Is this the end of Blockchain or DLT within banking and payments? Is the Blockchain hype cycle finally dead?
In July this year, I wrote about the SWIFT GPI initiative and the DLT PoC they were developing along with 33 banks to address the inter-bank payments process. The post in July also mentioned that the results of the PoC would be announced around/during SIBOS this year. SWIFT did release an interim report on the PoC, the results they were seeing with it, and the challenges ahead.
The management and reporting of inter-bank payments and the resulting liquidity management has been a critical topic for banks since the recession created such a liquidity crisis. In Europe, the PRA mandated financial services firms to submit LCRs (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) on a regular basis.
Subsequently the BCBS 248 regulation was announced by the Basel Committee for banks to address intra-day liquidity management and reporting. This has proven a lot more challenging due to complicated data infrastructures, data quality issues, lack of data reconciliation methodologies etc., Only 18% of transactions could be reported in real time, and only 21% of reported transactions had the level of granularity mandated by the regulators.
Now, without getting too hung up on these operational challenges, lets focus on the brighter side, which is the quantum of efficiency gains to be had through a practical DLT solution is big. The current process of inter bank transfers through Nostro accounts is begging for disruption.
The problem statement for the PoC was: Can Distributed Ledger Technology (DLT) – commonly known as Blockchain technology – help financial institutions optimise the liquidity of their Nostro accounts and reduce the significant operational costs associated
Some key points to highlight about the Technology used for the PoC are:
- SWIFT used the Hyperledger Fabric v1.0, a private permissioned ledger
solution which is able to strictly control access to the blockchain.
- The solution supports selective data distribution, allowing not only secure data access but also physical data storage to relevant nodes only.
- It also addresses cyber risks through its support for native integration with a SWIFT controlled Certification Authority, through the issuance of Certificates. This allows all access keys used for parties identification and transaction signing to be certified, providing trust in key authenticity and in the identity of parties.
- It provides a smart contract based platform – chaincode in Hyperledger
Fabric to implement business logic and workflows on the ledgers.
- DLT had to provide real-time visibility on the Nostro accounts and that consensus is achieved within 5 seconds. The latency will need to remain stable as the number of Nostro/Vostro relationship increases quadratically as the number of
- ISO 20022 data model was used to ensure that data is rich enough to provide intraday real time monitoring and reconciliation
Apart from these technical points, there were 34 functional use cases the PoC was supposed to achieve. These were the key results:
- All 34 business use cases were achieved successfully during the PoC across 6 of the 33 banks
- The solution seem to have addressed both liquidity and reconciliation issues
- Performance of 2 seconds to arrive at consensus was achieved
So Whats the Catch?
- Most of the top banks have their own internal entities to perform key currency settlements and work out the liquidity at the group level. Many of them also have real time feeds set up internally to manage liquidity reporting will not be keen to reinvest into this technology to achieve the same results.
- There is also a need to integrate the DLT solution with legacy systems and processes.
- For the above two reasons, most big banks are reluctant to think about DLT in production. However, some of the mid tier banks would benefit immensely.
- It also means that, while some banks are willing to work with a decentralised ledger in its truest sense, there are some firms that would want more centralisation with a neutral third party. Unfortunately the hybrid DLT technology that supports such a complex functionality is still not a matured solution yet.
This is my take on the results (interim): Technology could deliver if there is consensus across banks on what the final operating model across the solution and the processes depending on it are. But until a hybrid model can be delivered and tested technically, DLT for inter-bank payments is still a problem-waiting-to-be-solved.
SWIFT has also announced that the final results of the PoC will be disclosed in December. Watch this space.
Arunkumar Krishnakumar is a Fintech thought leader and an investor.
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Thanks Arun, great post. The savings are huge – 90% as you point out – so it will happen. To bring along all SWIFT members will take time. I think SWIFT will beat the flash in the pan competitor – Ripple XRP – for the simple reason of ownership structure. The SWIFT cooperative ownership model means all banks benefit from this. They will need time to adjust commercial policies but that is what will make this sustainable. So I think we can expect bank intermediated cross border payments to be 90% cheaper and done within seconds. This will unleash a wave of innovation on top and grow the market for banks (compensating for the lower costs).