Research Report | Finance must be the most suitable application area for blockchain (Part 2)


This article is divided into two parts: the first part [ finance must be the most suitable application area of ​​the blockchain (Part 1) ] discussed the market size, industry pain points and existing banks The liquidity management model, the next part will continue to start from the liquidity management model, and explore how the blockchain solution can improve the bank's day-to-day liquidity management. Through the following two technological innovations: recursive graph scanning algorithms and atomic transactions, it can bring more predictable transactions to bank liquidity management, automate processes, and reduce reporting requirements, which will empower the banking industry, a billion-level giant market.


Liquidity solution

Liquidity solutions can be divided into two parts. One is that each node uses this algorithm to collect the information necessary to determine the liquidity opportunities that exist in the network and make network recommendations. The other part is advice on how to provide liquidity to clear net debt and actually clear debt in a distributed system. Liquidity advice may be simple, as long as each participant contributes liquidity equal to their own net debit position.

Liquidity solutions involve two key technological innovations. The first is a recursive graph scanning algorithm that allows any node on the network to identify all networking opportunities that it may help achieve. The second method is to use atomic transactions to bundle multiple changes to the ledger into a single transaction that succeeds or fails overall. The platform must be able to create atomic transactions with multiple payments, which can be paid all at once or not all settled.

Managing banks' intraday liquidity is a challenge for banks that start with a negative net position and banks with a stable cash position that day. In both cases, banks typically address liquidity management challenges in three ways: real-time access, intraday borrowing, and restricted capacity. Active management of these activities will ensure that net cash usage throughout the day is within acceptable limits.

Given the urgent need for liquidity at the beginning of the day, operations managers face challenges that affect proactive daytime liquidity management:

  • Manage the bank's daily liquidity to mitigate major daily differences to ensure that the bank has sufficient capacity to pay all required payments in a timely manner without relying on capital inflows.
  • Modify business activities in the event of an unexpected market or special situation, thereby limiting the bank's ability to obtain liquid funds from the outside to meet its commitment obligations.
  • If there is insufficient liquidity in the account of one or more participants, payment and settlement activities cannot continue and settlement cannot be made in a timely manner across the system.

Even in a banking model (such as custody), if the company's cash position is relatively stable, efforts must still be made to reduce the book costs associated with large amounts of cash. Although differences in liquidity requirements from external sources of liquidity do not apply, despite any systemic issues, these companies still need to consider ways to ensure that customer payments and settlement activities continue.

The short-term solution is to use real-time information in SWIFT messages, central bank data, and agent bank information to establish a real-time view of actual cash positions. From this perspective, banks can reconcile estimated positions throughout the day to determine outstanding flows and current exposures.

Banks continue to use undisclosed and undisclosed credit lines from central banks on the same day as loans or through their agent banks as the source of liquidity for the day. Both sources have disadvantages. For the former, excess unencumbered collateral sitting idle at the central bank can be easily converted into cash, but this entails opportunity costs. This collateral can be used to increase returns in other transactions or reduce balance sheets. For the latter, the credit line of the agent bank may be reduced or withdrawn at any time, which becomes an unreliable source of funds when the bank needs it most (in the case of increased transaction volume, market turbulence or increased pressure). In order to limit the impact of these considerations, both regulators and banks have moved towards determining the size of the buffer area using retroactively performed analytical methods to meet intraday liquidity needs. However, this is no different than walking a tightrope. Maintaining buffers can enable strong, proactive intra-day liquidity management, but a buffer that is too large can cause its revenue to quickly exceed operating revenue.

Compared to the FIFO model, banks are also developing throttling capabilities and other processes designed to manage payments in a more prudent manner. By logically layering to reasonably prioritize debt, make net settlements, implement dynamic payment queuing and allow banks to intentionally slow or stop payments, banks can manage liquidity levels throughout the day and respond to any emerging or Emerging risks. Although banks are investing to improve their throttling capabilities, this mitigation also poses potential problems. If all banks withhold payment, the payment system may stall, disrupting customers and proprietary settlement activities. To address this, the Bank of England has set throughput requirements to ensure that the bank pays proportionally within a specified period. However, it applies retrospectively to the average measurement, so the risk remains for a given day. In addition, throughput requirements are not a global standard, thus increasing the risk of other currencies.

For banks that do not have sufficient liquidity to facilitate payment and settlement, these mitigation measures do not address the core issues. In other words, how can banks get a return on the fine line of investment liquidity, thereby minimizing the opportunity costs associated with holding large amounts of cash reserves, while ensuring that there is sufficient pool of funds to support unexpected outflows?

