A persistent and universal problem for large and small corporates alike spurred a group of Australian banks and technology vendors to develop a blockchain-based platform for bank guarantees. A pilot, focused on retail property leasing and commercial lease guarantees, has been successful and the platform is now ready to be rolled out and expanded to other uses and industries.
The banks – ANZ, Commonwealth Bank and Westpac – were joined in the project by IBM and Scentre Group, an operator of shopping centres in Australia and New Zealand. In the pilot, tenants, landlords and banks accessed the common, digital platform that manages the bank guarantee process.
To date, bank guarantees – independent undertakings by a bank on behalf of its customer to pay a named beneficiary in the event the customer fails to fulfil their contractual obligations with that beneficiary – have been issued manually and on paper. “Property companies can receive a huge number of paper guarantees and have to manage those for every tenant throughout the lifecycle of that paper,” said Nigel Dobson, banking services lead at ANZ. “It is a very analogue process with high levels of friction as the instruments are amended or cancelled to keep them current.” Managing guarantees also includes high operational overheads and the risk of fraud as paper documents could be altered, he added.
The project was first mooted in a white paper, issued in July 2017 by ANZ, Westpac, Scentre and IBM. The premise was that rather than relying on a paper instrument, the rules to ensure the validity and integrity of a guarantee could be codified and built into the operation of a shared ledger. Initial discussions between the banks (some of which were held in coffee shops in Melbourne’s Lygon Street) that a true digitised, standard document that multiple issuers could use could be created with open source distributed ledger technology soon blossomed into the pilot. The pilot involved live data, transactions and legally binding bank guarantees.
Dobson said the project has now substantially advanced the technology, processes and legal areas “to the point we now have a fully incorporated company”. The shareholders have increased their equity in the company, which has been set up as an independent financial technology company. IBM will run the platform on behalf of the company. Lygon owns the intellectual property, which can be leveraged “in a number of ways”, with an aim to scale and expand beyond commercial property in Australia and New Zealand.
Initial plans are to increase the product range covered by Lygon to a range of performance, environmental and financial guarantees – “anything paper-based that causes our customers friction”, added Dobson. This includes other industries such as mining and construction and government services.
In expanding beyond Australasia, Dobson says Lygon will initially target English-speaking countries with a similar legal heritage, such as Singapore and the UK. This will involve local banks, the value proposition being that Lygon has done the work and such banks would merely have to “turn it on”, with some local customisation required.