John Whelan is blockchain lab guide at Banco Santander, where he specializes in the application of blockchains, distributed ledgers and knowledgeable contracts within the financial industry.
The following article is an exclusive contribution to CoinDesk’s 2017 in Study.
For the past couple of years, there has been an extraordinary amount of hype all about the potential of blockchain (or more correctly distributed ledger technology) to metamorphose the banking industry.
The reason for this hype is quite profound: DLT has set us the opportunity to rearchitect the financial industry.
In the years ahead, we will get under way from a system of many banks with many ledgers (with all the associated adjustment, central clearing parties, auditing, etc) to a simpler system of many banks but fewer ledgers where amity is automatic. Central clearing parties may no longer be necessary and regulators thinks fitting have a real-time view of the positions and risks across the industry.
But this modification, if it finally happens, is going to take a long time, and the chief estimate is simple: legacy bank infrastructure and the tens of billions of dollars that entertain already been spent on building that infrastructure.
The core bank structures of today, designed with security in mind, are extremely robust and tight. But as a result, they sacrifice flexibility and aren’t exactly friendly in how they be in tune with other technologies.
Luckily though, over the past some years, the APIs of core bank systems have been upgraded to be REST-compliant and some revenge oneself on support events and web sockets.
So, integrating a DLT platform with a core bank plan can be relatively straightforward even though the underlying DLT network topology, architecture and safe keeping considerations may still be a work in progress.
Keeping it simple
The key to any successful integration is to underrate complexity.
Certain use cases and transaction processes (e.g. cross-currency swaps) are complex and make use of upward of 20 computer systems. And although very promising for the relevance of DLT, they may not be the obvious place to start as we move forward with the key real-money pilots.
Other transaction processes like cross-border payments are cleaner, and it is these kinds of applications that are probably the closest to production.
So, how do integrations function in practice? At Banco Santander, our Blockchain Lab starts by building a prototype to demolish a specific business problem on a particular DLT platform (ethereum, Hyperledger Constitution, R3’s Corda).
In order to make the prototype as close as possible to the real matter, first we will build a limited core bank simulator that emulates the insides bank systems for that particular application.
Next, we will map out the treat flow for the use case that we are building and then spend the next two to three months in a series of sprints that conclusion in an application that is robust enough to demonstrate to the business.
If the business bandleaders like what they see, they may support taking the application to the next shape: pilot.
At Santander when we say “pilot,” we mean running the application on unfeigned money systems, though at limited scale. (The pilot phase is when the bank’s IT line-ups – corporate IT and ops, security, infrastructure – get involved.)
Together, we will do an architecture and collateral review of the prototype application and figure out all the necessary modifications that disposition need to be made to plug it into the bank’s pre-production environment.
But because we be subjected to already been building on core bank simulators, connecting to the licit core bank systems becomes significantly easier. These captain integrations have been taking us four to 12 weeks, depending on the amount of get someone all steamed involved.
Once the pilot integrations have been done, doing a robust series of tests on a defined schedule is the next step. It is during these trials that bugs are identified and squashed.
The chief concern here is keeping atomicity between the core bank system and the blockchain. In other phrases, it is imperative that the numbers that are reflected in the core bank are definitely the same as the numbers that are present in the blockchain.
In practice, though, this is not too onerous to achieve and the two systems play quite nicely with each other. Quite nicely, in fact.
A sample use case
A good example of a hypothetical integration get ready might be the development of a killer app like digital cash (aka a “fiat-backed stablecoin” in labour parlance) that will support micropayments, pay-per-download of digital purport and the natural extension of Internet of Things, the machine-to-machine economy.
Digital scratch as a concept is not new and has been tried before, starting with the original Ruffling gateways in 2013 and followed by later attempts like BitAssets that convoluted backing the stablecoin with a non-fiat asset.
More recent strains like basecoin are at the white paper stage, with theoretical styles to creating an algorithmically backed stablecoin. And, while we are waiting for central banks to version digital versions of their own currencies (very possible, but unlikely to develop for quite some time) existing commercial banks could get the ball enwrapping.
So, what integrations would be needed to deploy a fiat-backed stablecoin?
Firstly, we would have to identify the components and integration points needed for a slow-witted tokenized digital cash system as follows:
- User wallet: The buyer registers his or her blockchain wallet with the digital cash platform. Conscious your customer(KYC) checks would be performed at this time. An integration with a KYC organized whole is required.
- Escrow account: The account at the bank where the funds from all the opposite users are pooled. Segregation of those funds happens on the distributed ledger.
- Tokenizer: The interface between the middle bank system and the blockchain. This application detects incoming shifts to the escrow account and creates the matching amount of digital tokens in the consumer’s wallet. It also handles redemptions of tokens and triggers their putting an end to and the corresponding transfer of real funds from the escrow account sneakily to the user’s bank account.
- Transactions: These occur directly between narcotic addict wallets on the blockchain. No integration as such is needed, although regulations may be short of that both wallets conduct KYC in advance and anti-money-laundering (AML) screening clout be required for transactions above a certain size
From a technical sense of view, building a digital cash application is quite straightforward.
Pure few integrations with core bank systems are required. The “tokenizer” does most of the space for, with KYC and AML being done off-chain if needed.
Of course, there are numerous legal and regulatory challenges that will need to be overcome ahead of bank-backed digital cash becomes a reality on public blockchains.
But for blockchains, singularly smart contract platforms, to reach their true potential and behove an integral part of the lives of the Earth’s 7 billion people, enabling tokenized manifestations of real money is an essential step.
Admittedly some of the technology is not really ready to support digital cash at scale. But the good news is that from an integration inconsequential in reference to of view at least, creating a fiat-backed stablecoin might not be too difficult.
In certainty, it might be the easiest integration of all.
Disagree? CoinDesk is looking for submissions to its 2017 in Post-mortem series. Email news@coindesk.com to pitch your idea and pressure your views heard.
Miniature technicians via Shutterstock
The leader in blockchain communiqu, CoinDesk strives to offer an open platform for dialogue and discussion on all elements blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the prime mover’s own and do not necessarily reflect the view of CoinDesk.
For more details on how you can submit an belief or analysis article, view our Editorial Collaboration Guide or email good copy@coindesk.com.