At the beginning, it was the blockchain. Around two years ago it became clear that the infrastructure supporting Bitcoin – the most established cryptocurrency – could redefine the concepts of trust, ownership and exchange. Giovanni Sabatini, general director of the Italian Bank Association, writes on Spunta

Blockchain systems require trustless or permissionless implementation: in this context there is no trust between the system nodes. The consistency of the register is ensured only by the protocol rules and the goodness of the consensus algorithm.

With the blockchain, data is not stored on a single computer but is distributed over several nodes – on several interconnected machines. In this way, a vast database can be distributed, and transaction management is shared between several nodes on a network. Without having to rely on a single centralised entity, this new concept of distributed databases changes the way we think and design the relationships and the exchange of value between the participants.

Although trustlessness is the real distinguishing feature of the paradigm, it can be seen that the main initiatives launched by financial institutions are based on private, or permissioned, blockchains.

Control of the register is entrusted to a single actor such as a reference bank, or a consortium entity co-ordinating a group of actors united by a common interest. ABI Lab, a banking research and innovation centre promoted by ABI and participated by over 160 banks and 65 information communication technology companies in Italy, is working on a distributed ledger technology (DLT) application to simplify and standardise domestic interbank reconciliation.

The Italian interbank reconciliation process – usually called Spunta in Italy – was selected by ABI Lab to verify the concrete applicability of DLT technology in the context of traditional banking processes. The reconciliation of correspondent accounts among Italian banks is a process, generally run by back offices, which aims at clearing every mismatch in a double-entry booking.

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After the automatic matching, the operators deal with the suspended movements – the operations that need to be confirmed before being registered in the correspondent account. This particular kind of account, a sort of bilateral ledger, is established between and co-owned by two banks to clear transactions; correspondent accounts are established through bilateral agreements between the two banks.

There are several aspects behind the choice of the Spunta as a use case:

  • It is an interbank process;
  • We expect low impact on the business;
  • We are in a stage of regulatory obsolescence;
  • There is a low level of standardization, and
  • The regulatory source is the Italian Banking Association.

 

Smart contracts

The application of DLT can make improvements to certain specific aspects of current banking operations. Among these are the time needed to identify those transactions between banks that do not match, the standardisation of the process and the single communications protocol, and the visibility of the transactions between parties.

Smart contracts are another innovation in this area: software that incorporates the rules of execution of an agreement to control the transfer of data and information.

The Spunta Project consists of several phases of activity – at the moment it is in the pre-production phase: a community of banks, 76% of the sector in terms of employees, are part of the initiative.

The work group has selected the Corda DLT platform developed by R3, and in collaboration with NTT Data for development of the application and SIA as provider of the node infrastructure, has defined the new verification process. The work is now based on the enterprise version of the platform released last June, with modifications developed specifically for the Spunta project. The new process will make bilateral channels available through which each counterparty can exchange information. Through the use of the DLT platform and smart contracts, it will be possible to provide automatic feedback on bank transactions, thus simplifying and accelerating the reconciliation process.

At the beginning a process, assessment is essential in order to collect all functional requirements. At this stage, one-to-one interviews with banks’ process experts were very important. The scenario analysed has pointed out considerable differences of process between the different realities. Subsequently, technological aspects were analysed, leading to the selection of the Corda platform. After the design of the Corda nodes network, the CordApp was developed and the PoC went live for testing at the beginning of May.

Work is now being done on a substantive test of the processes in the field. Two months of real data were uploaded to the node infrastructures corresponding to the banks working on the interbank Spunta Project. A total of 1.9 million movements were uploaded. The performances are good, making it possible to continue to the next phase of testing, which will involve participating banks working on a daily basis with the new application based on distributed databases.

The manual processes and systems used for interbank reconciliation are time-consuming, costly, labour-intensive and error-prone. The pilot’s success will simplify the resolution of the suspended movements in the correspondent accounts between banks in terms of better efficiency, transparency and speed of this process. This use case will demonstrate how easy it is for banks to reduce operating and back-office costs, while saving time and communicating securely using DLT.

Looking at the main benefits that the Spunta experts see in this new application based on DLT, there are three main advantages: full visibility of all the information about the accounts, an increased rate of automatic matching, and the communication channel integrated in the application