It’s a question of incentives. If you are an individual and your check bounces, you can go to jail.

At least, that was the case until a few years ago, when the bouncing of checks issued as collateral for an entire loan was decriminalized (not for monthly payments). Last year, the bouncing of any type of check from small and medium businesses (SMEs) was also decriminalized (but not yet for individuals).

With this in mind, the ‘blockchain tech meets paper checks’ idea becomes more interesting.

More at: Blockchain and the Birth of a New Financial Instrument – CoinDesk


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