Bank Guarantees Go Digital with Blockchain

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Providing financial security for the lease of assets or purchase of goods and services is a common requirement in today’s business world. A common way to address this need is the use of a bank guarantee – whereby a financial institution provides the seller with assurance of payment in case of purchaser default.

However, inefficiencies in today’s bank guarantee process are causing increasing challenges for the organizations that manage thousands of these financial instruments. The primary cause is the predominantly paper-based and manual business process. The consequences are delays in issuing and reporting, and inefficiencies in detecting fraud such as forgeries.

Any digital transformation of this process must retain complete confidentiality in the business transaction, maintain the legal accountability, and preserve the trust between each of the three parties to any single guarantee. The challenge is not streamlining the management bank guarantees but designing a solution that also ensures trust and verifiability of each single transaction in real time and by multiple parties.

A Blockchain Launches Down Under

Use cases for the DLT solution

IBM Research in Australia, working with the Blockchain Practice in IBM Global Business Services, three of Australia’s largest banks and a large property portfolio management company have taken on this challenge. The partnership created the right mixture of innovative thinking, and ability to execute in an enterprise scenario with deep domain knowledge.

Together, they developed Lygon, a first-of-a-kind platform to digitize and transform the bank guarantee process. Distributed ledger technologies play a fundamental role in providing the required level of trust and assurance to manage bank guarantees as digital smart contracts. The key operations in the lifecycle of a bank guarantee (issuance, amendment, cancellation, demand) are executed and recorded in an auditable blockchain transaction, which can be verified and trusted by all the involved parties. This significantly lowers the risk of disputes, drastically reduces processing times (for example, issuance is expected to reduce from up to a month to just one day) and improves the ability for companies to report on and track these key financial instruments.

Lygon’s Building Blocks

Hyperledger Fabric and IBM Blockchain Platform IBM Research in Australia, working with the Blockchain Practice in IBM Global Business Services, three of Australia’s largest banks and a large property portfolio management company have taken on this challenge. are at the core of Lygon. These key blockchain building blocks enable Lygon to scale and securely support enterprise workloads. During July and August 2019, the platform will undergo a live pilot with a limited set of customers that will be managing new and existing bank guarantees (converted into legally binding digital versions). Feedback will be gathered from the pilot with a view to further enhancing the platform and opening up to wider market segments.

In an era when successfully getting from blockchain proof-of-concept to production is still moderately rare, this pilot used live data and legally binding transactions. It’s a great example of industry collaboration and technology innovation coming together to improve customer experiences and transform a process that has remained largely unchanged for decades.

Download the whitepaper:  Distributed Ledger Technology and Bank Guarantees for Commercial Property Leasing (5MB PDF)

Research Scientist, IBM Research-Australia

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