Distributed ledger technology (DLT) is one of the hottest topics in financial services today. But beyond the hype that typically surrounds any new technology is the potential for DLT to create real business value.
In banking, distributed ledgers could create efficiencies for both internal operations and external transactions. Many of the delays inherent in current banking systems could be removed, and fundamental banking processes such as clearing and settlement could be accelerated. At the same time, there is potential for improving data security and reducing counterparty risk.
At Wells Fargo, we believe distributed ledger technology could positively impact the way the financial services industry records and transacts assets and manages data. We also recognize the technology is still emerging. Blockchain, the most mature form, has only existed for about 10 years — that’s the digital equivalent of a fifth-grader! Organizations will need to address significant infrastructure and regulatory constraints before distributed ledger technology can become part of everyday operations.
Distributed ledger technology 101
Distributed ledgers combine three existing technologies to create a single, shared record of transactions:
- Peer-to-peer networking, which connects participants to data in real-time
- Distributed data storage, which provides a shared view of data
- Cryptography, which securely validates identity, permissions, transactions, and data on the network
Blockchain is a specific type of distributed ledger technology, originally developed as the underlying computing protocol for the digital asset Bitcoin. However, some aspects of blockchain create privacy and scalability issues. So financial institutions are looking to other distributed ledger technologies to create secure, shared ledgers that can scale to the volume and complexity required.
Putting it into practice
While distributed ledger technology is a popular topic, its business applicability is important to consider. At Wells Fargo, we are pursuing proofs of concept in multiple areas where we see promise.
- Global payment services: DLT can be used in concert with existing bank infrastructure to improve operational efficiency in reconciliation and intraday liquidity management, or matching of FX trades. Costs and market risk could be significantly reduced for both Wells Fargo and our customers.
- Lending and trade finance: Business processes in these areas currently require numerous manual operations, with physical documents passing through many parties to settle a transaction. Using an efficient, secure way to digitize and distribute documents with trusted provenance removes the need for multiple intermediaries, streamlines business processes, and enables faster settlement.
- Capital markets: Investment banking and securities services are highly regulated, capital-intensive businesses. DLT can support a shared platform that reduces margin pressure by mutualizing fixed expenses and increasing business scalability.
- Identity services: Establishing a single customer view across jurisdictional and business silos can be difficult, meaning that customers must provide the same physical copies of information multiple times. DLT uniquely offers mutualized customer data management by securely sharing data among permitted parties in real time.
While these areas show promise, it is unclear when distributed ledgers will become integrated within the financial services industry. Regulations are needed, including legislation that allows banks to meet compliance requirements under new, more collaborative operating models.
If and when distributed ledgers are ready for production, the adoption will likely happen in three phases:
- Phase 1: As the first step toward adopting distributed ledger solutions, banks will leverage data from these new systems through existing central utilities, such as the Depository Trust and Clearing Corporation (DTCC).
- Phase 2: Banks will start to apply distributed ledger technology internally to operate more efficiently.
- Phase 3: Banks will act as nodes in distributed ledger networks and transact with other parties.
How to prepare for distributed ledger technology
Right now, it’s important to learn where distributed ledger technology is heading and how to best apply this technology to business applications. Identifying trends early isn’t easy, but keeping an eye on this emerging technology will ultimately help you deliver solutions with real business value.
To prepare for it, keep an “innovation mindset” around shared data management and the streamlined business processes that could result from trusted sources of highly secure data. The sweet spot for distributed ledger is the ability to digitize and share standardized data, remove reconciliation processes, and obtain greater transparency among transacting parties, thus eliminating the need for intermediaries. With this in mind, consider the possibility that distributed ledger technology could rewire financial services, and look toward the business value that the technology could create for your organization’s financial operations.
Laura Fontana is vice president, strategy consultant and lead for the Distributed Ledger Technology Program at Wells Fargo. She is responsible for curating a vision, strategy, and architectural framework for distributed ledger technology at the bank.
For more information, contact your Wells Fargo representative or fill out the Contact Us form on this site.