The question remains whether maintaining intraday buffers or increasing throttling capabilities is sufficient to proactively manage intraday intraday liquidity. A more proactive management mechanism is needed to support methods to ensure continued availability of intra-day liquidity sources and uninterrupted payment and settlement channels to ensure that net cash usage throughout the day is within acceptable limits.

Potential benefits of introducing enterprise blockchain

Predictable transaction

A bank trader agreed to conduct overnight interbank unsecured money market transactions at the value of the day. Currently, unless the operating departments of the two banks coordinate a specific settlement agreement, the beneficiary bank generally has little transparency about when these funds will arrive.

In addition, settlement may fail due to incorrect transaction details entered on the side of the transaction, which may take hours to coordinate and modify. Sometimes, the transaction may even be liquidated the next day, and even if funds are not received on the day the bank asks, the borrowing bank may still need to pay interest.

Expected receipts require a lot of guesswork-currently, many resources are used to anticipate when payments will be received. These difficulties make today's intraday liquidity management extremely difficult, considering their many different counterparties.

Blockchain technology may improve clearing and settlement, thereby addressing the following issues:

The use of clearers outside the ledger for clearing and messaging is a negligible improvement that will allow banks to better coordinate certain in and out transactions, which will have a significant impact on the ability of liquidity managers to manage transaction flows on the day.

Sharing records between counterparties through blockchain technology will allow counterparty nodes to ensure that they are always aligned. From the moment two counterparties enter transaction details, an agreement can be reached so that both parties have a shared data record of the transaction details. Both parties can more easily check the status of transactions with fewer manual confirmations. This is very important for the intraday market because timing is critical and any factors that need to slow down the settlement process (such as reconciliation delays) need to be reviewed to improve efficiency.

Settle directly on the ledger-plans are under way to develop digital fiat currencies on the ledger. In theory, if digital fiat currencies have good reputation and operability, transactions between nodes on the blockchain network may represent the final settlement between banks. The ability to transfer funds on the ledger, using existing payment and settlement systems, can determine time certainty in seconds instead of hours.

If the central bank allows the private sector to innovate and issue tokens backed by central bank funding, a competitive market for these solutions will emerge. With the maturity of blockchain technology and the increasing competitive pressure brought by technological development, both approaches are becoming more and more possible. Both approaches require strong support from regulators and central banks, as they represent a significant change in the structure of today's markets.

Automate the process

Blockchain technology provides flexibility for a wide range of implementations, and may ultimately allow parties to better coordinate transactions with each other. When certain conditions are met, certain transactions may occur automatically between all relevant counterparties. This can provide greater flexibility in the time and ability of both parties to conduct transactions, and can reduce the settlement cost as part of the application algorithm, rather than a further "value-added service" by third parties.

For example, an interest payment process or a fine repayment process on a ledger can be triggered automatically during repayment. In addition, certain types of liquidity exchanges can occur automatically under conditions agreed in advance between the two parties.

Reduce reporting needs

Such as the blockchain can make certain nodes "read-only" access to certain details in all transactions. The potential of using blockchain technology to report information to regulators in real time-given the complexity of reporting regulatory data, this task is currently not possible.

This information does not necessarily mean that all market participants will share all information with regulators. For example, the value and interest rate of a transaction can be shared with stakeholders without the need to share counterparty information. This can facilitate the creation of a market that is transparent to regulators and central banks, sharing only the level of detail agreed between participants and stakeholders.


New approaches to liquidity management are emerging every day. As part of new technology considerations, banks must consider whether their retroactive liquidity management capabilities are adequately matched with active management. As the industry gradually approaches real-time active management, blockchain-based solutions can create industry value to replace mature technologies.

With the advancement of technology, new methods of active management will also be gradually realized, including matching capabilities and net settlement processes, real-time payment process management and real-time total settlement 24/7.

Among various technologies, blockchain provides a particularly attractive solution, because data records that are securely shared across multiple parties can enable redesign of related business processes, rather than incremental enhancements. By focusing on balancing liquidity management and inter-bank transactions, blockchain can successfully reduce friction in this trillion-dollar market and create more value.

risk warning:

  • Beware of illegal financial activities under the banner of blockchain and new technologies. The standard consensus firmly resists the use of blockchain for illegal fundraising, online pyramid schemes, ICOs, various variants, and dissemination of bad information.