Over the past few years, speculation about the potential of the blockchain technology (or, in particular, distributed ledger technology, DLT) to transform the potential of the banking industry has been enormous.
The reason for this hype is profound: DLT gives us the opportunity to rebuild the financial industry.
In the next few years, we will transform many banks and many bookkeeping systems (including all reconciliations, central clearing parties, audits, etc.) into simpler systems for many banks, but with fewer books and automatic verification. Central clearing parties may no longer be necessary, and regulators will also look at risks and trends across the industry in real time.
But if this change really happens, it will take a long time, for the simple reason: the legacy of the banking infrastructure and the infrastructure that has invested tens of billions of dollars.
The core banking system is now designed with security in mind, so it is very secure and stable. But it also sacrifices flexibility, and the friendliness of interoperability with other technologies is also poor.
Fortunately, in the past few years, the core banking system APIs have been upgraded according to the REST specification, and some even support the WebSocket protocol.
Therefore, the integration of the DLT platform with the core banking system can be relatively straightforward, although the underlying DLT network topology, architecture and security issues are still in progress.
The key to any successful integration is the minimization of complexity.
Some use cases and transaction processes (such as exchange transactions) are complex and involve 20 computer systems. Despite the potential of DLT applications, they may not be the starting point for the first real money pilot.
Other trading processes, such as cross-border payments, are simpler, and these applications may be the closest to production.
So how will the integration work be implemented? At Santander, our blockchain labs began to prototype and solve specific business problems on certain DLT platforms (Ethereum, Hyperledger Fabric, Corda, R3, etc.).
In order to make the prototype as close as possible to the real thing, we will first build a core banking simulator to simulate the corresponding core banking system of the prototype application.
Next, we will plan the process of building the use case, and then spend two or three months to fully attack and develop a powerful application that can be displayed to the enterprise.
If business leaders like what they see, they will support the application to move to the next stage: pilot.
We say “pilot†refers to the application in the real money system, but it is small (the pilot phase is the banking IT team, corporate IT and operations teams, security and infrastructure all involved).
As such, we will perform an architectural and security monitoring of the prototype application to determine all necessary modifications before embedding the bank's pre-production environment.
But because we are already building a core banking simulator, connecting to a real core banking system is obviously simple. These integration pilots will take us 4 to 12 weeks, depending on the workload.
Once the integration pilot is completed, the next step is to conduct a series of tests as planned. Find and fix the vulnerability in the test.
The main concern is how to maintain atomicity between the core banking system and the blockchain. In other words, the numbers reflected in the core bank must be exactly the same as in the blockchain.
In practice, this is not too difficult, and the two systems work well together. In fact, it is very good.
A hypothetical case of a good integration process might be a killer application like digital cash (a stable currency supported by legal currency) that can support micropayments, digital content downloads, natural extensions of the Internet of Things, and machine-to-machine economy.
Digital cash is not a new concept. It has been tried before. In 2013, Ripple's gateway was the beginning. After that, BitAssets used a illicit currency asset to support a stable currency.
The recent basecoin with a white paper stage can theoretically create an algorithm-based stable currency. Although we are waiting for the central bank to issue a digital version of the central bank's currency (very likely, but quite unlikely in the long run), current commercial banks can continue to promote the project.
So, what kind of integration does it need to deploy a stable currency supported by French currency?
First, we need to identify the components and integration points of a simple tokenized digital cash system:
User Wallet: Users register their own blockchain wallet on the Digital Cash Platform and complete the Customer Needs (KYC) check at this stage. Need to integrate the KYC system.
Managed Account: A bank account that brings together different user funds. The allocation of these funds is carried out on a distributed ledger.
Tokenizer: The interface between the core banking system and the blockchain, discovering entries in the escrow account and creating equivalent digital tokens in the user's wallet. Handling the redemption of tokens, triggering the destruction of tokens, and the transfer of real funds from the escrow account to the user's bank account.
Trading: These occur directly between user wallets on the blockchain and do not require integration, although regulation may require transactions of more than a certain amount, both wallets are pre-KYC and anti-money laundering (AML) screening.
From a technical point of view, building digital cash applications is quite straightforward.
There is very little need to integrate with the core banking system. "Tokenizer" does most of the work, and both KYC and AML can be done under the chain as needed.
Of course, there are still many legal and regulatory challenges that need to be resolved before bank-supported digital cash becomes a reality on the public chain.
But for blockchains, especially smart contracts, to realize real potential and become part of the lives of 7 billion people around the world, realizing the tokenized version of real money is a necessary step.
It is true that some aspects of the technology are not yet sufficient to support digital cash on a large scale. But the good news is that, at least from the point of view of the integration point, it may not be too difficult to create a stable currency supported by the legal currency.
In fact, maybe this is the easiest way to integrate.
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