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Understanding Modern Banking Ledgers through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money
Gareth William Peters, Efstathios Panayi
TL;DR
The chapter examines how blockchain technologies could reshape banking through remittances, settlement, smart contracts, ledgers, and digital assets. It surveys blockchain architectures and banking applications, while identifying scalability, code-correctness, database, and legal challenges that remain before widespread adoption.
Problem
Banking applications need ledger technologies that can support financial processing while addressing permissioning, integrity, security, regulatory, and settlement requirements.
Method
The chapter reviews blockchain architectures, second-generation smart contracts, privacy-preserving structures, banking ledger applications, and settlement and provisioning processes.
Results
The chapter identifies blockchain structures and applications that could support permissioned banking ledgers, automated provisioning, privacy-preserving computation, and faster settlement.
Takeaways & Limitations
Blockchain-based banking systems may combine automated financial processing with data-integrity, privacy, permissioning, and regulatory considerations.
Takeaways & Limitations
Widespread smart-contract adoption remains limited by scalability, code correctness, and the relationship between electronic contracts and legally enforceable counterparts.
Abstract
from arXiv · showhide
In this chapter we provide an overview of the concept of blockchain technology and its potential to disrupt the world of banking through facilitating global money remittance, smart contracts, automated banking ledgers and digital assets. In this regard, we first provide a brief overview of the core aspects of this technology, as well as the second-generation contract-based developments. From there we discuss key issues that must be considered in developing such ledger based technologies in a banking context.
1 Introduction
The chapter presents blockchain as a potentially disruptive technology for banking and related financial applications, spanning remittances, smart contracts, ledgers, settlement, regulation, and governance. It distinguishes blockchain architectures and highlights both their prospective applications and unresolved scalability, legal, and technical issues.
- Blockchain may support transaction processing, government cash management, commercial bank ledger administration, and financial-asset clearing and settlement.
- Blockchain-based applications may enable near-instantaneous global remittances with very low transaction fees and shorten financial-asset settlement cycles.The chapter discusses potential applications in remittance, clearing, and settlement.
- Second-generation blockchains extend simple transactions by enabling computation and conditional payments through smart contracts.These developments also include third-party data ledgers, virtual contracts, and remote asset title transfers.
- Permissionless blockchains allow anyone to verify transactions, whereas permissioned blockchains require prior authorization from a central authority or consortium.The two types also require different consensus and verification-incentive approaches.
- Smart-contract adoption remains constrained by repeated computation across network nodes, scalability concerns, and disagreements between automated code and legal counterparts.
- Banking applications must address data integrity, security, authenticity, permissioning, regulatory requirements, and the legal and technical implications of automated contracts.The chapter specifically connects banking ledger technologies with loss reporting, provisioning, and compliance requirements.
2 Blockchain Technology Emerges
Blockchain emerged as a decentralized ledger for peer-to-peer transactions, using cryptography and consensus to establish a shared transaction history without a trusted authority. Its later architectures extend this foundation with permission models, smart contracts, and conflict-resistant distributed data management, while introducing scalability and legal challenges.
- Bitcoin introduced blockchain as a structure and communication protocol enabling secure peer-to-peer transactions and consensus without identifying users or relying on trust relationships.
- A blockchain records transactions chronologically in linked blocks, and network consensus confirms a new block before it becomes part of the accepted history.
- Public-key cryptography, cryptographic hashes, and timestamps help authenticate records, verify data integrity, and establish when ledger events occurred.
- 2.2.1 Permissionless blockchains: Permissionless blockchains allow anyone to verify transactions, but incentive mechanisms and computational costs can make participation and transactions more expensive over time.
- 2.2.3 Smart Contracts: Smart contracts can execute self-enforcing code that modifies blockchain data and supports complex transactions conditional on off-chain variables, but widespread adoption faces scalability, correctness, and legal-jurisdiction problems.
- 2.3 Differences between blockchains and databases: Compared with distributed databases, blockchains can reject conflicting transactions and execute self-enforcing contracts that alter shared data.
3 Data security, confidentiality, availability and integrity on the blockchain
Blockchain adoption in banking requires attention to confidentiality, availability, and integrity, because financial data must remain protected, accessible, accurate, and consistent throughout its life cycle. The chapter presents blockchain and smart-contract mechanisms as tools for addressing these requirements, while highlighting implementation and integrity risks.
- Banking records require confidentiality, availability, and integrity, which protect data from unauthorized disclosure, preserve authorized access, and maintain accuracy and consistency.These concepts are related but distinct requirements for organizational data security.
- Data integrity: Data integrity covers both valid, accurate data states and processes that preserve validity and accuracy during transformations.This applies to blockchain records, linked data, and smart contracts operating on blockchain data.
- Data integrity: Blockchain integrity depends on preventing unauthorized modification and maintaining consistency across replication, transfer, and smart-contract execution.Relevant threats include human and code errors, malware, hacking, hardware failures, and other cyber threats.
- Data integrity: Blockchain designs can support integrity through cryptographic linking, consensus, redundancy, validation, access control, encryption, and transaction mechanisms.Hash-linked blocks make alteration computationally difficult, while blockchain transactions are unitary and permissionless systems eventually return to consistency after temporary forks.
