“We have created a blockchain-based platform to digitize the bank guarantee ecosystem. The pilot will test live transactions using distributed ledger to prove the technology is commercially viable. It is a great example of digital transformation that refines the customer experience.”— Didier Van Not
Engaged in commercial or retail lease? Then you may need to secure a security deposit, or a bank guarantee. The deposit is held by the landlord to secure the property for the tenant, who will then take possession of the property. As a tenant—“if you default on your lease or damage the property, the landlord can draw down on the security deposit or bank guarantee.” (Emma Heuston).
While a security deposit is typically a cash bond, a bank guarantee is an undertaking from a bank or credit union to guarantee payment of the amount to the landlord. IBM has a pilot with four Australian financial services companies for a blockchain-powered platform designed to streamline bank guarantee process. For this article, I will focus on the bank guarantee.
Blockchain Use Case for Bank Guarantee
Through a bank guarantee, a bank promises to cover a loss if a borrower defaults. Rohas Nagpal identifies twelve types of bank guarantees:
Advance Payment Guarantee,
Bid Bond Guarantee,
Confirmed Payment Order,
Credit Security Bond,
Deferred Payment Guarantee,
Foreign Bank Guarantee,
Rental Guarantee, and
Nagpal identified a few benefits of using blockchain for bank guarantees. Distributed ledger technology ensures that:
- Bank guarantees are digitally signed by the issuing bank,
- Regulator nodes enable real-time supervision by the authorities, and
- Bank guarantees are encrypted, and the decryption credentials are available only to the issuing bank.
In May of 2018, CNBC reported that HSBC claimed it “performed the world’s first commercially viable trade finance transaction using blockchain technology.” HSBC issued a letter of credit from HSBC to ING for a U.S. based agriculture firm, Cargill. The international trade transaction involved a shipment of soybeans from Argentina to Malaysia.
IBM Pilots Bank Guarantee
IBM reported in a press release that the Australia and New Zealand Banking Group Limited, ANZ, Commonwealth Bank, IBM, Scentre Group and Westpac launched a live pilot for a blockchain-powered platform designed to streamline the bank guarantee process.
Scentre Group, a shopping center firm in Australia and New Zealand, manages ownership, development, design, construction, leasing, funds and asset management, among other activities for its shopping centers. It’ll benefit significantly by digitizing its bank guarantee process.
The pilot, dubbed Lygon, a digital platform, uses blockchain technology to obtain and manage leases on retail property bank guarantees. Bank guarantees are traditionally a manual process, issued on paper. By putting the bank guarantee on blockchain and digitizing the process—human error is minimized and accuracy improved. Moreover, the time it takes to manually manage a bank guarantee is significantly reduced from as much as a month, to the same day.
Moreover—fraud is potentially removed from the process. “Lygon has the potential to benefit many sectors and to reduce the risk of fraud across billions of dollars guaranteed by the banks,” says IBM. The pilot, started on July 3rd, will run live transactions for a group of retail property leasing customers for 8 weeks. Subsequent phases are planned to support other industries.
— IBM Blockchain (@IBMBlockchain) July 3, 2019
While IBM is piloting in Australia, it won’t stop there. It has already launched a number of enterprise blockchain offers. Last month, CIP, the Brazilian Interbank Payment Clearing House in São Paulo, officially launched its blockchain ID platform in partnership with IBM. “Its aim is to authenticate and verify digital signatures using mobile devices,” says Ana Alexandre for Cointelegraph.
In Japan, five banks—Bank of Iwate, Bank of Yokohama, Aomori Bank, Akita Bank and Yamanashi Chuo Bank—collaborated to launch a financial services infrastructure based on IBM’s blockchain distributed ledger technology.
Alexandre, Ana, “IBM Launches Blockchain Pilot for Bank Guarantee Processes”, Cointelegraph, July 2019.
Browne, Ryan , “HSBC says it’s made the world’s first trade finance transaction using blockchain”, CNBC, May 2018.
Heuston, Emma,“What Are Security Deposits and Bank Guarantees?”, LegalVision, August 2018.
IBM, “ANZ, Commonwealth Bank, IBM, Scentre Group and Westpac Commence Live Pilot for Lygon, A Blockchain-based Platform to Transform the Bank Guarantee Process”, IBM News Room, July 2019.
Kuhn, Daniel, “IBM, Top Australian Banks to Pilot Blockchain for Retail Lease Bank Guarantees”, Coindesk, July 2019
Nagpal, Rohas, “Issuing Bank Guarantees on the blockchain”, Medium, December 2018.