Distributed Ledger Technologies for International Banking

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Distributed Ledger Technologies
for International Banking
A Concise Analysis of Applicability
Ingrid Rebecca Abraham | May 2019
www.eternic.io

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Contents
1. Introduction .................................................. 3
1.1 Context
1.2 Problem Space
1.2.1 Trust
1.2.2 Privacy
1.2.3 Scalability
1.2.4 Regulatory Compliance
1.2.5 Netting/Offsetting/Liquidity Savings
2. Bitcoin .......................................................... 4
2.1 Architectural Overview
2.2 Analysis
2.3 Lightning
3. Ethereum .......................................................5
3.2 Analysis
4. Corda .............................................................5
4.2 Scalability
4.3 Netting/Offsetting
4.4 Analysis
5. Fabric ............................................................. 6
5.2 Analysis
6. Tempo .............................................................6
6.2 Stablecoin
6.3 Analysis
7. Stellar ............................................................. 7
7.2 Scalability
7.3 Analysis
8. Quorum .......................................................... 7
8.2 Analysis
9. Conclusion ............................................................ 8
Abstract This paper presents an overview of various contemporary technologies that
have the potential to provide the foundation of an international banking plat-
form, and analyses of their respective applicability to that problem space.
“Classical” blockchains are found wanting, considerably disjointed from the
needs of the problem space, but some other variants show more promise.
Most notable among these is Corda, which fully meets the foreseen require-
ments investigated herein, without any major caveats.
About the author
Ingrid Rebecca Abraham is a mathematician, software engineer and business analyst for Eternic.
The author would like to thank Sofie Nordahl, Frankie Elmquist, Katelyn Ching, Jacek Wrzos-Kaminski, David
Goodwin, Christoffer Andvig, Kenneth Wagenius, Ammar Iqbal, Peter Frøystad, Matthias Dörstel, and Even
Flom, for their help and guidance in producing this work.

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1. Introduction
1.1 Context
Since the release of Bitcoin in 2009, there has been
a constant stream of speculation over the potential
for its underlying technology and principles to revo-
lutionise financial market infrastructures. A decade
later, and despite the talent and focus poured in, such
a revolution is yet to materialise. However, the tech-
nology has greatly matured in the meantime, and many
promising variants have appeared as a lurking threat to
the current landscape [1].
1.2 Problem Space
International banking presents unique challenges to
financial market infrastructures, which have hither-
to seen underwhelming solutions. International bank
transfers can take several days, and are laboured with
extortionate fees [2], leaving a situation that is satisfac-
tory neither to banks, nor their customers. Dissatisfac-
tion with the current landscape makes it particularly
prime for disruption, but new contenders will have to
deal with the same challenges, and must ensure they
are adequately addressed.
International banking has traditionally operated under a
correspondent banking model, where banks in different
jurisdictions provide banking services on behalf of one
another [3], providing a bridge between jurisdictions. In
recent years, the number of correspondent banking
relationships has been in marked decline, due to tight-
ening KYC (know your customer) and AML (anti money
laundering) regulations [1].
1.2.1 Trust
The challenge most neatly solved by these technologies
is trust. One of the reasons domestic bank transfers
are so much simpler is the existence of a central bank,
responsible for establishing consensus in settlement,
negating the need for trust between the transaction
counterparties. For international transfers, the lack of
a central party becomes a pain point. This happens
to exactly mirror the problem that distributed ledger
technology was first conceived to solve, as it establish-
es consensus without the need for trust between
counterparties [4]
1.2.2 Privacy
In general, transaction counterparties do not wish to
inform the whole network of the details of their trans-
action. Transactions may contain key business informa
tion that could incur great costs if disclosed, further-
more, the counterparties may be contractually obliged
not to disclose the information in question. In an ideal
case, the only parties privy to a transaction would be
the counterparties, and any relevant authorities. This is
in stark contrast to the public ledger default, where all
information is public.
1.2.3 Scalability
A network that cannot process all the transactions
it is subject to in a timely fashion cannot succeed.
The network must be able to scale with increasing use,
ideally indefinitely, without imposing rising costs.
1.2.4 Regulatory Compliance
The regulatory landscape with which such a network
would need to comply is as a vast desert of shifting
sands. Not only does each jurisdiction have its own
regulations, but those regulations are under a constant
process of change. To have any hope of global compli-
ance, a network’s mechanisms for compliance must be
flexible and mutable.
1.2.5 Netting/Offsetting/Liquidity
Savings
This concern is slightly different from the others listed
here, in that it is not a prerequisite for such a system,
but rather a large advantage. Approximately 34% of
the cost of contemporary international transfers is
in trapped liquidity [1], and the mitigation of this by
methods such as netting or offsetting payments would
be a massive incentive to use the system. Care must be
taken, however, over any risks this may introduce.