- Blockchain mechanisms: Blockchain additionally provides cryptographic security, addresses multi-master replication, and enables more complex transactions through smart contracts.These capabilities complement distributed-database advantages in addressing enterprise data concerns.
- Integrity considerations in financial applications: Enigma illustrates a privacy-oriented blockchain architecture that distributes computation across partitioned data without exposing complete raw data to any network member.The architecture uses secure multi-party computation, avoids trusted-third-party intervention, and may improve scalability and speed through reduced replication.
4 Considerations in Blockchain Technology Developments for Bank Ledgers and Financial Accounting
The section examines how blockchain technologies could support government and banking ledgers, cash management, accounting, and regulatory processes. It emphasizes permissioning, data integrity, automation, and governance as requirements for practical financial applications.
- Scope of applications: Blockchain applications could extend beyond remittance to government cash management, distributed banking ledgers, OTC contracts, reconciliations, and loss-data reporting.The proposed application areas include treasury accounts, automated ledgers, clearing and settlement, client-account reconciliation, and distributed loss reporting.
- Potential benefits: Automated transaction processing, clearing, reconciliation, audit, and regulation could reduce overhead, costs, and counterparty credit risks.The stated incentives for financial institutions and regulators include lower audit and regulatory costs and more efficient transaction processing.
- Treasury Single Accounts: A Treasury Single Account consolidates government cash resources into a common ledger, while a permissioned blockchain could automate its administration without a single administrator.The proposed structure preserves public authorities’ control over budgets and expenditures while automating financial execution through a privacy-preserving, permissioned distributed blockchain.
- Treasury Single Accounts: A blockchain-based TSA could potentially reduce governance and oversight problems in fragmented institutional structures and lower remittance and revenue-collection costs.The text presents these as potential advantages, including cheaper blockchain-based remittance services than traditional providers.
- Commercial bank ledgers: Blockchain ledgers and smart contracts could automate financial accounting books and share records among institutions, regulators, and government agencies.The architecture could be organisationally distributed or public, with encryption used for private data.
- Accounting and provisioning: Banking ledgers must address hash-entry frequency, IFRS 9 classification and measurement, and automated recognition of expected credit losses.IFRS 9’s expected-loss model could be enacted through smart contracts, enabling timely recognition from initial financial-instrument recognition.
5 Blockchain Technology and the Trade Settlement Process
The section describes how blockchain architectures could transform trading, clearing, and settlement by reducing intermediary roles and shortening settlement cycles. It presents consortium-based designs spanning exchanges, clearing houses, and settlement systems.
- Settlement risks: Traditional settlement cycles of T+3 or T+2 create counterparty and settlement risks that shorter settlement could mitigate.Counterparty risk arises before settlement, while settlement risk occurs when one transaction leg completes without the other.
- Blockchain architecture: A consortium blockchain could be used across the trading-clearing-settlement cycle to support decentralisation and disintermediation.The proposed architecture assigns distributed functions to exchanges, clearing, and settlement or custodial levels.
- Trading: Distributed exchanges could let broker consortia validate transactions while reducing exchange fees.Investors would continue trading through brokers, consistent with naked-access regulations.
- Clearing: A distributed clearing house could eliminate the CCP, with smart contracts administering contract stipulations and reducing scope for risk-management issues.The design makes clearing closer to bilateral clearing while retaining automated administration of contractual terms.
- Settlement cycle: The proposed lifecycle transmits verified trades from a distributed exchange to clearing and then settlement, where asset transfers occur automatically after confirmation.The sequence covers order submission, broker-created transactions, network verification, clearing, and custodial or CSD settlement.
- Settlement cycle: The configuration could reduce settlement from days to minutes or seconds and support continuous settlement, automated contract maturity, reporting, compliance, and collateral management.The text presents these as potential efficiency improvements from blockchain-based settlement.
6 Blockchain Technology and Multi-signature Escrow Services
The section presents multi-signature escrow as a blockchain-based mechanism for resolving disputed payments and contract transfers. A 2-of-3 address allows the parties or escrow intermediary to authorise the outcome.
- Escrow rationale: Multi-signature escrow can support dispute resolution for financial transactions in banking ledger and settlement applications.The approach is presented as especially relevant where blockchain transaction irreversibility makes amendments or dispute handling necessary.
- Dispute handling: When the parties dispute contractual performance, the escrow service decides which party receives the funds and signs the 2-of-3 address with that party.The receiving party then adds its signature and publishes the transaction; the escrow service typically charges a fee.
- Smart-contract integration: The authors suggest that these escrow approaches could be adopted more widely through automated smart-contract structures.This extends multisignature dispute-resolution mechanisms into broader blockchain applications.
7 Conclusions
The conclusion reviews blockchain architectures, financial requirements, and second-generation applications across treasury, banking ledgers, trading, settlement, clearing, and escrow. It stresses that both beneficial and detrimental aspects require consideration before development and commercialisation.
- Contributions: The chapter covers permissioning, data integrity, security, authenticity, regulatory requirements, and applications in treasury and banking ledgers.It also addresses trading, settlement, clearing, and multisignature escrow services.
- Conclusion: Blockchain technologies’ beneficial and detrimental aspects should be considered before commercialising the proposed financial applications.The conclusion applies this caution to the disruptive technologies and ideas discussed throughout the chapter.