In the last year, the central Bank of Lithuania has developed its own blockchain solution and sandbox to enable startups to develop concepts rapidly. The LBChain platform supports both Hyperledger Fabric and R3’s Corda enterprise blockchains and was developed by IBM and Tieto, respectively. IT consultancy BearingPoint has an existing regtech solution, Abacus360, which services more than 2,500 companies. It used the LBChain platform to develop a prototype using distributed ledger technology (DLT) for the regulatory reporting of transactions.
Last week, in an online presentation of five LBChain projects, Daniel Münch from BearingPoint highlighted the top level compliance challenges. There’s a current push for digitization at the same time as societies have rising expectations that there’s sufficient oversight that bad behavior will be caught. The combination means an escalating cost of regulation. And the rising costs are resulting in ever smaller marginal benefits.
Despite the investment, the data quality is fairly poor. It’s usually aggregated data, and it’s late. Historically, reporting has taken place every two weeks or monthly.
Plus, there are also multiple sets of regulatory requirements that have overlaps so that a single transaction or event may need to be recorded across two or three different regulatory systems.
On top of this, the penalties can be quite high, depending on the jurisdiction. According to the European Securities and Markets Authority (ESMA), France has one of the highest potential penalties in Europe of up to €100 million or ten times the profit from the infringement.
At a micro level, the biggest challenge is matching the data recorded by both banks in a transaction. If the banks use the same transaction trade repository (TR) – private companies that keep track of the records – the trades only match in major details 80% of the time, the rest requiring manual intervention. If they use different repositories, then the trades match only 20% of the time.
The blockchain solution
If the counterparties have a shared record of the transaction using DLT, these differences are nonexistent, so there is no manual intervention. Plus, there’s a significant improvement in data quality, which is now granular and the data updates in real time.
BearingPoint created a platform for interest rate swaps with three banks, and received feedback from the Bank of Lithuania regarding compliance. The transaction data was recorded using LB Chain, with the regulatory reporting logic incorporated in the smart contract..Münch reported that there’s potential to use DLT beyond transaction reporting. Regulators can choose to either have a node on the network or receive the data via a push mechanism.
All the projects had a choice of whether to use Fabric or Corda. BearingPoint said they’d seen Corda come up quite a bit in the financial sector, plus the Corda language is Kotlin, which is similar to Java where their main competency lies. One of the features they liked is that financial transactions are only recorded by those that are party to the transaction so that the third bank won’t see the transaction.
We’ve reached out to BearingPoint to establish the next steps for the project and will update the article in due course.