Distributed ledger technology (DLT) may make several parts of the post-transaction banking process redundant. That’s an exciting prospect in an industry that spends billions on post-trade processing each year. However, there are several steps that must be completed before the industry is ready to begin using DLT to its full capacity.
Based on blockchain (the DLT that underpins bitcoin transfer), distributed ledgers are databases of transactions shared between the parties conducting those transactions. Moving to a single consolidated view of the truth eliminates the need to keep separate ledgers and to be constantly reconciling different versions of the truth across these views.
By separating the topic of DLT from the bitcoin use case, the technology can be used to model the transfer of any asset or commodity. The cryptography used to encrypt a transaction is secure and can be relied on, a necessity when trading bitcoin due to the anonymity of counterparties. As a result, it removes the risk of fraud, error, or dispute over the details.
DLT’s transparency may improve anti-money-laundering techniques by properly assessing ownership of assets without compromising data security and data protection. By engaging with DLT at an early stage and incorporating its concepts, along with the Internet of Things and cloud technologies, into the process of digital transformation, we can holistically work toward a vision of the new digital enterprise.
It sounds great, but it needs a lot of work. So far firms including Nasdaq and BNP Paribas have been able to develop business-to-client but not business-to-business offerings. The reason is that a lack of standards between firms is preventing the technologies from being joined.
Several consortia are in play with considerable backing from the industry, and each of these has the potential to develop one or more parts of what eventually becomes an industry solution. There is a massive opportunity to redesign and simplify processing in the industry back office, which has seen little automation, without building one legacy platform onto another. Concentrating on the use cases where all firms can find real value is the starting point.
To do that requires a good understanding of the business processes, technology, and regulatory regimes that impact the back office. Banks must engage in this analysis in order to contribute. The cost of capital is rising, business margins are falling, and the risks of disintermediation are increasing.
When approaching a change as massive as DLT, the industry will need to ensure that security and data protection are tightly wound in. Where the boundary between shared services and shared data is a fine line, it is incumbent upon the industry not to cross it. These parameters need to be resolved. By working together, the industry can collectively pull back from the position it finds itself in right now and develop a better future for customers, shareholders, and the business of banking.
With the banking industry in a state of flux, The Banker, in collaboration with SAP, has developed a timely video series titled “Digital Trends Driving Bank Innovation,” which included a video with Ruth Wandhofer, Global Head of Regulatory and Market Strategy, Citi, on Blockchain, Separating Reality from Hype.