ZTLment: Europe’s First Payments Institution Built on Blockchain

Q&A with Mads Stolberg-Larsen, Co-Founder & CEO, ZTLment

ZTLment, a smart contract software company, celebrated a major milestone in October. It became the first company in Europe to be licensed to operate fully regulated payments on top of blockchain. ZTLment is now approved to use its smart contract software to move euros peer-to-peer on blockchain rails in full compliance.

ZTLment’s blockchain of choice? Algorand.

The regulatory implications of this license are significant, as it shows EU supervisory authorities’ willingness to accept blockchain technology. It also opens up countless doors for ZTLment to partner with innovative players within supply chain and trade finance who want to build smart contract workflows.

We asked ZTLment Co-founder and CEO Mads Stolberg-Larsen about the path to achieving this milestone, some specifics about the technology, and of course, why Algorand was their blockchain of choice.

Tell us more about the license — why is this significant?

We have built Europe’s first payments institution on blockchain and achieved regulatory breakthrough. Securing licensing means there is an EU supervisory authority recognizing that it is possible to move fiat currency through a decentralized system, and there is end-to-end compliance in regards to the European open banking framework, Payment Service Directive 2 (PSD2).

What is your vision?

The ultimate goal is to make cross-border trade frictionless and bridge the $1.7 trillion global trade finance gap. We believe that any company, regardless of where it’s located or its size, should have access to first-rate finance tools and resources.

What is ZTLment?

ZTLment is a smart contract software platform that combines data from the cloud with transaction execution on the blockchain. We connect existing business systems and platforms with fiat money on-chain. With our technology, businesses can (1) automate finance operations, (2) improve liquidity, and (3) increase trust and transparency in business workflows.

How does ZTLment work?

Smart contracts play a crucial role in ZTLment’s services. As I previously mentioned, our smart contract software combines data from the cloud with transaction execution on blockchain. As soon as a contract is signed at the start of a business workflow, the software can trigger payments and financing based on any milestone in the workflow. Funds are then moved automatically seconds later. All with full regulatory compliance built in.

What is unique about ZTLment?

ZTLment is not transacting cryptocurrency or unregulated stablecoins. We are moving fiat currency on the blockchain.

Why fiat?

First off, stablecoins under existing European regulation are crypto.

This introduces all kinds of regulatory uncertainties because crypto is an asset –not money– in the eyes of the law. So de facto, you are settling transactions in “tables” or “chairs” if you are using stablecoins or crypto.

We have not spent time thinking through how to do VAT accounting or settling transactions in “tables” or “chairs” — and we will not bother, because we don’t see it as a viable way for regular businesses to gain access to the benefits of blockchain technology. Instead we are using e-money, which is regulated as “funds” under PSD2, just like bank deposits and cash.

What about MiCA?

Great question. As people working in this space know, stablecoins regulatory status might change with the forthcoming MiCA regulation entering into force. Here stablecoins will need to be regulated as e-money to be used by European businesses and citizens. However, the second order effect of that is that e-money is subject to PSD2. We have made sure to solve for that.

What problem in TradFi does blockchain solve?

Traditional payment infrastructure relies on centralized and trusted operators to execute the settlement of transactions. These central operators are just middlemen, ensuring the funds are safely transmitted from one party to the other. In contrast, blockchain technology uses consensus mechanisms, such as Algorand’s Pure Proof of Stake, which ensure the network is secure and network nodes are operating properly. The blockchain “decentralizes” transactions so that they don’t need to be validated through a third party. Instead, they are validated via consensus mechanisms.

With traditional payments, there are data centers, payment infrastructure systems and additional institutions that a transaction needs to go through before they finally settle. This process can take days or weeks depending on the institutions involved and there is no standardized way for interacting with these different systems. With blockchain technology, validation only takes a few seconds, no third parties are involved and the digital format for money and assets is standardized.

What is in it for businesses? Why should they care?

First, we can help them build integrated and automated workflows. With smart contract software we are able to directly connect the big milestones in business workflows to the release of money — for example, “goods received” or “50% of the project delivered”, enabling them to reach new levels of efficiency in their day-to-day finance operations.

Second, we can unlock liquidity in a much more flexible way than legacy supply chain finance and dynamic discounting solutions allow. Instead of it being binary based on a piece of paper — namely the invoice — we can make it data-driven based on real world business events.

Last but not least, we can increase trust and transparency. Buyers and financiers can lock funds in the smart contract software, which makes sellers able to “see” that money is there. Sellers then know that if they deliver they will get paid. Buyers and financiers on the other hand know that they won’t pay unless sellers deliver.

Do both parties need to be onboarded to ZTLment or be on blockchain?

In short, no. There are two different ways to transact with ZTLment.

1. If both parties have a wallet, either provided by ZTLment or someone else, then the funds can be routed peer-to-peer via our smart contract software.
2. Alternatively, we have configured our smart contract software such that the funds can automatically be routed out to the receivers’ bank account via our e-money partner, Monerium.

Why Algorand?

We are blockchain agnostic and follow layer 1 developments closely. With that being said, Algorand has some nice technical features for regulated enterprise applications like ZTLment. For example, its permissionless, pure proof-of-stake (PPoS) consensus mechanism makes it fast, secure and cheap to transact on blockchain. We also like the Algorand virtual machine (AVM) for a few reasons: AVM is able to handle a high transaction output compared to e.g. the Ethereum Virtual Machine (EVM). It’s also efficient in terms of computational power and energy consumption. Additionally, the programming language TEAL has design features that prioritize security over flexibility, which is important in a business context. Plus, Algorand was invented by one of the brightest minds in cryptography, Silvio Micali, and he has a strong, talented team leading it into the future.

What is next for ZTLment?

A European regulator issuing this license is a big step for us and the entire blockchain industry — so now we must put it to good use. Recently, we announced our partnership with the farmer focused decarbonization platform, Agreena and we have a number of projects in the pipeline.

If you want to learn more about ZTLment’s Money API, smart contract features, latest news and team, visit the official website here.

Note: The term “fiat currency” doesn’t exist in European payments regulation. There exist only cash, e-money and bank deposits. These three things are used interchangeably as “fiat currency.”

If you are curious about the regulatory aspects, you can read the Danish Financial Supervisory Authority’s public market orientation about ZTLment here.

ZTLment: Europe’s First Payments Institution Built on Blockchain was originally published in Algorand on Medium, where people are continuing the conversation by highlighting and responding to this story.