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Blockchain: a case for the general ledger

Money transfer transactions account for more than $500 billion in the financial services ecosystem. While the quantum of the market grows exponentially, the system facilitating payments continues to operate nearly unchanged for more than 40 years.

Banks and financial enterprises bundle transactions and dispatch them to the Automated Clearing House for clearance and settlement at specified intervals. The downside: processing of transaction batches takes up to four days and incurs high operating costs, with operators levying unreasonable transaction fees. The remittance fee of online service providers and mobile payment applications also lacks pricing rationale.

The financial services industry has advanced by leaps and bounds driven by innovation. Digital technology helps financial institutions streamline business processes and minimise costs across the value chain. Financial services enterprises have become more efficient, transparent and agile powered by technology. Further, technology enables enterprises to comply with a series of local, regional and global regulations. Santander InnoVentures, the fintech venture capital fund of the Santander Group, predicts that the banking industry can save up to $20 billion annually in infrastructure costs with the distributed ledger, or blockchain technology.

Streamlining the back office

The cryptographic mechanism used in distributed ledgers can transform operations at banks, insurance companies and capital markets enterprises – trade processing, bookkeeping,cross-border payments, reconciliation, and clearing and settlement of financial assets including securities.

Decentralised peer-to-peer payment networks, such as bitcoin, useencryption to “mine” digital money, secure transactions, and validate records. An individual can transfer money or ownership of a digital asset to another entity anywhere, any time. Bitcoin miners develop “blocks” of transactions at short intervals using open source software. The digital ledger generated through the chronological sequence of blocks becomes a shared “blockchain” database.

The decentralised blockchain system manages payments as well as data on a single platform. Near-real time processing, direct transfer of ownership and the elimination of third parties minimise costs, while mitigating default as well as counter party risks. In addition, public databases ensure transparency. All of it makes blockchain a technology that holds promise for financial services and financial technology companies.

In one example, Coinsetter, a New York-based bitcoin exchange, plans to enhance trades settlement across Wall Street with its “On-Blockchain Settlement” system. It aims to “solve the problem of having to place trust in an exchange or intermediary, while also allowing market participants to have full visibility into trade settlement as well as tangible access to moving their assets 24/7,” according to Jaron Lukasiewicz, CEO of Coinsetter.

Building a math-based infrastructure

 Despite the potential of a distributed ledger, financial institutions are not rushing to replace legacy systems with the new technology. Blockchain or its variants will be adopted in a bigger scale only after early movers address underlying questions. Will a distributed network operate as efficaciously as the tried and tested centralised system? Can blockchain ensure interoperability? Who is responsible in the event of a dysfunctional system? How will cryptocurrency and related technology be regulated? 

Fortunately, the industry is not waiting for answers. Several financial services enterprises are developing in-house models and forging partnerships to create proofs of concept. Venture capital is pouring into start-ups building payment platforms using cryptography even as industry leaders incorporate blockchain technology into securities management, post-trade processing, settlement, and asset servicing.

Other examples of momentum behind the distributed ledger abound.

NASDAQ, the New York Stock Exchange and Goldman Sachs are developing blockchain-based systems for payments and transfer of securities. UBS has established a blockchain laboratory in collaboration with Ethereum, an open source platform that decentralises the web. The platform creates self-executing/self-enforcing smart contracts for users.

Permission-based systems mitigate the risk of control over operations in a distributed ledger network. Financial operators are invited to access a distributed ledger, and only members whose identity is validated can record transactions and maintain the network. Some private ledgers, such as the Hyperledger of Digital Asset Holdings, adopt consensus algorithm rather than open source blocks.

R3 CEV, the financial services technology provider, is undertaking a pilot of blockchain solutions and prototypes for a consortium of global banks, including JPMorgan, UBS, BBVA, the Commonwealth Bank of Australia, Credit Suisse, the Royal Bank of Scotland, and Barclays. Uniform technology and shared ledger solutions will drive interoperability, thereby increasing user adoption.

The financial ecosystem needs a centralised authority to ensure accountability and safeguard the interests of stakeholders. If public/private ledger incubator programs combine speed, operational efficiency and scalability with security and reliability, we may well see a distributed infrastructure replacing centralised systems. 



Comments: (4)

A Finextra member
A Finextra member 21 July, 2016, 08:21Be the first to give this comment the thumbs up 0 likes

Your writing way is interesting.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 July, 2016, 10:491 like 1 like

How do we reconcile "the financial ecosystem needs a centralised authority" with a "distributed infrastructure replacing centralised systems"? 

A Finextra member
A Finextra member 21 July, 2016, 10:581 like 1 like

The primary goal of the payments industry is to try and remove its back-end barriers by upgrading the legacy back-end systems with an immediate payments infrastructure serving all bank account holders more efficiently and cost effectively. The impact of mobile at the front end has rippled through to the demand for real- time processing in the back end retail payments infrastructures. The combined effect is a move towards immediate payments processing person-to-person.

Increasingly, banks are being seen as utilities or commodity providing “pipes” for payments and offering similar products and services at similar rates.

It may well be a hybrid of DLT or indeed some under utilised consumer pipes, such as the ATM networks and other similar schemes (such as Telco’s or Cards Operators) that may well provide structural savings.

As an example, ATM networks are primarily used by consumers only in a pull model (removing cash for an ATM machine) and by banks primarily for the faster payment service, which also uses the push capabilities for a credit transfer. Combine this with the new mobile initiatives, which via Link, connects almost every bank account with every mobile phone and one has the potential for a powerful cost effective proposition.



João Bohner
João Bohner - Independent Consultant - Carapicuiba 21 July, 2016, 14:42Be the first to give this comment the thumbs up 0 likes

I think that is having a misunderstanding, between "Payments" and the full banking business, in this blockchain technology.

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