Can distributed ledger technology solve key challenges?
Distributed ledger technology has immense potential as a global financial infrastructure, for everything from trade finance and payments to securities services and proving identity for Know-Your-Customer requirements.
But to achieve the benefits of distributed ledger technology more quickly, banks and other players in the financial ecosystem need to move faster towards making distributed ledger technology mainstream.
Four Key Obstacles to Overcome Commercialisation
Industry players ranging from financial institutions, corporates, technology companies through to the public sector will need to work together to commercialise distributed ledger technology. There are four major hurdles.
First, financial institutions will need to ensure that distributed ledger technology solutions meet real needs. They must also demonstrate that it solves the challenges on a scale that makes it practical. So far, most distributed ledger technology initiatives have been narrow pilots or proof-of-concept projects between a limited number of players.
Gradually, though, distributed ledger technology is gaining greater adoption and is being used to improve efficiency and the integrity of processes, but if there is greater demand from corporates that want to achieve the efficiencies that distributed ledger technology can provide, banks will gain a much-needed impetus to move faster from concept to actual implementation.
Collaboration between FinTechs and traditional financial institutions can integrate the strengths of the banks’ distribution capabilities with FinTechs' innovative ideas and move adoption along even faster.
Second, industry players need to establish a legal framework for distributed ledger technology. Today, there is a long-established legal framework for services such as letters of credit and cross-border payments to ensure transactions are completed smoothly and to resolve disputes. So far, however, a similar legal framework has not been established for transactions that use distributed ledger technology. Banks, corporates, law firms, regulators and other parties need to work together to set up a legal framework.
Thirdly, a global set of standards for distributed ledger technology needs to be established, similar to ISO 20022 and other standards for SWIFT. There are currently many different standards and they are not often interoperable. Development of a common set of standards would enable integration of the various versions of distributed ledger technology and would speed up mass adoption of distributed ledger technology as the foundation of a global utility.
Finally, industry professionals need to provide practical education so that financial institutions, corporates and government bodies can better understand distributed ledger technology, realise its capabilities it provides, and fully identify the benefits it will deliver.
Much of the training so far has focused on the technical requirements to make distributed ledger technology operational and the integrity of the underlying algorithms. This is sensible, but training now needs to transition towards a business focus that shows how it can solve the problems it is designed to address and enable business leaders as well as public service officers to understand the benefits more clearly.
Commercialising Distributed Ledger Technology With Regulatory Support
A push for distributed ledger technology from the public sector, which can support regulatory oversight and help ensure delivery of the inherent advantages of distributed ledger technology, would also be beneficial. Indeed, the public sector is best placed to bring players together and can become a key facilitator for moving distributed ledger technology implementation forward.
While regulators clearly have a duty to evaluate distributed ledger technology thoroughly to determine how it can best be structured to achieve policy and social benefits, an increasing number of policymakers are working with banks on distributed ledger technology
innovation, such as China, Dubai, Hong Kong, India and Singapore, for instance, as well as in western countries such as the UK and US.
Along with benefitting from the transparency offered by distributed ledger technology, which provides a trail of transactions without giving away confidential details, the public sector also gains by supporting a technology that helps to promote their market as a leading financial centre.
By taking a leading role in implementation and demonstrating how their city promotes leading-edge technology that benefits the broader market, policymakers can differentiate themselves and attract businesses that want to stay at the forefront of technology innovation.
Standard Chartered Bank’s Approach to Distributed Ledger Technology
After starting to look into Bitcoin and what could be done with it, in 2015, Standard Chartered Bank quickly realised that the underlying technology of distributed ledger technology was most promising. It then decided to focus primarily at distributed ledger technology’s trade and cash applications rather than at other uses of the technology.
Standard Chartered Bank has so far explored approximately 80 use cases as it looked carefully at how to optimise the benefits of distributed ledger technology for its clients.
After the extensive review, the bank initially prioritised two proof-of-concept initiatives, one for trade and one for cash. The trade finance proof-of-concept, for instance, provides faster transactions and achieves efficiency via disintermediation, with records processed and verified real-time and obligations or commitments fulfilled automatically when pre-defined criteria are met. In 2017 and beyond, the bank plans to commercialise several more use cases.
The bank has taken the approach of starting small, with use cases based on client needs and with the goal of proving that the concept works. These small-scale collaborations enable faster wins, have the potential to scale up, and can be expanded to additional services or participants once the concepts are proven.
