Hi folks,
I'm Marc Palet, a fintech venture capitalist based in Singapore, and focused primarily on emerging market payments and digital assets.
I lead APAC investments at OMVC and also write angel checks. I've helped a number of early-stage founders in the space, so if you're building something and want to reach out, drop me a message via Linkedin or to [email protected]. Also, I’m in NYC this week for NYFW - can catch in person if you’re in town.
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-Marc
When sending money to a friend, some people picture something traveling — a dollar leaving their account and landing in theirs, as if cash was teleported. Nah, that’s not exactly what happens.
What looks like a transfer is really just two databases updating their records. Your bank marks your balance down. Their bank marks theirs up. No dollar bill moved anywhere.
This is key to understanding payments. And honestly, it's key to understanding why payments are broken in so many places. But most people have no idea what's actually happening behind the scenes. So today, I'll walk through how it actually works, from the ground up.
The U.S. dollar is the world's reserve currency. Around 88% of all foreign exchange transactions involve USD. An Indonesian supplier selling goods to a Nigerian manufacturer? They'll invoice in dollars. Global trade overwhelmingly settles in USD, which means a huge portion of the world's financial plumbing routes through the U.S. banking system.
And at the center of that system sits the Fed.
The Fed is the bank for banks. Commercial banks — JPMorgan, Citi, Wells Fargo — they all hold accounts at the Fed. Like any institution, the Fed runs a balance sheet.
The money in each individual bank’s accounts is called reserves — essentially digital cash for banks. When money moves between banks, it doesn't move as cash. It moves as entries in the Fed's ledger, shifting reserves from one bank's account to another's. This is what settlement actually means. Reserves are the settlement layer of the entire banking system.
The Fed is where the money lives. The payment rails are how it moves.
A rail is just a system for moving money between banks. In the U.S., there are a few main ones — ACH, Fedwire, CHIPS, RTP, and FedNow. Each was built for a different purpose, and each settles differently. But they all share the same underlying mechanic. When a payment moves from one bank to another, the sending bank's reserve account gets debited and the receiving bank’s account gets credited.
Cross-border payments: same mechanic, more moving parts
Domestic payments are relatively clean. Two banks, one central bank, one reserve account getting debited and another getting credited.
Cross-border payments are the same idea, just messier. There's no single central bank sitting above all others. The Fed doesn't hold reserve accounts for banks in Indonesia or Nigeria. So when money needs to move across borders, the system needs a workaround. That workaround is correspondent banking.
The concept is simple. Say Bank A in Brazil needs to send dollars to Bank B in Indonesia. Chances are, they have no direct relationship. So they route through intermediaries — banks that do have relationships with each other, and that hold accounts at one another. Those accounts are called nostro and vostro accounts. A nostro account is your account held at a foreign bank. A vostro account is a foreign bank's account held at your bank.
When a payment moves internationally, it hops through this chain. Each bank in the chain debits one account and credits another. Nobody is moving cash. It's still just ledger entries — the same mechanic as a domestic payment, just replicated across multiple institutions in multiple countries.
In well-connected corridors between major currencies, the chain is short and the process is relatively smooth. In underserved ones — most emerging markets — the chain gets long, fees stack up, and sometimes the payment fails entirely because no correspondent relationship exists.
This is the fundamental problem. Cross-border payments are essentially a network of balance sheets trying to talk to each other, each one operating under different rules, different timetables, and different incentives. There's no single ledger. Just a chain of bilateral relationships, each one a potential point of friction, delay, or failure. The more hops, the more that can go wrong.
This is precisely where blockchain wins.
Every bank, every fintech, every payment provider runs its own database. Getting money from one to another means convincing a chain of separate systems to talk to each other, trust each other, and settle with each other. That's where the friction lives.
But a blockchain is a universal ledger. A single, shared record that any participant can read and write to, without needing to trust a central operator. When a transaction is recorded on a blockchain, every participant sees the same thing simultaneously. There's no reconciliation between databases. No correspondent chain. No bilateral relationships to maintain. Just one ledger, accessible to anyone.
For payments, this is a profound shift. Instead of a payment hopping through multiple banks to reach its destination, a stablecoin transaction moves directly from one wallet to another on a shared ledger. The sender's balance goes down. The receiver’s wallet goes up.
And crucially, it doesn't matter where the sender and receiver are. The blockchain doesn't have corridors. A payment from Barcelona to Jakarta looks exactly the same as a payment from Barcelona to Madrid.
That said, blockchain doesn't come without its own set of problems. Far from it.
The most immediate one is that most people still want to hold and receive money in fiat. Which means that even if a transaction settles on-chain in seconds, it still needs an on-ramp at one end and an off-ramp at the other. Someone needs to convert local currency into a stablecoin before sending, and someone needs to convert it back on arrival. Those conversion points still touch traditional infrastructure — local banks, licensed exchanges, liquidity providers. The blockchain leg is fast and cheap. The first and last mile often isn't.
Beyond that, there are still unresolved questions around privacy, security, and what happens when things go wrong — blockchain transactions are irreversible, and the guardrails that traditional finance has spent decades building don't yet exist on-chain at the same level of maturity.
So no, blockchain isn't a perfect solution. Not yet.
But the technology is fundamentally better. A universal ledger that settles instantly, runs 24/7, and doesn't care about corridors or correspondent relationships is a stronger foundation for global payments than a constellation of bilateral balance sheets trying to talk to each other.
The reason most people don't see it is that they've never stopped to think about what's actually happening under the hood.
Before I close though — many readers will have noticed something missing from this explanation. Cross-border payments don't just involve a payment. They involve FX too.
When money moves across borders, it rarely starts or ends in dollars. The sender converts local currency into USD. The receiver wants local currency back out.
There's a reason I haven't mentioned it until now. FX is widely misclassified as part of payments — but it's fundamentally a trading problem.
Payments are about moving money. In a regular payment, one asset moves from one place to another. Your bank's balance goes down, someone else's goes up.
FX is about pricing the exchange between two currencies. In an FX transaction, two different assets move in opposite directions between two different balance sheets simultaneously. One side gives up pounds and receives dollars. The other gives up dollars and receives pounds. Both end up with a different currency mix than they started with.
Still ledger entries, technically. But very different in substance.
Truth be told, FX is where most payments actually break. Moving money from A to B via stablecoins is the easy part. Solving the underlying FX layer is where it gets very hard.
That deserves its own piece. I’ll save that for another time.