Blockchain research @ IBM Research – Australia

Innovative solutions for the financial services and public sectors

Scientists at IBM Research – Australia are working on a number of innovative blockchain solutions for the financial services and public sectors. These solutions aim to reduce inefficiencies, tackle fraud and increase regulatory compliance in a wide range of use cases such as cross-border payments, bank guarantees and corporate Know Your Customer (KYC) processes.

Distributed Ledger Technology, commonly referred to as “blockchain,” is an emerging platform that has the potential to transform how organizations transact in multi-party business networks, significantly reducing risk and enabling new and innovative business models. Blockchains allow businesses with common interests to create shared ledgers that are distributed across the participating business entities. Data written to the network is immutable, final and auditable.

In addition to building first-of-a-kind solutions, the team is also working on a number of research challenges related to scalability, data management and governance.

Some of the key use cases that scientists at IBM Research – Australia are focused on include:

  • Bank guarantees: Blockchain replaces paper-based bank guarantees with shared digital records to significantly improve efficiency and reduce the potential for fraud.
  • Cross-border payments: Blockchain reduces payment reconciliation time and improves capital allocation and management within correspondent banking relationships.
  • Shared “Know Your Customer”: Blockchain reduces costs associated with customer on-boarding, enhances the customer experience and improves transparency and regulatory compliance in a manner that ensures customer privacy and consent.

Blockchain for managing bank guarantees

Bank guarantees are a bank’s unconditional undertaking to pay one party in the event of another party’s default. Bank guarantees are used across many industries to secure contracts, including in the trade of goods and services, financial transactions, industrial projects, and the leasing of assets.

Bank guarantees are commonly used by prospective tenants to secure commercial property leases in lieu of a cash deposit or rental bond. For tenants, they allow for more flexibility in securing their lease obligations as an alternative to cash. For commercial landlords, they provide the certainty of a financial institution in the event of the tenant’s default (e.g. where they fail to pay rent or make good upon vacating a property), while also avoiding the administrative burden of managing cash deposits and trust accounts.

Today’s bank guarantees are paper-based, and their physical nature gives rise to a number of inefficiencies, including:

  • Physical Document Management: costs, risks and delays associated with the physical printing, issuing, exchanging, retrieval and potential loss of guarantee documents;
  • Tracking and Reporting: challenges in the tracking, reporting and overall transparency of a guarantee’s status as it undergoes potentially multiple handoffs and changes throughout its lifecycle; and
  • Lack of Standardisation: manual effort required to review and negotiate the terms and conditions of a guarantee, which can vary by bank and by landlord.

A blockchain solution digitises the issuing and managing of bank guarantees and provides a single source of truth for the existence and status of a bank guarantee, thereby resolving the first two challenges, while acting as a catalyst for the third.

Download Whitepaper “Distributed Ledget Technology and Bank Guarantees for Commercial Property Leasing”

Blockchain for cross-border payments in correspondent banking

When money is moved between two banks across borders, separate ledgers are used by the correspondent and respondent banks for recording debits and credits. The accounts on these ledgers are called nostro and vostro, from the Italian ours and yours. A nostro account is used to keep track of foreign currency held in a foreign bank account, owned by a local bank. Conversely, a vostro account keeps track of local currency held in a local bank account, owned by a foreign bank. The use of traditional double-entry booking for managing the movement of money takes several days to settle, involves manual reconciliation and leaves idle capital in these accounts.

This video highlights a blockchain proof-of-concept built by IBM Research – Australia that enables multiple banks to use a single shared ledger, thus eliminating double-entry bookkeeping. The solution removes the need to reconcile payments, reduces settlement time, and enables banks to better utilize capital.