A white paper has identified several areas of UK payments that would benefit from distributed ledger technology.

The operational efficiency of the UK's payment systems and some related processes could be significantly improved through the appropriate application of distributed ledger technology (DLT), according to a white paper by the Whitechapel Think Tank. The paper aims to address the challenges faced by the payments industry in order to assess whether DLT could have relevant and useful applications. It identified four main categories of 'operational pain points' in payments: reference data, identity management, settlement and internal bank processes.

Where can DLT provide benefits in next five years?

In particular the paper identifies two areas of payments that would benefit from DLT: a central sanctions register and an Extended Industry Sort Code Database (EISCD). The central sanctions register would involve HM Treasury (HMT) uploading its Sanctions List to a permissioned distributed ledger, which would be accessible by banks and technology providers with appropriate permissions, while the EISCD is a consolidated list of all UK sort-codes used as the definitive source for payments routing for all UK non-card based schemes. These two operational 'pain points', as defined by the white paper, both have a high level of feasibility with regards to the application of DLT, with a high level of potential benefits within a short time frame of up to five years.

Central sanctions register

A central sanctions register would be an important tool for preventing money laundering and enabling financial institutions to comply with AML regulations and complete KYC processes. Currently the process of distributing updated lists of sanctioned entities and individuals is carried out through various means and there is a risk of information not being up-to-date, errors and higher admin costs. The white paper argues that providing such a blacklist on DLT would improve visibility and make the latest version immediately available to all interested parties.

EISCD

White Chapel's report notes that payments routing reference data is needed across many organisations and systems to ensure efficient and error-free transaction routing and that the Payments Strategy Forum already has a draft strategy to improve this process in the UK. It says that DLT has the potential to improve the accuracy, distribution and use of reference data because it “can enable secure update of specific reference data records by the responsible entity, provide assurance that each “copy” is identical and ensure that all users have the most recent version”.

Other areas where DLT has potential

The paper also found that there is a high level of both feasibility and benefits from applying DLT for market settlement and correspondent banking, although the application of DLT in these areas is more likely to take place in a longer time frame of five to 10 years.

Blockchain not the answer to everything

However, the report also concluded that many of the 'operational pain points' in the UK payments system were too large or complex to fully investigate within the confines of this study and it said that “a number of known inefficiencies within the payment industry could also be addressed using more conventional technologies”.

---

CTMfile take: This white paper really underlines that we are just at the beginning of trying to find applications for distributed ledger technology in the payments industry and that practical uses are still several years away.