Blockchain triggers a wave of innovations in Banking Settlements

A successful demonstration of instantaneous clearing and settlement of securities using distributed ledger technology (DLT) by a Canadian consortium of Payments Canada, the Bank of Canada, TMX Group and R3, a couple of years back indicated that "Atomic transactions" in bilateral mode could save upto 30% of processing cost and cut T+3 / T+2 settlement cycle significantly. Accenture and others estimate that the industry could save upto $ 10 Bill per year (A reduction of 7 – 25 basis points). Swiss National Bank used BoFA-ML backed R3 platform for multi-party settlement pilot named "Project Helvetia" and called it out a success in 2020. Project Helvetia settled large transactions between financial institutions using digital currencies. SNB plans to expand the trial to cross-border payments in 2021, it has not yet decided whether to issue its own central bank digital currency. Paxos, which recently raised Series D funding, has onboarded Bank of America, ABN Amro, Credit Suisse amongst others to use a permissioned version of the Ethereum blockchain for bilateral settlement. Currently, the solution is operating as a pilot under a No-Action relief letter from the SEC. As SEC, SNB and the likes firm up the governance framework in coming quarters, a new tech spend space is in the making.

From technical architecture standpoint, Smart bilateral contracts, collectively, are the cell-level components of Settlement Bus. Functional and Control algorithms ensure the seamless and instantaneous processing and multi-way reporting. Application user interfaces work in synch with digital Vault, settlement bus and the accounting log to support the transacting parties.

While Blockchain based settlements, we enter in an era which is cloud-based, data-driven and largely disintermediated. Financial Market Infrastructure cost stack is up for an overhaul unleashing efficiency. The disruption creates large opportunities for the banks to reimagine their tech stack, and for the tech firms to support their clients with innovative co-create model.