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2. Bitcoin
Bitcoin is the original blockchain platform. Presented
by an anonymous contributor under the pseudonym of
Satoshi Nakamoto in 2009 in the wake of the financial
crisis [5], it was intended as a rebellion against tradi-
tional financial institutions, by providing a medium and
mechanism for financial services without the involve-
ment and beyond the control of the institutions in
question.
Bitcoin provides a public ledger in the form of a block-
chain, whose rows contain inputs to a transaction
(Bitcoin values whose providers have signed, proving
ownership over them), and outputs, which can in turn
be used as inputs to new transactions. This data model
is known as the UTXO (unspent transaction outputs)
model. Appending new data to the ledger, and verifi-
cation of that data’s validity and integrity, is handled
by mining nodes. These nodes compete to solve a
cryptographic puzzle (the solution to which is known
as a “proof of work”, a name shared by the consensus
protocol as a whole), that allows them to publish a new
set of transactions, or block, to the blockchain [5].
2.2 Analysis
Bitcoin has plenty of shortcomings, both in our
particular problem space, and in general. Foremost is
the inability of its consensus protocol to scale beyond
a mere 7 transactions per second, due to a limit on the
size of a block, and the protocol’s calibration to mine
only one block every 15 minutes on average. Above and
beyond the limited transaction throughput, the con-
sensus protocol is extremely costly and environmentally
unfriendly, due to the excessive energy consumption of
miners trying to generate a proof of work. Furthermore,
Bitcoin offers no privacy, as every transaction is visible
to every node on the network.
Bitcoin is also not built for regulatory compliance,
as the only data stored in the ledger is amounts of Bit-
coin and ownership of said amounts, and it lacks
a comprehensive smart contract system. Bitcoin does
have smart contracts, just with very limited scope,
granting security benefits at great cost to utility.
2.3 Lightning
Bitcoin’s potential ace in the hole is the Lightning
Network, a “layer 2” protocol built on top of Bitcoin.
Participants in the Lightning Network can prefund a
payment channel known as a HTLC (hashed timelocked
contract) using a bitcoin transaction, which then allows
them to safely transfer funds back and forth on this
channel, as well as transfer funds through a chain of
channels to a counterpart with whom they do not have
a direct channel [6]. Transfers in such channels are not
broadcast to the network at large, only the opening and
closing of the channel is broadcast. As a result, transac-
tions on the Lightning Network are private, near cost-
free and instant, with indefinite scaling potential.
The only thing left wanting in this scenario is regula-
tory compliance, though that can also be managed by
a separate off-chain process. However, with all said,
Lightning is not actually tied to Bitcoin, with Lightning
Network implementations possible on most of the
platforms discussed herein. Lightning was conceived on
Bitcoin, and has received most of its attention there,
but perhaps its full potential is best met elsewhere.

