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In continuation of my previous blog on Blockchain: Need of Future for Financial Industry, let us now try to understand one more path breaking revolution in the field of Accounting and Ledger maintenance. This will provide a better and efficient way of fund settlement between two parties domestically as well as internationally, where Foreign Currencies are involved.
Settlement and Accounting for Banks (Local and Foreign Currency)
Any transaction to materialize, it should have an obligation. To fulfill the transaction, all mutually agreed parties in the ecosystem should get involved. The Process of transaction can be either One-time or recurring based on the agreement between the parties.
Settlement lifecycle involves following parties:
While we talk of real time settlement of financial transaction between two banks, reality is different. The settlement of funds takes place either in a specified Interval, or specified time of the day, or after day or two generally referred as T+1 or T+2.
Settlement of fund can happen for different kind of transactions like Credit Transfer, Direct Debit, Collection, ATM Transaction, e-commerce payments, Security and Bond Trade Settlement etc. In all these transactions, some and other way Banks are getting involved.
The Central Bank of the country plays a vital role in multicurrency fund settlement during inter and intra country transactions. Multicurrency transaction Settlement can be carried out between Central Banks, Commercial Banks and Non-Financial Service Providers. Every party in the chain want their part of settlement as soon as possible to mitigate the financial risk for the obligatory transaction.
Given the customer expectation, Financial Institutions and Non-Financial Institutions are looking for an innovative and simple accounting and ledger maintenance possibility which should enable following:
This Blockchain mechanism will give the flexibility to settle the fund across all geographic locations for the banks at real time or near to real time. The additional flexibility will come when the accounting of each transaction will be done for each transaction wise.
Example: Customer-A (Debtor) wants to transfer funds to Customer-B (Creditor) for an amount $20.
A payment of $ 20 from Customer A to Customer B, where Customer A and Customer B are customers of two different banks, requires the Local Clearing systems today. This solution enabled distributed ledgers offer a third option: Any party, such as Customer C (unrelated to the banks) can create a channel between ledgers and facilitate the payment. The transaction structure can be conceived as Customer A paying Customer C on one ledger, and Customer C paying Customer B on the other ledger. Customer C’s role is fully automated using a distributed model, and Customer C can earn transaction fees as per the choosing.
(Please refer to the below diagram: Cloud Based Ledger Maintenance)
Now, it is the time for the Financial and non-financial Institutions to go for more realistic settlement of fund, which will always give a better exposure in-terms of their day to day business related functions.
Advantages of Cloud Based Accounting:
Below are some of the advantages for Institutions from Cloud Based Accounting
Above can be achieved through a new cloud based accounting, where the ledger will be maintained for the two parties in a cloud based network.
Benefits of Blockchain and Distributed Ledger Maintenance on Cloud:
Below are some benefits perceived for financial and non-financial institutions by using Blockchain along with Cloud based Distributed ledger maintenance
Time will no longer be a constraint for entities involved, to access the ledger and obtain the settlement details with maximum data availability for business reporting and auditing.
The amalgamated process based on Blockchain and Cloud based Distributed Ledger Maintenance should provide a greater edge to process the Financial Transaction across the Globe. This will reduce the cost of maintenance in Financial Institutions pertaining to the transactions. Financial and non-financial Institutions will be benefited from a new trend in transaction processing and maintenance of their accounting Ledgers. This will be a win-win case for Financial, non-financial institutions and Customers.
This discussion on data transmission method through Blockchain and the distributed ledger maintenance on Cloud will provide enormous benefit and scope for moving towards an innovative and flexible financial World.