Blockchain not ready for cross-border bank payments

A banking industry pilot project has revealed that blockchain is not ready to handle the billions of pounds worth of transactions that take place between banks across borders.

According to the Financial Times (FT), the project, organised by the Society for Worldwide Interbank Financial Telecommunication (Swift), revealed that further progress was needed before blockchain could “support production-grade applications in large-scale, mission-critical global infrastructures”.

As reported by Computer Weekly in July, the pilot enabled banks to manage nostro accounts, which are used to make cross-border payments, in real time.

Swift decided to carry out a pilot in this area of banking because currently banks are not able to monitor their accounts in real time due to a lack of intraday reporting coverage, which blockchain could potentially resolve. Swift is owned by banks as a not-for-profit cooperative that provides a network for sending financial transaction messages.

While Swift said the test “went extremely well”, it stressed that “further progress is needed.”

According to the FT report, Damien Vanderveken, head of research and development at Swift, said: “Although the proof of concept demonstrated that distributed ledger technology could improve nostro liquidity management and reconciliation processes, it also revealed that the prerequisites will have to be met before banks can enjoy the full benefits of switching to a distributed ledger technology process.”

He said the test showed “operational challenges” to using blockchain technology for all of its 11,000 members. The 28 banks that ran tests on the system, which included Lloyds Bank, required the creation of 528 sub-ledgers to avoid confidential information being seen by rival banks. But Vanderveken said 100,000 sub-ledgers might have to be created to roll it out to all Swift members, which would make it “unwieldy” to maintain, upgrade or configure.

It is not just large financial services companies that are experimenting with the use of blockchain in global banking. Financial technology (fintech) firm Traydstream, which provides banks with software to manage their trade financing activities, is itself testing out blockchain.

But it could be some time before trade financing is run on blockchain, according to CTO Ray Sherry, due to significant programming being required before you start.

“I am a great believer in distributed technology revolutionising different industries, but there are some challenges around it. It will work for simple trade financing transactions today, but I don’t see any simple trade financing deals,” said Sherry. “You have to restrict who has access to blockchains, which means writing smart contracts [programs] that control access,” he added.

Assuming that a bank can do this, it gets more complicated, according to Sherry. “The blockchain addresses things like security, provides immutability and is decentralised, meaning no single database as such. But it doesn’t give you the rules of engagement. For example, it doesn’t address the rules that trade finance has to comply with, of which there are thousands,” he said.

Sherry also pointed out that the public nature of blockchain also made it a major challenge for use in trade financing. “First of all, it is public, so whenever you enter into a blockchain as an organisation, whatever you make available is visible to everybody. If someone is prepared to work out the identifiers, they can work out who is doing what. That does not work for us in trade financing because the banks would not want to indicate who they are dealing with. There is a level of privacy that still needs to be established,” he said.