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3. Ethereum
Ethereum is a blockchain-based distributed computing
platform proposed by Vitalik Buterin in 2013. Inspired by
Bitcoin, Ethereum inherited many of its traits, such as
the proof of work consensus protocol, but its distin-
guishing feature is its Turing complete smart contract
system, known as the EVM (Ethereum virtual machine)
[7].
In contrast to the UTXO data model, Ethereum’s data
model is based on accounts and state transitions.
The state of the system holds information on accounts
and balances, and transactions are implemented as
EVM operations that modify this state, known as state
transitions.
These state transitions and other EVM operations are
the main component of blocks in Ethereum, instead of
input/output rows [7].
3.2 Analysis
Although the EVM is a huge boon, Ethereum retains Bit-
coin’s shortcomings in terms of privacy and scalability.
There are currently plans and efforts around sharding
and changes of consensus protocol that might mitigate
these shortcomings, but the efficacy of these efforts
remains to be seen.
4. Corda
Corda is a decentralised database platform [8] present-
ed by R3 LLC. It was designed with financial institutions
in mind, and is notable for its JVM based smart contract
system, privacy features, scalability claims, and focus on
integration with existing systems.
Corda uses a UTXO data model similar to Bitcoin’s, with
the major change that database rows can contain arbi-
trary data instead of just a value field. Its architecture is
centred around notaries, pluggable third-party services
that sign a transaction if and only if all input states of
the transaction are unconsumed. It has no specified
consensus protocol, because consensus is established
by notaries, which can internally use any consensus
protocol they wish.
Privacy is achieved in Corda by restricting knowledge
of transactions on a need to know basis. Transaction
data in Corda is only sent to transaction counter-
parties, and the relevant notary [9].
4.2 Scalability
Corda is a strange case in terms of scalability, wherein it
is difficult to quote a maximal throughput for the entire
network, but throughput can still be a regular concern.
Throughput in Corda is defined by the notaries. Each
notary has a throughput limit dependent on its
underlying infrastructure and its consensus protocol,
independent of other notaries. In theory, this means
that the throughput limit of the whole network should
scale roughly linearly with the addition of notaries.
However, in practice the network does not consider or
treat all notaries equally, and added pressure on key
notaries can create bottlenecks.
4.3 Netting/Offsetting
Corda also has built in mechanisms for deferred net
settlement. This is achieved by the exchange of Obli-
gation contracts, which express a debt and constraints
on the on-ledger assets used for settlement [8]. These
contracts allow for both bilateral and multi-lateral
netting. However, the multilateral netting implementa-
tion is somewhat strange in the decision to seek credit
loops and settle those together, instead of netting
everything through a single agent [10]. This is done to
enable settlement without requiring participants to
trust a central party, but offers shortcomings in the
efficiency of netting. This does not preclude the possi-
bility of building acentralised netting solution on top of
what already exists.
4.4 Analysis
Of the technologies discussed herein, Corda appears
the most promising, as it answers all the concerns
raised over the adoption of such technologies, without
any major caveats.

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5. Fabric
Fabric is a blockchain framework implementation, and
part of the Hyperledger family of blockchain projects
hosted by The Linux Foundation [11]. Fabric was orig-
inally contributed to Hyperledger by IBM and Digital
Asset.
Fabric features a highly flexible and modular design,
with many core components such as the consensus and
membership/permissioning services being pluggable.
Clients in Fabric initiate transactions, and send these to
Fabric nodes, which maintain a copy of the blockchain
and the current state. Nodes are divided into two types:
peers and orderers, with peers containing a further
subtype of endorsers. Endorsers are responsible for
validating transactions according to the state and
chaincode, while orderers take no validation responsi-
bility, and merely establish transaction order [12].
The smart contract system in Fabric, known as chain
code, is Turing complete, and distinguished in its ability
to run distributed applications written in general pur-
pose programming languages such as go, Java, and
Javascript, and not requiring a domain specific lan-
guage.
Fabric also allows the creation of “channels”, which
allow groups of participants to have a separate private
ledger, facilitating both privacy and scalability.
5.2 Analysis
Like Corda, Fabric also answers all the listed concerns.
However, unlike Corda, Fabric was designed with a vast
array of industries in mind, not just financial services,
hence the modularity of its design. As a result, an
equivalent implementation is likely to take more time
and resources in Fabric than Corda.
6. Tempo
Tempo is a distributed ledger platform presented by
Radix DLT [13]. It is marketed as a public decentralised
ledger built without blockchain, purporting to solve
issues with scalability and price volatility, while also
being easy for developers to build against.
Radix use different words to describe it, but the data
model of Tempo is fairly analogous to Bitcoin’s UTXO
model. Where they distinguish themselves is by shard-
ing, with their novel ledger architecture and consensus
algorithm.
The global Tempo ledger is separated into shards, which
each contain a subset of transactions on the network.
A shard is the minimal unit of the global ledger that is
required to run a Tempo node. This is made possible by
“temporal proofs”, the consensus algorithm in Tempo,
which only requires data from one or two shards, and
can be performed by the nodes on those shards.
To generate a temporal proof, the party initiating
a transaction sends that transaction to a node they are
connected to, along with a request for a temporal proof
of a specified length to be created.
The node then checks that the transaction is valid, and
if it is, forwards it on to another node it is connected to,
which will perform the same check, and so on until the
number of nodes that have validated the transaction is
equal to the specified length of the proof [14].
6.2 Stablecoin
Radix also aim for the native currency of their network,
the Rad, to be a stablecoin. This is intended to be
achieved via an algorithm that mints or burns Rads in
response to the rise or fall of the Rad’s value against a
basket of tokenised currencies, making this more spe-
cifically an algocoin [15]. Radix’s plans in this regard are
yet to be implemented.

