Sunday, 16th October, 2016

Better together?

TL;DR A bank prototype could herald a new approach to blockchain integration; one where blockchain tech supplements rather than replaces existing payment rails. (More below.)

FORWARD

QUOTE OF THE WEEK

“If the central banks succeed, it would be one of the greatest unexpected twists in new technology: An invention aimed at dethroning central banks and making it harder for money to be tracked instead ends up empowering those central banks and making money more easily traceable.”

- Nathaniel Popper, "Central Banks Consider Bitcoin's Technology, if Not Bitcoin", The New York Times

THE TAKEAWAY

At first glance, the collaboration announced this week between Wells Fargo and ANZ looks like just another financial sector blockchain prototype.

But what's interesting about this particular project is that blockchain tech runs in parallel to the incumbent system, rather than attempting to replace it.

The incumbent in this case is SWIFT, the backbone of correspondent banking. While SWIFT has been doing its own blockchain innovation research lately (blockchains featured heavily in their recent SIBOS conference), the new WF-ANZ design uses the SWIFT system as it always has - without modification.

The new prototype allows Wells Fargo to send a payment instruction to ANZ (or vice versa) via SWIFT, and SWIFT still does its thing, sending the transaction message and coordinating the settlement. But the banks also input the same transaction details into a distributed ledger, which disseminates the information throughout its network.

This may seem like a duplication of effort, as both SWIFT and the blockchain are transmitting mostly the same information. However, the relative ease of implementation ensures that the banks can continue experimenting with blockchain enhancements to their correspondent banking transactions without the risks inherent in replacing existing infrastructure.

SWIFT’s primary advantage in correspondent banking is simple: its incumbent status brings with it 10,000+ pre-existing relationships to other global financial institutions. And its messaging system generally works and is trusted, even if it's a bit clunky.

Reconciliation, however, is inefficient with SWIFT. Settlement communication is often delayed by a combination of end-of-day batch processing and time zone differences. Two separate accounts must be reconciled (usually in different currencies) which often requires manual effort from back-office workers.

With a distributed ledger, the payment information and the banks’ actions are recorded in real time for all participants to see. The recipient receives word of the disbursement almost immediately, and can use the transmitted funds sooner. Maintaining one transaction record for both sides could reduce the work required.

Going forward, the combination of blockchains with incumbent systems could provide a relatively safe and low-cost path to implementation. The advantages of each offset the disadvantages of the other. It is easy to see how cross-border payments would benefit from this. Certain types of trading, too.

Still, it's unclear whether any blockchain prototype will succeed in unifying financial institutions around a common solution.

The WF-ANZ project could wind up in a sea of fragmentation, where dozens of different blockchains vie for supremacy in a post-SWIFT correspondent banking system.

Or SWIFT could wait and see which solutions prove sound, and set the new blockchain standards.

– N

More background:

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OTHERS ARE TALKING ABOUT...

The New York Times published a piece on central banks and the blockchain, highlighting how “interested” several of the big ones are in the technology. From “interested” to “actually doing something about it” (beyond publishing papers, of course) is a big step.

Along the same lines, the FT tells us that the blockchain is moving from hype to application, especially in securities markets. Still a lot of talk about projects, though, and not much sign of real-world use.

Elsewhere, TechCrunch launched a series of short but slick videos on the blockchain, with an all-star cast; Quartz had a strange report on how the blockchain could make nuclear weapons safer; Reuters connected the fall in the yuan with the rise in bitcoin; and Newsweek is trying to get us scared of quantum computing.

UPCOMING EVENTS

Oct 17-19 – Blockchain 360 & IoT Security Summit – Boston, MA
Oct 21-22 – Crypto Cannabis Conference 2016 – Denver, CO
Oct 23-26 – Money 20/20 – Las Vegas, NV
Oct 24-26 – CoinAgenda 2016 – Las Vegas, NV

RECENT SECTOR REPORTS

Making blockchain real for customer loyalty rewards programs – Deloitte
Smart Contracts in Financial Services: Getting from Hype to Reality – CapGemini Consulting
Blockchain: what it is and why it matters – UK Government Actuary's Department

WHAT WE’VE BEEN UP TO

No way, is it that time of year already??? Yes, we are starting to gear up for Consensus 2017. You may think it's a while off still, but try and tell that to our events team.

If you know you'll be attending, we don't have a lot of reduced-price (60% off) Innovator tickets left (only 52 at time of writing), so don't leave it much longer. Don't say we didn't warn you.