ANZ, Westpac, IBM and Scentre Group, which owns and operates and Westfield in Australia and New Zealand, have collaborated on a proof-of-concept project using distributed ledger technology (DLT) to underpin a bank guarantee.
DLT is inspired by the blockchain used by Bitcoin to track transactions. The proof of concept involved a bank guarantee for a commercial property lease.
Bank guarantees are generally paper-based and involve a number of inefficiencies, an outline of the project released today by the project’s participants states.
Those include the costs, risks and delays involved in the production of physical documents; the challenge of tracking and reporting on a guarantee’s status; and a lack of standardisation of terms and conditions of guarantees.
“A shared ledger, which could be relied on as the single source of truth for the existence and status of a bank guarantee, could resolve the first two challenges, while acting as a catalyst for the third,” the white paper (PDF) states.
“In an ecosystem where three parties (i.e. the tenant, the bank, and the landlord) participate in the creation, management and expiry of a common instrument, a blockchain solution could provide the optimal medium for facilitating the necessary flow of information, while balancing the competing needs of transparency and confidentiality.”
The proof of concept used Hyperledger’s Fabric 1.0 open source blockchain technology. ANZ and IBM both support Hyperledger.
The trial involved a blockchain between a tenant, landlord and bank. Instead of issuing a paper guarantee, the bank would create a new entry on the shared ledger that represents a “digital guarantee”, the white paper explains
“The existence of this guarantee would be immediately visible to both the tenant and the landlord, who would in turn carry out the process that would normally be triggered by the receipt of a paper guarantee (e.g. commencement of the lease).”
The blockchain-based solution means that the shared ledger would be reliable record of the state of the guarantee.
A benefit of a blockchain-style approach is that it offers a single source of truth across multiple parties, it adds.
“Rules for updating and maintaining the database — that is, what records can be changed, how they can be changed, who can change them, and who needs to provide consent — are codified and embedded in each node in the network,” the white paper states.
“Consensus algorithms ensure that changes originating from different nodes are committed in a way that ensures all nodes retain a shared and consistent view of the database at any given point in time.”
“We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases,” said Nigel Dobson, ANZ’s general manager wholesale digital, digital banking.
“This proof of concept demonstrates how we can collaborate with our partners to develop a digital solution for customers, which also has the potential for industry-wide adoption.”
“This is about removing the cost of fraud, error and operational risk that will continue as long as bank guarantees remain paper-based and manually issued,” said Westpac’s Andrew McDonald, the bank’s general manager corporate and institutional banking.
The next step involves encouraging industry participants to adopt the DLT approach, McDonald said.
“The changes required are pervasive and will require close collaboration between competitors, regulators, consumers, technologists, and the legal community in order to achieve a suitable solution,” the white paper states.
“The collaboration demonstrated in this POC shows the willingness of the industry to achieve a common goal, albeit on a small scale. This now needs to be scaled and discussed with a broader range of participants. As with most DLT solutions, the full benefit will only be realised through broad industry adoption.”
Westpac recently joined SWIFT’s blockchain proof of concept project, which is focused the use of DLT to help banks reconcile their nostro accounts in real time. ANZ joined earlier this year.
The ASX is preparing to make a decision on whether DLT can replace CHESS (a system that provides post-trade services for the exchange).