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6.3 Analysis
Radix’s architecture certainly achieves their goal
of scalability, with a near linear relationship of shard
count and transaction throughput.
Where Radix may run into issues with banks is privacy.
As Tempo is based on a public ledger, all transactions
are visible to all participants, which may be undesirable
to institutional participants, as well as potentially raise
barriers to regulatory compliance.
As for their stablecoin, Radix are taking a bold ap-
proach with their algorithmic solution, which promises
to relieve the need to lock up assets as collateral back-
ing the currency. However, recent attempts to achieve
algorithmic stability have proven fickle and risky [16]. A
truly stable algocoin could be years away, and financial
institutions are unlikely to be willing to accept such an
immature solution.
7. Stellar
Stellar is a distributed ledger network and consensus
protocol presented by Stellar.org and The Stellar Devel-
opment Foundation. Notably, IBM’s recently announced
World Wire [17], “a real-time global payments system”,
is to be built on Stellar.
Stellar’s design presents many novel concepts with
interesting applications.
For one, the stellar consensus protocol is based on es-
tablishing lines of trust, individual participants choose
which nodes they trust, and if a specified fraction of
those nodes validate a transaction, so does the partic-
ipant in question. This organically leads to something
akin to Corda’s notaries [18].
Stellar also has an interesting mechanism for managing
off-chain assets, where you can choose to trust an is-
suer of tokens for an asset, then trade in that asset with
the expectation that the issuer will accept the token in
exchange for the asset on request [19].
This shifts the responsibility of establishing trust to
network participants, and relegates the provisioning of
asset tokens and trading coins entirely to third parties,
for better or worse.
7.2 Scalability
Stellar’s transaction scaling is completely flat, and so
has a hard limit of transaction throughput, independent
of the size of the network. Stellar estimate this limit to
be 1000 transactions per second [20].
7.3 Analysis
While Stellar has some interesting features, its lack
of scalability and privacy features stand in the way
of its adoption in the interbank space.
Stellar is notable for having been picked up by IBM for
World Wire, which purports to be a global payment sys-
tem, however, the initial target market for World Wire is
remittances [21], where the open ledger might actually
be an advantage, and scalability may be less
of an issue.
8. Quorum
Quorum is an Ethereum based distributed ledger
protocol, more precisely a stripped down fork of go
ethereum, presented by J.P. Morgan Chase. It offers the
capability for private transactions and contracts, as well
as permissioned networks and alternative consensus
protocols made possible by that permissioning [22].
Quorum’s architecture is largely the same as Ethere-
um’s, the exceptions being the addition of a private
state database, to achieve private transactions and
contracts, and the alternative consensus protocols of
Raft and Istanbul BFT [22].
3.2 Analysis
Quorum successfully provides privacy, but retains the
rest of Ethereum’s shortcomings. Namely it fails to scale
adequately. Raft can handle a much higher transaction
throughput than proof of work, but still does not scale,
and is only estimated to be able to handle around 1000
transactions per second. Such a system may however
be suitable for a bank’s internal use, which makes sense
since Quorum is the primary platform for J.P. Morgan
Chase’s stablecoin, JPM coin, intended for J.P. Morgan
Chase customers and internal use.

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9. Conclusion The maturity of distributed ledger technology, and its applicability
to international banking, are exemplified by Corda, being trustless,
private, scalable, and having mechanisms for regulatory compli-
ance and transaction netting. Promise is also shown by Fabric and
lightning networks. However, the former is a less “out of the box”
solution than Corda due to its efforts to accommodate so many
different industries, and the latter remains too immature for con-
sideration.
Figure 1: A Venn diagram illustrating where each of the investigated technologies lie in the intersection
of concerns they address.