Through these proof-of-concept initiatives, the bank has identified several key benefits. For international payments, for example, distributed ledger technology could reduce the time taken for international settlement from three days to about 10 seconds. While settlement is still conducted by banks, nearly instant transactions will let corporates make payments faster and leverage real-time information.
Standard Chartered Bank Initiatives
Along with these proof-of-concept initiatives, Standard Chartered Bank is taking other steps that demonstrate how it is working effectively to turn distributed ledger technology initiatives into reality.
One is the development of a new service called TradeSafe, a trade finance solution which started by looking at how to reduce the risk of duplicate invoicing and ensure that the paper document taken to the bank actually has a trade transaction behind it. Although banks have traditionally used paper documents to verify genuine trades before providing financing, the process never completely removed the risk of double financing or paying fraudulent invoices.
TradeSafe leverages distributed ledger technology to enable banks to check transactions against existing invoices and reduce risks. The secure database keeps irrefutable evidence of a transaction, records the activities of the entire supply chain, and enables banks to issue financing against invoices with confidence. Duplicate invoices are automatically flagged and deleted, and all authorized counterparties can check the status of invoices. This security gives the bank more comfort than is currently possible, because of the greater transparency.
Another is the Blockchain Trade Finance Working Group in Hong Kong, where Standard Chartered Bank is one of the lead banks under the Hong Kong Monetary Authority’s FinTech Facilitation Office. Standard Chartered Bank is collaborating with four other banks and Deloitte Touche Tohmatsu to demonstrate the application of distributed ledger technology in digitising paper-intensive processes through prototype smart contracts for open account trade.
Standard Chartered Bank has partnered with Ripple, the US FinTech that is pioneering global financial settlement solutions, together with banks, corporates and
regulators to develop additional opportunities for distributed ledger technology. Ripple is a multi-bank initiative that offers straight-through processing, real-time settlement, low costs, elimination of reconciliation between multiple internal ledgers, improvement of liquidity and cash flow, reduction of the cost of capital, and better pricing.
Standard Chartered Bank is also involved in the SWIFT Global Payments Innovation initiative relating to distributed ledger technology by participating in the SWIFT Global Payments distributed ledger technology proof-of-concept project, which it expects will allow it to continue improving clients’ cross-border payments experience by making its internal processes for NOSTRO reconciliation even more efficient.
Along with these proof-of-concept initiatives, Standard Chartered Bank is taking other steps to demonstrate how it is working effectively to turn distributed ledger technology initiatives into reality.
Implementation in 2017
Distributed ledger technology delivers a combination of transparency, real-time information, efficiency and certainty that makes it truly powerful. As supply chain ecosystems shift to become cross-border and multi-party, distributed ledger technology has the flexibility to facilitate the migration from closed to open supply chain ecosystems and could allow manufacturers to extend their sourcing directly from suppliers rather than through intermediaries.
Distributed ledger technology’s flexibility, security and immediacy are ideally suited to solving these problems, allowing large corporates to improve their supply chain ecosystems.
What’s more, the three dimensions of a supply chain – the information, physical and financial chains – can be assembled on a distributed ledger so that all parties gain a consolidated view.
In time, distributed ledger technology will become a vital part of an interlinking network of technologies that will completely transform the way banks look at supply chains, with no difference between physical and financial supply chains.
Looking even further ahead, distributed ledger technology could work hand-in-hand with other technological developments such as tokenisation and the Internet of Things, enabling applications such as the automated tracking of the physical supply chain and integrating the physical supply chain with the financial supply chain even more closely.
Days ahead should see far greater market adoption of distributed ledger technology and, more importantly, the transition from ideas and concepts into a tangible value proposition to solve clients’ real needs. Going live on distributed ledger technology solutions coordinated by Ripple and implementing new solutions such as TradeSafe as well as continuing to work on other distributed ledger technology initiatives position Standard Chartered Bank at the forefront of financial institutions leading the way in achieving the full benefits of distributed ledger technology.
About the Author
Gautam Jain is the Managing Director and Global Head of Digitisation and Client Access, Transaction Banking with Standard Chartered. Based in Singapore, Gautam is responsible for providing product development and market access to clients across the globe through best-in-class electronic channels, and an international network of branches, subsidiaries and alliances. In addition, he is focusing on increasing the speed of transforming TB into a digitally-enabled business, as a competitive differentiator.