Challenges for investment banks 2017 (Part 10): Using Distributed Ledger Technology

Beat Monnerat, Senior Managing Director of Financial Services for Asia Pacific; Owen Jelf, Senior Managing Director for Capital Markets; Accenture | Feb. 10, 2017
For blockchain-based DLT to gain acceptance, banks will need to ensure that their blockchain-enabled solutions comply with all current regulatory mandates.

This vendor-written piece has been edited by Executive Networks Media to eliminate product promotion, but readers should note it will likely favour the submitter's approach.

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At the heart of the long-term opportunity for blockchain is the ability for banks to move operational, risk, and finance systems to shared data platforms using blockchain-based distributed ledger technology (DLT) and decommission large portions of their current process and data infrastructure. It will take time and multiple iterations of the platforms to get to that end-state but the potential for material cost and efficiency gains are what is driving the industry's focus and investment.

Blockchain technology could reduce infrastructure costs for eight of the world's 10 largest investment banks by an average of 30 percent, translating to $8 billion to $12 billion in annual cost savings for those banks, according to a new report by Accenture and McLagan, a business unit of Aon plc.

But to be clear-blockchain is not a panacea. It will improve some processes, but not all.  And it is still early days.

There are questions around a broader adoption that need to be addressed from a regulatory angle including: How will standards be created and by whom? As the technology matures over time, how will new standards be changed and adopted to keep pace with the technology? How will governance models be structured? How will expectations around these functions shift in an environment where group consensus is key to success?

Uncertainty remains around the regulatory response to blockchain, but it is likely that regulators will respond to banks and industry blockchain initiatives rather than provide best practice guidance, at least in the near term. For blockchain-based DLT to gain acceptance, banks  will need to ensure that their blockchain-enabled solutions comply with all current regulatory mandates.

 Immutability: Friend or Foe?

One of the most notable features of blockchain is immutability. Yet, this fixed and indelible structure may limit blockchain's ability to meet certain regulations. The fact that data can be entered into but not removed from the ledger has profound positive implications for data lineage, auditing and tracking.

However, to mitigate risk enterprises must have the ability to address fraud, comply with regulatory mandates, and correct errors and omissions, all while maintaining an immutable audit trail-especially in permissioned systems. This requires  a careful balance between preserving the benefits of blockchain and providing a safety valve for authorized administrators.

The Accenture-Ateniese redaction capability offers a way to "edit" standard blockchains, while maintaining the fundamental value of the technology's immutability. Developed in collaboration

with Dr. Giuseppe Ateniese from the Stevens Institute of Technology, this new capability was designed specifically for enterprise and permissioned systems. It addresses a range of immutability challenges, including the legal right to be forgotten, human error and illegal action -- all issues of regulatory focus. It is  meant to be used in the rarest of circumstances where there is no other reasonable alternative while at the same time  provide a solution for addressing regulatory concerns about the new technology.

Keeping regulatory requirements in mind, banks need to examine their existing operational systems to determine where blockchain could add value in the long run.

Here is what banks should consider:

Putting the right pieces in place for blockchain initiatives, aligned to a clear vision, could help banks capture short-term opportunities while building a more efficient, secure and cost-effective operating model for a future where blockchain technology is the norm.