Eddie Butterman reviews the concepts enshrined in Distributed Ledger Technology and examines a real-life scenario in a country where DLT is already being used for certain types of payments.
What is DLT: A simple guide
Distributed Ledger Technology (DLT) is a record-keeping system (or database) of shared, replicated, and synchronised information.
It is decentralised and distributed across a network, generally using multiple sites (or nodes), institutions, and sometimes, geographies.
One key advantage of DLT is its 'shared consensus' feature. Another key aspect of DLT is that it is a decentralised entity – eliminating the need for a central point of authority over the system.
Due to this, anyone attempting to manipulate the system in order to create a fraudulent record must infiltrate multiple points of entry – at least 51% of the network – in order to break the data consensus.
The idea of distributed ledgers has been around for some time.
Recently though, development of these ledgers has grown so rapidly that many expect it to become the transaction-recording technology standard of the future.
This is because these networks have the power to bring services to users in real time, no matter their location.
Where will we see a significant impact?
In the long run, payments will benefit greatly from DLT. This is because DLT:
- does not require manual processing
- updates itself in real time
- requires no third-party intervention and
- is immutable.
Once a record has been entered, it cannot be altered without upsetting the balance of the remaining transaction records in the ledger.
Today’s financial system relies almost entirely on a network of clearing houses, which confirm and record transactions around the world.
DLT could eliminate this process by allowing every bank within the network its own copy of the ledger – a way to communicate directly – and the potential to approve transactions in real time.
DLT’s most relevant use is for recording transactions involving multiple parties, particularly when the parties are unfamiliar with each other and require heightened transparency. Applying DLT to payments removes many unknown elements currently inherent in the payment process.
The big question is, can the widely accepted networks of today be replaced by new technology based upon a decentralised solution?
Before fully diving into the potential uses of DLT for payments, the financial services industry and its regulators must first decide whether to implement a central bank sponsored ledger or a private replacement.
The Japanese initiative to promote a cashless society
Let’s review an actual scenario where DLT has been implemented for payments.
In March 2019 a new digital currency, J-Coin, was launched in Japan as part of a government initiative to promote new 'cashless' payment options. A consortium of banks created J-Coin and the J-Coin Pay mobile app in advance of the 2020 Tokyo Olympic Games.
Using J-Coin Pay, individuals can make purchases from both brick-and-mortar and e-commerce stores, as well as transfer money peer-to-peer (P2P).
Useful applications include parents’ ability to transfer allowances to children, friends splitting a restaurant bill, or welfare/social assistance benefits.
Also, costs for merchants should decrease as well due to transaction efficiencies that DLT offers.
Unlike previously established cryptocurrencies, such as Bitcoin, J-Coin is a pegged cryptocurrency, always maintaining a value of one coin for every ¥1 Japanese Yen (approximately one cent USD). This stability should make J-Coin a more viable option as a payment method with a broad user base.
Eddie Butterman is a Vice President at Mizuho Bank, Ltd. Currently based in New York, Eddie helps corporate clients navigate the complex world of transaction banking to deliver efficiencies for their organisations.
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