Estimated reading time: 6 minutes

Distributed Ledger Technology, or DLT, has been all the rage in the banking industry for the past few years. After what felt like endless white papers and Proofs of Concept (POC), DLT has finally started being applied to real-world problems to bring down costs, increase efficiency, and improve customer experience. 

What needs to be done to make sure DLT can become truly mainstream – and how close is the banking industry to this goal?

At Sibos, the panel of experts sought to answer just this. The panel featured:

• Akinchan Jain, Head of Asset and Liability Operations, World Bank
• Hariram Janakiraman, Head of Industry and Innovation, Transaction Banking, ANZ
• Jack Pouderoyen, Digital Assets and Currencies, Swift
• Ying-Ying Tan, Global Head of Product Management, Securities Services, Standard Chartered Bank

The rationale of DLT

The first priority, as with any new technology, is working out what the specific use cases of DLT are and how they can be integrated with existing processes to increase efficiency and reduce cost. 

Institutions have tapped smart contracts, digital contracts stored on blockchain that can be executed automatically without human intervention, to speed up processes and increase data flows. This increases efficiency on the bank’s side while also improving the customer-facing side in ways that would not be possible without DLT.

From a securities perspective, too, institutions are examining their existing processes to find places where a switch to DLT can bring value and efficiency. This should happen internally first, with banks implementing small-scale projects that still go beyond POC but are restricted enough that a model can be tested out without disrupting external processes. Then, once a specific project works, it can be integrated into the wider ecosystem and grow to scale. 

Beyond specific projects, banks must lean into DLT in some way or risk getting left behind. “To us, DLT is an incremental asset class that we have to manage. Do we believe that one day the traditional asset class and the digital asset class will converge? The answer is probably yes. It’s not a question of if, it’s a question of when,” said Tan.

Beyond POCs

Once the specific use case has been identified, implementing it at scale is the next step. However, it’s often difficult to move from a POC to a commercially viable solution. The first issue is inconsistent and fast-developing regulation: while DLT legislation is becoming more and more common, many jurisdictions do not recognise it as a financial instrument at all yet, while others impose strict limits on its use. Even in countries where it is allowed, it is a relatively new field, making legislation’s implementation inconsistent – especially across borders. 

Because DLT is such a new field and institutions aren’t sure how clients and external actors will respond to innovation, it can often be hard to build a business case and predict revenue for a DLT project. This is why some banks are implementing DLT as a cost-saving measure instead, which is much easier to forecast and control. Standard Chartered, for example, has implemented DLT in their transfer agency infrastructure, a laborious and cost-intensive process which has become at least 60% more efficient through the use of DLT. This model has now become completely profitable and is being sold as a standalone product used in 5 countries already – but the key to its success was starting small and internal.

Opportunities for emerging countries

New technology like DLT and tokenisation can help developing economies develop faster and “leapfrog” into the digital world: emerging markets which are still setting up their basic infrastructure can find it easier to incorporate innovation than established players who must convert existing processes.

The World Bank’s advisory service helps member countries develop frameworks and policies to do just that, as well as use DLT for specific projects to support development. For example, a project in West Africa uses blockchain to help mango farmers access trade finance, and DLT is being used to track World Bank loan disbursement in Moldova. 

Collaboration and interoperability

Large institutions are perfectly placed to implement DLT because of their reputation for trust and accuracy with customers. The technology can often be used to improve processes which lack efficiency and transparency, such as the transfer of bond data from issuers to holders and purchasers. DLT can be a way for all participants in a trade to come together and share information without the need for slow and expensive market data providers. 

An often-discussed issue with DLT, especially as it is just starting out, is liquidity. As investors need to be onboarded onto a DLT platform, trading speed and liquidity are issues that may discourage further investors from joining – a catch-22 that some fear will take years to resolve. However, the World Bank has recently issued bonds underpinned by blockchain technology which used a traditional clearing system, solving the connectivity issue while still leveraging the benefits of DLT. Solutions like these are the “best of both worlds,” integrating digitisation without any costs for users, and could be the key to unlocking DLT’s potential much faster. 

DLT can itself be used to increase interoperability, especially with countries which aren’t as connected to the international market as they could be. Australia and New Zealand, for example, have a shorter trading window than anywhere else because of their location and time difference from most significant markets; using DLT to make transactions immediate and keep markets open 24/7 could be revolutionary for those markets. The Australia and New Zealand (ANZ) Banking Group, for example, found a way to process payments that used to take days to months in just 15 seconds with DLT.

The missing links

DLT implementation at scale is more than just a pipe dream now, but significant changes in the industry need to happen before it becomes the norm. The first issue is the lack of widely accepted standards for DLT, which impedes development and collaboration. “Without standards, you are not really creating any efficiencies or cross-shares. You’re just creating something which works very well in your pocket, but that’s all – it stops there. In order to really expand it, you need to have those standards,” said Janakiraman.

Standards don’t have to mean constraining innovation, however—just creating norms and practices that can be universally implemented to ensure interoperability. These norms can be created from the bottom up and changed as necessary if a new innovation requires them, but they are essential to avoid the creation of many equally valid systems that can’t work as anything other than standalone—a fear shared by many industry professionals.

“One of the risks I see is everybody creating their own blockchain platform. And some of these are walled gardens, but even if you implement standards and interoperability, you need to have an environment where all of these platforms connect to each other,” said Jain. The new platforms must be able to connect to each other and to existing infrastructure within the market and outside it or remain part of a fragmented and overly complex DLT landscape. 

The enormous scalability and interoperability of DLT, for anything from mango farming to faster securities processing, is key to unlocking its true potential. As more and more institutions use the technology for commercially viable projects, it’s only a matter of time until DLT becomes truly mainstream and its benefits can be really felt.