Parvez Siddiqui is cofounder of TrustIn Limited, a regulated and global digital escrow platform, and an advocate for inclusive finance.
Trust has always been essential to commerce. Silk Road traders, for example, needed intermediaries to guarantee that merchandise went one way and payments went another. As the world grows and develops and technology advances at a rapid rate, trust remains the catalyst for a functioning global society.
Where a payment process would once take weeks to finalize and delicately navigate, payments can now be made with a literal click of a button. Parties never even have to encounter one another. But in this arrangement, how does one ensure trust?
Digital escrow is one tool that aims to help answer this question. This is the process by which an unbiased third-party agent holds cash or a title and only releases the payment or item due when a contract has been thoroughly fulfilled. As the cofounder of a digital escrow platform, I believe that as this market evolves, it needs to address complications while developing a tactical plan for maximum expansion.
The Mechanics Of Digital Escrow
Digital escrow is a relatively easy concept: An impartial third party holds funds or property until specified rules are achieved. Here’s how it works:
• Conditions established: The buyer and seller determine the agreement, what will be provided, payment, etc.
• Payment made: The buyer places payment in the escrow account as a show of good faith.
• Services rendered: The seller provides the product/service as required.
• Payment released: The buyer acknowledges satisfaction and approves the release to the seller.
A key development in digital escrow today is the use of virtual accounts. These accounts can be created depending on the transaction, like an account just for a real estate purchase or supply purchase. Virtual accounts can also provide visibility, so buyers and sellers can see where the funds are at any time and cross-border flexibility. The ability to function in different currencies can make international transactions simpler.
Digital escrow is used in various sectors, such as e-commerce. In an industry that reached $5.8 trillion in retail sales in 2023 alone, some e-commerce platforms are using digital escrow to help give buyers and sellers more peace of mind until the transaction is complete. Digital escrow can also be used in real estate, supply chain financing and crowdfunding, something I’ve seen firsthand through my company’s work. Luxury goods and collectibles are another example; sometimes, digital escrow is used to secure transactions involving rare items like art, high-end jewelry and cars.
Challenges And Opportunities Facing The Industry
1. Regulatory Complexity
Global digital escrow services must navigate diverse anti-money laundering and know-your-customer requirements, which can vary significantly across jurisdictions. Missteps can be costly, as global non-compliance fines exceeded $4 billion in 2022, according to the Reading Between the Fines Report by Fenergo (registration required).
Opportunities for leaders:
• Partner with regulators. Build relationships with regulatory bodies to help foster trust and compliance with local and international standards.
• Explore automation for compliance. AI and machine learning can streamline AML/KYC checks, which can help reduce errors and adapt to evolving regulations.
2. Cybersecurity Threats
Digital escrow platforms are prime targets for cyberattacks due to the sensitive financial data they handle. A breach could compromise funds and erode user trust. This year, the average cost of a data breach globally increased by 10% to $4.88 million, according to IBM’s Cost of a Data Breach Report (registration required).
Opportunities for leaders:
• Embed cybersecurity by design. Ensure you’re using advanced encryption, multifactor authentication and secure application programming interfaces to help protect platforms from breaches.
• Consider blockchain technology. Blockchain technology can help enhance cybersecurity in digital escrow by creating immutable transaction records that are transparent and tamper-proof. Depending on the type of blockchain used, even the escrow platform itself may not be able to change the transaction guidelines or terms and conditions of the escrow transaction because that will be saved securely in the blockchain.
While my company uses traditional cybersecurity measures, we are working on a blockchain solution to further secure user data and escrow transaction conditions. For companies looking to do something similar and integrate blockchain, starting with a clear identification of relevant use cases, such as transaction verification or fraud prevention, is key. From there, you can partner with experienced blockchain platforms to ensure a successful implementation.
Looking Toward The Future
The future of digital escrow lies at the intersection of technology and trust. Innovative tools and global standardization will shape the industry’s trajectory.
1. Use of blockchain: I believe the potential of blockchain technology for tracing and verifying escrowed funds could be transformative for the digital escrow space. The blockchain market as a whole is projected to reach $825 billion by 2032, according to Fortune Business Insights.
2. AI-driven compliance: Automation could transform compliance and regulatory efforts, as well as help reduce human error.
3. Standardization across the globe: I expect to see new global regulations and compliance standards for digital escrow in the future, especially since I anticipate cross-border transactions to become more commonplace.
To avoid becoming obsolete, companies should conduct compliance audits regularly and establish internal structures to assess new regulations prior to relaying compliance training to employees and clients. Understanding who the leaders in the industry are and tracking governmental regulatory agencies can keep a company apprised when changes do occur so compliance can be adjusted seamlessly.
Trust is the new currency, and I believe digital escrow will become more common in transactions worldwide. If current challenges—like regulatory hurdles and cybersecurity risks—can be worked out, the integration of technologies like blockchain could position digital escrow as a transformative solution in the global marketplace.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
