Beyond blockchain: Managing cash with distributed ledgers

Blockchain is just one version of distributed ledger technology. Learn how it could help you manage your cash flow.

By Chris Swanson, senior vice president, U.S. Bank
Tags: Blockchain, Innovation, Artificial intelligence, AI
Published: April 11, 2018

Type in the word “blockchain” into a Google search, and you’re inundated with thousands of articles on its potential. Companies across the world are racing to research and test this emerging technology, creating an opportunity for disruptive change in several industries.

While blockchain gets the vast majority of attention, it’s merely one version of distributed ledger technology. We used to view ledgers centrally, with one definitive record living at a clearinghouse (like a central bank). Distributed ledger removes this intermediary from the process.

As a result, each party within the chain must achieve consensus before any transaction takes place. This doesn’t necessarily need to take place in “blocks.” For example, the Tangle Network instead uses a cyclical graph process to document transactions, which removes the need for data miners within the chain.

Distributed ledger technology comes in many forms and it’s become a hotly discussed issue among financial and data professionals. If you’ve heard murmurs about blockchain or distributed ledger technology, it’s time to consider how it might work for you.

 

Why is there so much interest?

Decentralization and time management, for starters. Distributed ledger technology can look very compelling to treasury teams that spend countless hours with manual data entry for international payments. That transaction data could instead live within a digital ledger, which shortens settlement time by bypassing the clearinghouses (and bureaucracies) of both partner countries.

It also helps reduce the amount of fraud and risk associated with faulty data entries. Human action is reduced in a shared ledger, and faulty changes must occur on every computer with an embedded copy. For large-dollar transactions, this would require changing the ledger at millions of individual locations — a massive task for any potential hacker.

 

Who’s leading the charge on testing?

Some enterprises and governmental agencies are actively pursuing distributed ledger technology. The demand for a decentralized system of data management has also intrigued technology companies like IBM, SAP and Cisco. For them, distributed ledgers can help streamline everything from supply chain data to company device management.

Banks and financial institutions are also testing the effects of distributed ledgers, especially when it comes to Know Your Customer (KYC) compliance and fraud reductions. U.S. Bank is part of a larger consortium called R3, which recently released its latest distributed ledger platform.

 

Why consider adopting a distributed ledger?

In short: For the potential to make payments faster, more reliable and safer. Without the need for manual processing or a centralized clearinghouse, your payments could be completed far sooner than before. It’s a scenario that carries many tangible benefits for an organization’s bottom line.

In real estate, for example, sellers and buyers could use a customizable digital ledger for all transactions related to a property. Rather than paying an intermediary management company, the two parties set up the ledger on agreed terms. These “smart contracts” could loop in data from a variety of connected devices — like environmental sensors, wearable trackers, and industrial robots — and adjust payments if issues aren’t resolved.

 

Why decide not to adopt?

Because the technology needs to prove itself first. Distributed ledgers, while brimming with potential, must show they can justify the cost and resources. We’ve been able to prove that the technology performs as intended during tests, but we have yet to understand its full potential. We foresee low and medium scale application of distributed ledger technology in a few years, as more companies test the service.

Any application of distributed ledger technology would require extensive changes on the regulatory and IT sides, too. While “permissionless” ledgers exist for direct peer-to-peer transactions (Bitcoin being the most popular form), financial institutions use “permissioned” systems that require approval for any actor included in the process. You also need to account for IT development and storage costs with ledger data, especially as storage is finite.

 

The hype is real, but tenuous

Gartner recently published an updated version of their Hype Cycle, identifying where recent emerging technologies land on the path between innovation and productivity. Distributed ledger and blockchain land at the tail end of the “Peak of Inflated Expectations,” which will eventually result in a period of oversaturation and disillusionment.

Eventually, however, these technologies will find their place in the evolving transactional market. For now, distributed ledger and blockchain are enjoying widespread attention. We should know in a few years if that attention is well deserved.

 

For more information on distributed ledger solutions, check out my recent discussion on blockchain and practical applications.

Chris Swanson is a technology and business strategist currently leading the U.S. Bank blockchain and distributed ledger practice. He manages business line and developer resources in proof of technology and business value testing.

©2018 U.S. Bank. Member FDIC