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References
[1] KPMG Services Pte. Ltd, Cross-Border Interbank
Payment and Settlements - Emerging Opportunities for
Digital Transformation, (2018)
[2] O. Denecker et al., Rethinking correspondent
banking, McKinsey & Company Volume 9 Number 23
(2016)
[3] European Central Bank, Glossary of Terms Related
to Payment Clearing and Settlement Systems, (2009)
[4] Mark Walport, Distributed Ledger Technology:
beyond block chain, UK Government Office for Science
(2016)
[5] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer
Electronic Cash System, bitcoin.org/bitcoin.pdf (2009)
[6] J. Poon and T. Dryja, The Bitcoin Lightning
Network: Scalable Off-Chain Instant Payments,
lightning.network (2016)
[7] V. Buterin et al., A Next-Generation Smart Contract
and Decentralized Application Platform, github.com/
ethereum/wiki/wiki/White-Paper (2019)
[8] Mike Hearn, Corda: A distributed ledger, corda.net/
content/corda-technicalwhitepaper.pdf (2016)
[9] Richard Gendal Brown, The Corda Platform:
An Introduction, corda.net/content/corda-
platform-whitepaper.pdf (2018)
[10] Dave Hudson, Cash in the World of DLT,
vimeo.com/234410890 (2017)
[11] The Linux Foundation, Hyperledger Fabric,
hyperledger.org/projects/fabric (2019)
[12] C. Gorenflo et al., FastFabric: Scaling Hyperledger Fab-
ric to 20,000 Transactions per Second, arXiv:1901.00910v2
(2019)
[13] RADIX DLT Ltd., Radix, radixdlt.com
[14] Dan Hughes, Radix - Tempo, radixdlt.com/tempo/lat-
est (2017)
[15] D. Hughes et al., Economic Model radixdlt.com/
alpha/learn/whitepapers/economicmodel (2019)
[16] G. Calle and D.B. Zalles, Will Businesses Ever Use
Stablecoins?, r3.com/research (2019)
[17] IBM, IBM Blockchain World Wire, ibm.com/
blockchain/solutions/world-wire (2019)
[18] David Mazières, The Stellar Consensus Protocol:
A Federated Model for Internet-level Consensus, stellar.
org/papers/stellar-consensus-protocol.pdf (2016)
[19] I. Li et al., Assets stellar.org/developers/guides/
concepts/assets.html
[20] Stellar Development Foundation, Stellar Basics,
stellar.org/how-itworks/stellar-basics
[21] Jesse Lund, Why IBM Build World Wire on Stellar,
youtu.be/GtQY8Jfa4NA (2019)
[22] Patrick Mylund Nielsen and David Voell,
Quorum Whitepaper, github.com/jpmorganchase/
quorum-docs/blob/master/Quorum Whitepaper v0.1.pdf
(2016)

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Disclaimer
About Eternic
The intent of this report is to provide general infor-
mation and insight based on our own analysis and
research. The contents should not be understood as
constituting legal, tax, investment, financial or other
advice, or an endorsement of any of the companies/
products presented herein.
The contents shall not be copied or redistributed
without express written permission of Fintech Innova-
tion AS. Whilst care and attention have been applied to
the compilation of this report, it is possible that some
information may be incorrect, inaccurate, incomplete
or inapplicable to particular situations. All of the in-
formation contained in this report is subject to further
modification and any and all forecasts, projects or
forward-looking statements contained herein shall not
be relied upon as facts nor relied upon as any repre-
sentation of future
results which may materially vary from such projections
and forecasts.
Nothing contained herein is in any way intended by Fin-
tech Innovations AS to offer, solicit and/or market any
security or any securities related product which Fintech
Innovations AS is otherwise prohibited by Swiss, or any
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The contents and views expressed herein are that of the
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also do not necessarily reflect the views of Eternic, its
holding company, or associated partner companies.
Eternic was established by Constanti AG in Zug, Swit-
zerland in 2018 following years of research and devel-
opment focused on improving international payments
and settlement.
Our mission is to fundamentally improve banking set-
tlement and foreign exchange transactions by enabling
real-time bank-to-bank transactions and oversight,
eliminating the need for correspondent banks in be-
tween to mitigate and manage risk. Working in partner-
ship with central banks and leading financial institu-
tions, our goal is to develop a global platform for faster,
more secure, and less expensive international financial
transactions.
Using the latest advances in distributed ledger and
tokenization technology, our stable interbank transfer
mechanism is designed to work in tandem with existing
financial systems to increase speed and reduce cost-
whilst working within the regulatory framework. Devel-
opment of the Eternic platform is currently underway
through Fintech Innovation AS in Oslo, Norway.
Since 2010, our team members have been involved in
delivering successful payment solutions for companies
such as Klarna Bank, Collector Bank, and Tandem Bank.
In addition, our team brings years of experience in
successful software and app development for shipping,
streaming, online security, and visualization to the table.
Want to learn more?
Visit our website www.eternic.io or contact us at
hello@eternic.io.

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