Distributed ledgers hit mainstream banking but regulators warn of looming danger

Several banks including Santander and UBS are embracing distributed ledger technology for cross-border payments in real-world transactions.

The distributed ledger technology produced by Ripple allows banks to get rid of the traditional model of using local currency accounts with correspondent banks for transactions, instead, money is converted into the native Ripple currency, XRP, and sent in near real-time.

In total seven banks have signed up to use the technology including; UniCredit, ReiseBank, National Bank of Abu Dhabi, ATB Financial, and CIBC.

The purpose of using the technology is essentially to slash the time and cost of cross-border settlement and enable new types of high volume, low value global transactions.

Chris Larsen, CEO, Ripple, says: "We’ve reached a tipping point where financial institutions are moving beyond blockchain experimentation and projects to real world applications that are driving significant bank-to-bank volume."

Twelve of the top 50 global banks are now part of Ripple’s network, with 10 banks in commercial deal phases, and over 30 pilots completed.

Despite the increasing push from banks to use distributed ledger technology in real-world scenarios, there has been a warning from the Financial Stability Oversight Council (FSOC) about the use of the technology.

The US Treasury agency said in its annual report: "Market participants have limited experience working with distributed ledger systems, and it is possible that operational vulnerabilities associated with such systems may not become apparent until they are deployed at scale."

The report goes on to state that although distributed ledger systems are designed to prevent reporting errors or fraud by a single party, "some systems may be vulnerable to fraud executed through collusion among a significant fraction of participants in the system."

FSOC said that regulators will be required to adapt to the changing market structure as more distributed ledger systems come online. This may require cross jurisdiction and cross national boundary work to be carried out and coordinated in order to effectively identify and address the risks associated with distributed ledger systems.

What is clear is that as this technology becomes more popular amongst financial institutions there will need to be actions taken by the regulators to ensure that everything is above board.

So far regulators in the UK have been proactive in their support for new technologies and incidents of fraudulent activity using distributed ledger technology are extremely uncommon.