The concept of a shared ledger represents a shift in the way financial systems and books of record are kept. Today, financial institutions and financial market infrastructures record transactions separately on their own databases, and use a messaging structure to reconcile and instruct positions across different records of value.
But in the future, other models could take a different approach. One such model could be for institutions to record aggregated balances using a shared ledger. Instead of requiring messages to instruct settlement to be sent between institutions, a shared infrastructure could provide a common view, with real-time visibility, of balances across all the shared ledger’s participants.
An ISO 20022-based messaging layer will enhance the shared ledger proposition by offering a payload of rich and structured data to fulfil the adjacent functions that are essential to the completion of any regulated financial transaction in an instant and frictionless way.
This model could result in a number of benefits. For one thing, the use of shared ledger technology and tokenization could theoretically reduce risk and cost in the market.
Operating on a real-time, 24/7 basis, such a shared ledger could offer instantaneous movement of value and native atomic settlement for Delivery versus Payment (DvP) and Payment versus Payment (PvP) transactions, while reducing the need for reconciliation between financial institutions. There could also be an opportunity to build additional services on top of the shared platform.
As such, the shared ledger model could potentially help to improve the cost, speed, predictability and accessibility of cross-border payments – thereby supporting the G20 roadmap, and the continued push to improve cross-border payments by the Committee on Payments and Market Infrastructures (CPMI).
So far, so good. But alongside a shared ledger, there’s also a need for a robust messaging layer to enable the necessary exchange of rich, structured data about any given transaction.
Blockchain technology – which the shared ledger would use – is very effective at recording whether or not a movement of funds has taken place. As a mechanism for accounting, it could fulfil the roles of recording balance information and proving that settlement has taken place.
Messaging layer
But in order for transactions to be frictionless, additional types of data also need to be transferred to enable value-added services such as AML, compliance, sanctions screening, trade and accounts receivable reconciliation. Today, with 89% of cross-border payments reaching recipient banks within an hour, achieving compliance through having the right data available is key to an instant transaction flow. However, shared ledgers are not well suited to carrying and storing high volumes of data due to the way data is synchronized across parties and the computing power required.
This is where a messaging layer fits in. At its core, messaging facilitates the transfer of data held by different institutions, whether to affect the legal settlement of transactions or to enable the ancillary value-added services which are critical to global financial transactions.
The industry has come a long way in transforming payments with rich, structured data via ISO 20022, with the benefits of this shift now starting to become apparent. Moving forward, an ISO 20022-based messaging layer will enhance the shared ledger proposition by offering a payload of rich and structured data to fulfil the adjacent functions that are essential to the completion of any regulated financial transaction in an instant and frictionless way.