Bank blockchain interoperability is becoming an increasingly important issue as financial institutions develop their own distributed ledger networks. Blockchain technology derives much of its potential value from allowing participants to share selected data and transactions through a common, transparent infrastructure. When individual banks instead create separate private networks, however, the industry risks reproducing the same fragmentation that blockchain was intended to overcome.
Financial institutions including JPMorgan Chase, Signature Bank, and Silvergate Capital have developed blockchain-based systems that provide benefits to their respective customers. New multibank initiatives are also emerging, with regional banks joining platforms designed to connect institutions through distributed ledger technology. While these developments demonstrate continued interest in blockchain, the proliferation of independent networks raises questions about how effectively these systems will communicate with one another.
This isn’t a good thing. The concept that makes blockchain compelling is equal transparency of select data, select transactions, and value across all participants. The JPMorgan implementation delivers value to JPMorgan clients. SigNet delivers value to Signature bank clients. SEN delivers value to Silvergate Capital clients. And so it goes. Each new private blockchain creates yet another separate island that reduces the overall value of all solutions. Gateways are not the answer as each gateway can only deliver solutions that represent the lowest common denominator. If this doesn’t concern the banking industry, then perhaps regulators should consider mandates that guarantee the data they require is kept on a blockchain they control or at least can access using a defined standard:
“But in recent weeks, several regional banks have signed up for new multibank blockchains. In November, New York Community Bancorp joined the Provenance blockchain developed by Figure Technologies. The $53 billion-asset Western Alliance Bancorp in Phoenix and the $19 billion-asset Customers Bancorp in West Reading, Pennsylvania, have started using a blockchain for banks run by Tassat. Other banks are working with Tassat but haven’t announced so publicly.
What’s changed over the last five years is that distributed ledger technology itself has adapted to the needs of banks. Stablecoins have come along to provide stable stores of value. And the organizers of multibank blockchains have figured out an approach in which each bank member gets value out of its own version of the ledger, then links it up with others for a multibank blockchain.”
Private and multibank blockchain initiatives could provide financial institutions with faster transactions, improved data sharing, and new ways to transfer value. However, those benefits may be limited if banks continue developing networks that function primarily as separate ecosystems. Connecting those networks through gateways may provide some interoperability, but it can also constrain functionality to capabilities that all participating systems can support.
The emergence of multibank blockchains offers one possible path toward reducing this fragmentation. Allowing individual institutions to maintain their own versions of a ledger while connecting with other banks could extend the usefulness of distributed ledger technology beyond a single institution and its customers.
Ultimately, bank blockchain interoperability may determine whether distributed ledger technology delivers broad industry benefits or produces another collection of disconnected financial networks. Common standards for data, transactions, and network access could become increasingly important as more institutions adopt the technology. If the banking industry cannot establish sufficient interoperability on its own, regulators may also take a greater interest in defining standards that ensure required information can be accessed consistently across blockchain networks.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group
