ANZ and Wells Fargo jointly test a real-time cross-border payment blockchain prototype to improve bank clearing and settlement (Project White Paper Download)

According to ANZ Bank and Wells Fargo, blockchain technology has the potential to reduce the cost and time of money transfers, as well as increase access to liquidity.

ANZ and Wells Fargo say blockchain technology will increase liquidity and reduce risk and costs of cross-border payments

The comments were announced following the completion of a six-month project to create and test a distributed ledger for reconciling and settling payments between two banks.

In the ‘proof-of-concept’ white paper (download the full version here), the two banks say blockchain can ‘add real value to the user experience and efficiency of correspondent banking relationships (arrangements between global banks on local payment systems)’.

ANZ Bank and Wells Fargo said:

“The conditions are ripe for a renaissance in cross-border payments and correspondent banking.”

Pointing out that global settlement engine SWIFT could be disrupted, its infrastructure appears very outdated in the face of private blockchains.

The two banks believe that Swift could evolve into a kind of ‘governing central authority’ dedicated to managing blockchain networks.

ANZ Bank and Wells Fargo, both members of the Linux Foundation, have used the foundation's Hyperledger technology to create a private, shared and distributed ledger platform that can run in parallel with existing infrastructure. The platform enables the two banks to transfer funds without the need for centralized infrastructure. The two banks say the platform speeds up the confirmation of cross-border payments and makes it easier to audit and keep transactions confidential. A report document on the trial has been released.

Real-time payment chain

The new technology brings together a payment chain for both banks that is real-time from payment creation to completion, compared to the existing batch processing process which could take up to two days to complete, while also eliminating the manual reconciliation of separately held account statements under the existing counterparty banking arrangement.

Cumbersome reconciliation activities result in delayed notification of funds disbursement and inefficient management and use of liquidity.

ANZ and Wells Fargo said:

“If the industry could have a single account record that was trusted and shared and maintained by multiple correspondent banks, funding issues would be largely resolved.”

ANZ group executive manager of strategy Nicholas Groves will attend the Australian FIX conference in Sydney on Thursday to discuss blockchain banking applications with experts from Commonwealth Bank of Australia, Nasdaq, IBM and R3 blockchain consortium, of which ANZ is not currently a member.

National Australia Bank and Westpac Banking Corporation are also working to reduce costs and cross-border payment risks through Ripple's distributed ledger technology. In September, National Australia Bank said it had conducted a blockchain technology trial in cooperation with Canadian Imperial Bank of Commerce, enabling real transfers of US dollars through Ripple's distributed ledger.

In an interview in August, ANZ’s new head of digital banking, Maile Carnege, said the bank would look to adopt blockchain technology internally before looking at how it could be used in consumer-facing applications.

“I think where we’re going to get the quickest and most exciting near-term adoption is in reducing costs and reducing staff in the back and middle offices. That’s not to say we’re going to miss out on the consumer side, but my guess is we’re going to start internally first.”

Blockchain attracts the attention of the Federal Reserve

The development of blockchain is being closely monitored by central banks around the world. Federal Reserve Governor Lael Brainard said at the Institute of International Finance conference in Washington that they are "watching distributed ledger technology, or blockchain technology, very closely, recognizing that this technology is likely to be the most influential development in the payment, clearing and settlement space for many years to come."

She said:

“Like many new financial technologies, distributed ledgers have the potential to both ameliorate traditional financial risks and exacerbate them.”

According to Coindesk, the Federal Reserve is expected to release a report on blockchain technology later this year.

Blockchain was a key topic at Sibos, the international payments conference held in Geneva in the last week of September, with trade finance another banking application.

At the conference, UBS and IBM unveiled a project that replicated an international trade transaction using the Hyperledger Project’s Fabric blockchain. Bank of America Merrill Lynch and Microsoft also presented a letter of credit solution built on a forked Ethereum blockchain.

ANZ and Wells Fargo said in their report that banks have determined that "public and anonymous networks, such as the Bitcoin network, are not suitable for use in a large, regulated network of financial institutions. However, derivatives of the Bitcoin blockchain, such as permissioned blockchains, can provide the benefits of trusted information sharing while reducing the need for middlemen and the associated costs, as well as achieving a high degree of security through encryption."

Widespread impact

UBS Chief Operating Officer Axel Lehmann told the Australian Financial Review last week that blockchain technology would eventually have a huge impact, but it would take five to 10 years rather than two to three years.

He said UBS has no immediate plans to use blockchain alternatives to traditional letters of credit. He said:

“We might also observe the use of private blockchains to optimize internal processes.”

The Australian Securities Exchange (ASX) is considering adopting blockchain technology for securities settlement and clearing, while the Sydney Stock Exchange (SSX) said last week that its blockchain-focused joint venture had partnered with Bit Trade Labs to develop a blockchain for the real-time issuance and allocation of equity securities.

It is part of SSX's efforts to become less reliant on the ASX for post-trade services, with the company seeking to build an instantaneous 'trade settlement and transfer' platform.