Let’s explore What is Distributed ledger technology (DLT)?
Do you know that there is a lot of difference in Bitcoin, Blockchain and DLT.
What’s a ledger?
Let’s back to 1960’s,
Suppose, you buy and sell products you maintain a ledger, a small book, so its a tedious work to do every time you trade or pay or receive payment you need to update the record. Same goes for Banks that it has multiple records that are recorded once you do a transaction. It is voluminous in both numbers and in monetary terms. Creating a database they have a repository at central level is called Ce-Fi. Ce-Fi has a drawback is anyone can change data from central repository. This has create a need for DLT.
Let’s see how DLT works. Every node will have one copy which will seek permission share ledger.
“All DLT is blockchain but all Blockchains are not DLT. “
In blockchains we store ledgers. Block and chain of blocks, applications of Blockchain is Bitcoin. Every node in network will have same data and it gets update regularly.
What's DLT?
Distributed ledger technology (DLT) is a digital system for recording the transactions of assets wherein, the transactions and their details are recorded in multiple places at the same time. DLT does not have to construct a chain of blocks while storing information. DLT is a “decentralized database” managed by multiple participants, across multiple nodes. Blockchain is a type of DLT where transactions are recorded with an immutable cryptographic signature called a hash.
Why do we need DLT when everything is already in place?
So, the answer is, in traditional databases, distributed ledgers we have no central data repository or administration functionality.
Distributed Ledger Technology systems, are a completely decentralized way of handling, storing, processing, validating, and authentication of data. Instead of relying on a centralized server, the responsibilities are spread across a wide network of different computers.
In a distributed ledger, each node processes and verifies every item, thereby generating a record of each item and creating a consensus on its veracity.
Benefit’s of DLT:
Distributed ledger technology (DLT) offers a unique way to transact securely on a shared database without using an intermediary.
In practice a distributed ledger is simultaneously owned by nobody and everybody, sounds interesting wherein all the parties have access to the same shared data so a blockchain offers a secure, single version of the truth.
In Blockchain the DLT, architecture represents a how an enviormental change happens as information is gathered and communicated by moving record-keeping from a single, authoritative location to a decentralized system in which all relevant entities can view and modify the ledger.
A distributed ledger can be used to record static data, such as a registry, and dynamic data, such as financial transactions.
DLT gets the best of both worlds as it harnesses the pros of decentralization yet network owners are not obliged to give up all of their control. As such, enterprises often opt to adopt Distributed Ledger Technology to process, validate or authenticate all sorts of data exchanges.
As a result, all other entities can see who is using and modifying the ledger.
Transparency of DLT provides a high level of trust among the participants.
It practically eliminates the chance of fraudulent activities occurring in the ledger.
DLT removes the need for entities using the ledger to rely on a trusted central authority that controls the ledger, or an outside, third-party provider to perform that role and act as a check against manipulation.
The great advancement of DLT is its ability to minimize or eliminate the often time-consuming and error-prone processes needed to reconcile the different contributions to the ledger, ensure that everyone has access to the current version and that its accuracy can be trusted.
Can DLT be applied over Banks?
New concepts surely churn out a lot of resistance from the old malfunctioning world and at least lack of clarity creates fear!
The answer is clear YES!
Post this, COVID-19 affected banking significantly and highlights the need to accelerate digitalization however it has had a strong negative impact on both national and international trade, and how banks are accelerating digitalization and exploring blockchain for betterment is still a hazy view. Banks embracing DLT as an opportunity will be a revolution in itself that can bring forth greater transparency. DLT is a critical component of a core modernization program and acknowledges that it’s here to stay.
Following are the best and most compelling use cases for blockchain-based financial services:
Blockchain Know Your Customer (KYC):
It helps in ongoing administrative and regulatory burdens.
Blockchain KYC solutions can provide much-needed relief to Payments. Blockchain technology can facilitate fast (potentially real-time) payment processing services.
2. Fraud Prevention.
3. Real-Time Information: By storing customer data on decentralized blocks, blockchain technology can eliminate redundant efforts and make it easier and safer to share information between financial institutions in real-time
4. Encrypted distributed ledgers provide real-time verification of transactions: In DLT, the need for intermediaries, such as banks or clearinghouses. Payment servicing (particularly for cross-border transactions) is highly profitable for many banks, so DLT may pose a significant revenue threat. However, it’s worth noting that although there’s strong growth in transaction volumes for cryptocurrencies, they are a long way from supplanting the world’s major currencies.
5. Clearance and settlement in banks: Clearance and settlement mechanisms are a cumbersome accident of history.
It’s very slow and expensive for banks and their customers to move money across the world. Using DLT, a decentralized interbank blockchain could obviate the need for intermediaries and allow banks to clear and settle as soon as a payment is made and for far cheaper. This is a benefit for banks and their customers.
Wherein multiple intermediaries involved in the traditional system, including
The Custodian banks
The Correspondent banks
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) assists financial messaging.
These labyrinth of parties and messages nearly takes 3 days to settle a transaction. With DLT changes are unparalleled with a lot of time savior.
6. Loans and credit:
DLT opens up a new world of opportunity for digital lending which is important and potentially more economical, efficient, and secure. DLT can also be a catalyst for a practical and secure means of peer-to-peer lending.
The current blockchain technology offers some unique advantages when lending involves several parties and is particularly relevant for syndicated lending. Everything that’s cumbersome is noted all the negotiation are under a blockchain network, which significantly expedited the process with full documentation tracking and negotiation transparency
To date, this is one of the most complex, time-consuming, and potentially frustrating for borrowers who may have an urgent need for funds. Banks and lenders have underwritten loans using
A system of credit checking
Credit reporting,
Specialist credit agencies.
7. Trade finance:
Another core banking activity, trade finance facilitates transactions between buyers and sellers worldwide.
Trade finance lubricates the wheels of international commerce, providing credit, payment guarantees, and insurance on terms that benefit all parties. Once again, this is traditionally a paper-intensive iterative process that involves several parties and takes time.
Blockchain has the potential to enhance transaction transparency, transform supply chain traceability and boost automation in trade finance.
Benefits of Blockchain in Trade finance is:
Reduce costs
Eliminate errors and accelerate document delivery to customers.
Increase efficiency
Generate more business by making trade finance more transparent and accessible to customers in global locations.
How to Prepare for DLT?
Banks need to choose which roles they wish to play in the new value chain. Doing nothing is not a viable option. DLT is moving from theory to practice, and will undoubtedly progress. It’s the future the world is evolving fast-paced .
Some banks have already moved beyond proofs-of-concept to running live DLT solutions.
FUNDAMENTALS OF DLT IN BANKS MAKING IT STRONG
DLT is a fundamentally new way of doing business that with the modern technology and adoption of new things brings out a lot of struggles.
It’s not an evolution of what’s gone before, so has it’s own perks of being crisp without adjustments later.
Much more than the technology – It will need adoption challenges, fresh thinking.
The new approach to how software is designed, developed, deployed, and managed.
Looking forward to a new way of auditing in DLT applications applied to banks we need to be aware of the Fin-Tech world and application of use case to deploy our skills in the right place than in the traditional practices where we give our best and strive for reporting after pure fundamental checking which is time and manpower consuming. Let’s be the change, We cannot avoid or surpass the fact that the tech world is taking over all the business and services to the next level, Let’s learn and adopt.
Article by
CA Riddhi Jain
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