Lygon blockchain: ANZ, CBA, IBM, Westfield, Westpac join forces
It's incredible how quaint paper-based systems seem once you break down how they actually work.
An ongoing blockchain project has entered the live trial stage, with ANZ, CBA, IBM, Scentre Group (Westfield owner) and Westpac coming together to create Lygon, a platform for digital bank guarantees. The trial will run for eight weeks, with live data and transactions for a test group of retail property leasing customers from 3 July.
It's been under construction since at least July 2017 and is now entering live testing with real customers.
What problem does Lygon solve?
Bank guarantees are a guarantee from banks to landlords, in which the banks guarantee that they will pay the landlord in certain situations. For example, if a tenant violates the terms of their lease, the landlord may cash in the bank guarantee for appropriate payment from the bank.
It's commonly used in retail property leases.
In this case, the landlord might be Scentre Group, which owns the Westfield shopping centres, the banks would be CBA, ANZ and Westpac, and the tenants would be the stores that are leasing space in the Westfield malls.
The usual current system of bank guarantees runs like so:
- A landlord requests that a tenant get a bank guarantee.
- The tenant goes to a bank and fills out a bank guarantee application form.
- The bank reviews the application and prints out a physical paper document, which lays out the terms of the bank guarantee. It verifies the authenticity of the document by giving it a bank letterhead and having a bank employee sign it with a pen.
- The bank gives that piece of paper to the tenant, and the tenant gives it to the landlord who then keeps it in their possession.
- When a landlord needs to exercise a guarantee, they give that piece of paper to the bank specified by the document.
- When adequately satisfied that the document is legitimate and the terms have been met, the bank pays the landlord according to the terms of that document.
So, you have a system where the sole source of truth for every single guarantee is a single piece of paper held by a landlord. The landlord will often hold hundreds, or in the case of Scentre Group potentially thousands, of such documents.
These documents will need to be updated, such as if the terms of the lease change or the tenant's collateral needs updating and so on. This involves either creating another piece of paper which explains the changes to the first piece of paper, or returning and replacing that original piece of paper.
These documents constantly make their way back through the tenants and the banks for updates. Indeed, any time anyone wants to do anything with the bank guarantee it can only move at the speed of paper – involving risks of getting lost in the mail or running up courier costs – and it will need to pass through multiple hands, all of which will need to give it a hearty amount of manual handling.
As a piece of paper, it's also susceptible to all kinds of damage, which puts landlords at risk of not being able to claim a guarantee later. At the same time, when a landlord requests a replacement for a lost document, the bank has no way of knowing that the original document has actually been lost and that they aren't creating a duplicate.
If a guarantee gets lost in the mail, where does it go? When someone cashes in a guarantee, how can the bank be sure whether they're the rightful landlord or a mail thief? And when a tenant provides a guarantee, how can the landlord be certain it's not a forgery? After all, the banks and landlords often won't have any contact until something goes wrong or the guarantee needs to be exercised. Prior to that, they're basically just using the tenant to pass notes to each other.
The entire system sounds frankly ridiculous and already seems quaint.
The reason it couldn't go digital until recently is because it requires a range of competing banks and other stakeholders to get together and recognise the validity of the same shared system.
How Lygon works
Initial findings say Lygon can turn the month-long bank guarantee issuance process into a same-day process, while simultaneously reducing the risk of fraud for all parties involved and decreasing the potential for errors.
It works by tokenising the guarantees on a permissioned blockchain network that ropes in the bank, the tenant and the landlord. The Lygon system of bank guarantees works like so:
- A landlord requests that a tenant get a bank guarantee.
- The tenant applies for a guarantee through their bank.
- The bank creates a digital guarantee on the shared blockchain. Its existence can simultaneously be confirmed by the bank, the tenant and the landlord as soon as it's created.
- The tenant, landlord and bank can view the current state of the digital guarantee at all times, request changes, etc.
That's much better.
Why does it need to be a blockchain?
Blockchain is needed because you want a standard system that can be used to manage guarantees across a lot of different banks, landlords and tenants each of whom uses their own system, and because you need all parties to be able to agree on the current state of the ledger, that is, the current status and terms of the guarantee.
You can't have a system where the bank, tenant or landlord can unilaterally modify the guarantee, but you do want to allow subsets of participants to transparently request modifications from each other as reasonable.
A permissioned blockchain strung between the tenant, landlord and bank lets each participant enjoy certain powers as programmed.
Both tenants and landlords can:
- Request new guarantees.
- Request amendments to guarantees.
- Request cancellation of guarantees.
- Provide consent for a guarantee to be issued, amended or cancelled.
Additionally, landlords can request full or partial payment of a guarantee.
And the banks can:
- Issue new guarantees in response to requests from tenants and landlords.
- Amend existing guarantees in response to requests.
- Cancel existing guarantees in response to requests.
- Close guarantees in response to requests from landlords or after a payment is made.
This opens the door to a whole new world of possibilities.
For example, landlords can now request guarantees on behalf of a tenant and the banks can confirm that it was indeed a request from a specific tenant. It also lets you provably tie each new guarantee or amendment to specific requests, so no more mysterious changes, "he said she said" issues or duplicate documents.
One of the great things about it is that this is the kind of blockchain change a lot of people will be able to see in everyday life.
Rejoice, all ye who are sick of excessive paperwork.
Disclosure: The author holds BNB, BTC at the time of writing.
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