Treasury Viewpoint

Is distributed ledger technology (DLT) a banking fad or fixture?

The technology, which relies on blockchain, is grabbing headlines, and the acronym DLT is catching on. But will its mark be permanent?

Key Takeaways

  • Emerging technologies coupled with an increasingly globalized landscape are transforming the way payments are executed.
  • Real-time payments from/to anywhere and in any currency continue to evolve and could create immediate visibility and transparency.
  • Instantaneous global access to funds and corresponding information would enable companies to better optimize working capital, meet liquidity needs worldwide and mitigate fraud.
  • Banking interoperability would allow financial institutions to work together seamlessly and use new or emerging technologies such as the cloud and Application programming interface to efficiently connect to clients and distribute data.

Envisioning the future, understanding present challenges

DLT could reshape how we store and transmit both money and information. Today when money moves, each party involved marks the transaction in its ledger. Record-keeping and reconciliation are duplicative processes that repeat across the separate financial accounts of remitters, banks, central banks, clearing systems and beneficiaries. The inefficiency is exaggerated and most acute for global payments, since time zone differences, cut-off times and other complexities can add days of delay.

Nirvana for global payments and treasury

What if payments could be made nearly instantly on a single, tamper-proof ledger shared among participants? These transactions would be immutable, incorruptible and irreversible.

Directly connecting counterparties via a shared ledger would enable a global peer-to-peer (P2P) wholesale payments system. Payments could happen nearly instantly from and to anywhere in any currency. An immediately visible payment trail could simplify track and trace.

Beyond transaction details, enriched data could be immutably linked to a transaction to allow easier, more accurate auditing of supporting documentation for a payment.

Companies could gain anytime, anywhere, near-instant global access to their funds and related information. Cash could be in continual motion to meet a company’s working capital and liquidity needs worldwide. This is increasingly important as liquidity markets demand more efficient cash management.

In the future it’s possible that one shared ledger could connect all central banks, financial institutions and companies for unprecedented interoperability.

Back to reality

DLT is nascent and rapidly evolving. Blockchain and DLT are not a panacea for all global payment woes, and many areas must be resolved, including:

Interoperability

Integration

DLT won't connect simply and directly into existing banking platforms and systems. A bank's most valuable commodity is its ledger. Distributing a ledger via emerging technology is a serious, long-term endeavor.

Governance

Rules must be developed for a P2P global payments system based on DLT. For example, what will be the recourse for money sent in error?

Security

As the financial industry modifies the technology to work within permissioned networks, security implications must be thoroughly explored and addressed.

Integration

DLT won't connect simply and directly into existing banking platforms and systems. A bank's most valuable commodity is its ledger. Distributing a ledger via emerging technology is a serious, long-term endeavor.

Governance

Rules must be developed for a P2P global payments system based on DLT. For example, what will be the recourse for money sent in error?

Security

As the financial industry modifies the technology to work within permissioned networks, security implications must be thoroughly explored and addressed.

Banking on interoperability

Banks have long sought the ultimate efficiency of full interoperability for global payments as a means for companies to fully mobilize their cash flows. DLT could be the catalyst to enable this leap.

A new level of connectivity would enable banks to deliver solutions for managing and optimizing cash and liquidity in a seamless way through the convergence of technologies. With a distributed ledger as the foundation, banks could use APIs and the cloud to efficiently connect to clients and distribute data.

Beyond faster, better, cheaper

Blockchain and DLT could revolutionize the speed and efficiency of global payments. The accelerated pace of innovation makes it imperative that corporate treasuries build flexibility into new technology investments to be prepared for new ways to transact.

Investing in technologies

J.P. Morgan is investing in blockchain and other technologies and multiple use cases for DLT are in progress for payments as well as other initiatives.

Significant technology investment:

  • USD 2 billion in technology and security controls
  • USD 600+ million in cyber capabilities
  • USD 100+ million to redefine treasury solutions

Innovation:

  • Our in-house Blockchain Center of Excellence developed and open-sourced Quorum in November 2016.
    • This blockchain architecture, a permissioned implementation of Ethereum, meets regulatory requirements, while ensuring data privacy and can process up to hundreds of transactions per second.
    • Quorum underpins J.P. Morgan’s new Network Payments initiative that is trialling the use of distributed ledgers across the bank to increase efficiency, transparency and streamline interbank wires.
  • J.P. Morgan is:
    • A premier member of the Hyperledger Project
    • A partner to Digital Asset Holdings for blockchain trials

What should you be doing about distributed ledger technology?

DLT developments could enable significant leaps in how you manage your global payments. MAKE SURE TO:

  1. 1 Talk to your banks about how they are applying DLT to global payments.
  2. 2 Understand how your banks are connecting emerging technologies, such as APIs and the cloud, to drive global payments efficiency and how they could work together with DLT.
  3. 3 Build flexibility into new technology investments to be prepared for new ways to transact.
  4. 4 Work with your banks to map out your current pain points in making and receiving global payments. Identify interim solutions that will address today’s challenges, while effectively bridging to emerging technologies like DLT.
  5. 5 Speak with your technology group to understand how it is leveraging APIs and the cloud today to interact among your company’s own systems and with your banks.

To learn more about how J.P. Morgan Treasury Services can help you protect, manage and grow your business globally, please contact your representative or visit us at jpmorgan.com/treasuryservices.

 

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