​ANZ, Westpac buy into blockchain with IBM bank guarantee trial

The trial saw ANZ and Westpac, in partnership with IBM and shopping centre operator Scentre Group, digitise the bank guarantee process used for commercial property leasing using the blockchain.

Australia and New Zealand Banking Group (ANZ), alongside competitor Westpac, has announced the completion of a blockchain-based trial with tech giant IBM.

The trial saw the trio digitise the bank guarantee process used for commercial property leasing, using distributed ledger technology (DLT) to replace the paper-based process with a single source of information via an immutable record.

Blockchain is a type of DLT originally conceptualised to facilitate the trading of the bitcoin cryptocurrency. In a nutshell, blockchain allows for the tracking of digital assets so that a level of trust and consensus can be established, and previous transactions agreed upon.

A bank guarantee is an independent undertaking by a bank, on behalf of its customer, to pay a named beneficiary in the event the customer fails to fulfil their contractual obligations.

ANZ said utilising the blockchain for bank guarantees reduces the potential for fraud and increases efficiency.

The trial was completed in partnership with shopping centre operator Scentre Group, which was formed in June 2014 through the demerger of Westfield Group and the merger of its Australian and New Zealand operating platform and management with Westfield Retail Trust.

The companies used DLT powered by Hyperledger Fabric V1.0, a blockchain framework created by one of the Hyperledger projects hosted by The Linux Foundation, which partnered with financial and tech giants -- including ANZ and IBM -- in late 2015 to advance the technology.

"We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases," said Nigel Dobson, GM of Wholesale Digital at ANZ.

"This proof of concept demonstrates how we can collaborate with our partners to develop a digital solution for customers, which also has the potential for industry-wide adoption."

ANZ signed a AU$450 million deal with IBM in August 2015 that gave the bank access to IBM's software portfolio, cloud development capabilities, and core systems infrastructure.

The agreement also saw the two firms co-invest in an Innovation Lab, powered by IBM's cloud development platform-as-as-service, Bluemix, to allow ANZ to use Bluemix to develop, build, test, and deploy new applications to market faster.

In a statement, the three companies said the bank guarantee trial forms part of a broader plan to build a shared solution with the rest of the banking industry, inviting other organisations to participate in a larger pilot.

The companies released a whitepaper [PDF] that details how the solution worked, and how it could be used in other situations that rely on bank guarantees.

"The solution explored in this [proof of concept] has the potential to shift the issuance of bank guarantees from a manual, paper-based model into the digital era, and in doing so, lift efficiency for all parties involved," the whitepaper explains.

"However, this move cannot be done in isolation. The changes required are pervasive and will require close collaboration between competitors, regulators, consumers, technologists, and the legal community in order to achieve a suitable solution.

"The collaboration demonstrated in this [proof of concept] shows the willingness of the industry to achieve a common goal, albeit on a small scale."

The companies believe the proof of concept now needs to be scaled and discussed with a broader range of participants, noting the solutions' full benefit will only be realised through broad industry adoption.

"This is about removing the cost of fraud, error, and operational risk that will continue as long as bank guarantees remain paper-based and manually issued," said Andrew McDonald, GM of Corporate and Institutional Banking at Westpac.

"Next steps involve encouraging all industry players to adopt this technology so we can better protect and save money for our customers. Beyond that there is no reason why this couldn't be applied across other industries."

Westpac joined financial messaging service SWIFT's blockchain proof of concept last week, which is expected to validate whether the technology can help banks reconcile their international nostro accounts in real-time.

Westpac is the only Australian bank joining the 22 institute-strong consortium that now comprises Deutsche Bank, JPMorgan Chase Bank, Lloyds Bank, Standard Bank of South Africa, and others.

Launched in January, the proof of concept is still under development by SWIFT and a group of six founding banks, which includes ANZ, BNP Paribas, BNY Mellon, DBS Bank, RBC Royal Bank, and Wells Fargo.

The Commonwealth Bank of Australia is also exploring DLT technology, claiming the first interbank trade transaction in October that combined blockchain technology, smart contracts, and IoT in partnership with Wells Fargo and Brighann Cotton.

Looking to startups for its blockchain initiatives, NAB Ventures, the venture capital fund of the National Australia Bank, led a $24 million Series B investment round for foreign exchange startup Veem in February. The San Francisco-based startup uses blockchain technology to perform cross-border business-to-business payments that are settled and sent in respective local currencies.

Data61 recently said blockchain -- the development of which is being overseen by eight different government bodies in Australia -- holds promise as a new foundation for transactions in society, in particular for voting, notarisation, supply chain, registration, and process coordination, in addition to payment-related services.

To prove the technology's application in other industries, Telstra is experimenting with a combination of blockchain and biometric security for its IoT smart home offerings; the Australian Securities Exchange is prepping its blockchain-based equity settlement, asset registration, and clearing platform for rollout later this year; and the Sydney Stock Exchange recently announced a project to instantly settle trades using blockchain technology with the help of Sydney-based Bit Trade Labs.

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