How Westpac, the ANZ and IBM proved blockchain could be used for commercial property guarantees

Johannes Eisele/AFP/Getty Images

The successful use of blockchain in Australia to digitise bank guarantees for commercial property leasing is a rare use of technology which has been in place since 2009.

The ANZ and Westpac teamed with IBM and shopping centre operator Scentre Group to use distributed ledger technology to replace paper-based guarantee documents, resulting in a single source of information with reduced potential for fraud and increased efficiency.

The success of the proof of concept project means the method can be used in other commercial transactions where bank guarantees are part of the deal.

The use of blockchains, used to enable the digital currency Bitcoin, means you can prove where information has come from and gone to, creating new economic activity in areas such as financial services, supply chains and government registries.

“While the Bitcoin network has been in operation since 2009, use of the underlying technology for use cases other than digital currency is rare and relatively immature,” according to a white paper by the two banks, Scentre Group and IBM.

Distributed ledger technologies are more commonly seen in the engineering community, investigating blockchain for security and speed, rather than banking.

Here’s how bank guarantees normally work, using paper, for commercial property leases.

Supplied

Bank guarantees are used across many industries to secure contracts and are commonly used by prospective tenants to secure commercial property leases rather than shelling out cash.

For commercial landlords, bank guarantees provide certainty of payment in the event of the tenant’s default on rent and avoid the burden of handling cash.

The downside of paper-based guarantees is that there is the potential for fraud and that the physical paper has to be handled and held by the three parties in a transaction — the bank, the landlord and the renter.

“One of the key benefits of a blockchain solution is its ability to provide a single source of truth across multiple parties,” according to the white paper.

“The traditional method for achieving this is through the trust and responsibility placed in a central authority to own and operate a registry for the benefit of others.

“In a blockchain solution, trust and responsibility are federated across the network.

“Rules for updating and maintaining the database — that is, what records can be changed, how they can be changed, who can change them, and who needs to provide consent — are codified and embedded in each node in the network.”

In this Australian proof of concept project, the tenant and landlord could request that a guarantee be created or amended but the ability to action that request was limited to the bank.

This ensures that neither tenants nor landlords can illegitimately adjust active guarantees, such as increasing or decreasing a guarantee amount before claiming in their favour.

Here’s how the bank guarantee works using distributed ledger technology:

Supplied

“The solution explored in this POC (proof of concept) has the potential to shift the issuance of bank guarantees from a manual, paper-based model into the digital era, and in doing so, lift efficiency for all parties involved,” according to the white paper.

“However, this move cannot be done in isolation. The changes required are pervasive and will require close collaboration between competitors, regulators, consumers, technologists, and the legal community in order to achieve a suitable solution.

“The collaboration demonstrated in this POC shows the willingness of the industry to achieve a common goal, albeit on a small scale. This now needs to be scaled and discussed with a broader range of participants.

“As with most DLT (distributed ledger technology) solutions, the full benefit will only be realised through broad industry adoption.”

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