How might blockchain technology transform financial services?

Blockchain is a distributed database or “shared” ledger, which involves numerous interconnected participants who host and store copies of records on the network. Unlike traditional centralised databases, no single entity holds control. 

When a transaction is submitted to the network, a participant is chosen to validate it. These participants collectively determine the network’s state, and one is designated to write the ‘block’. Decisions are reached without a central intermediary. 

Once validated, all participants store copies of the transactions within a block. Each block links to the previous one, forming a chain – the blockchain. Importantly, once a block is added, previous blocks cannot be altered. This means records cannot be deleted and are irreversible, which strengthens the reliability of data, transparency, and provenance. 

Since each participant maintains a full copy of the chain, records are distributed across the network. This minimises the risk of hacks, enhances security, and ensures tamper-proof resilience. 

How might blockchain transform the financial services industry?

The financial services industry relies on global networks, intermediaries and their own systems. These intermediaries and third parties operate within specific jurisdictions. For instance, Lloyds Banking Group participates in UK and EU domestic payment schemes (such as CHAPS and Target2) to support clients. We provide access to our markets, and reciprocally access other markets for our customers. 

However, reliance on third parties and their systems can lead to friction, time zone challenges and delays –  even though checks like sanctions and anti-money laundering are absolutely necessary. 

Blockchain technology offers an alternative. Think of it like a social messaging group, where members interact in real time, rather than communicating individually. Each message could represent a transaction, the members as the nodes and the chat history being the financial events. This means every message is transparent and shared by all members, but could also be made private using encryption.

There would be no group admin to confirm events, instead members would have equal roles in verifying and recording messages. They would see and respond to events in real time with any attempt to alter a message immediately apparent to the group.

Now imagine siloed financial databases being inside group chats like this. Participants could bring specific currencies; others might bring assets to the group. So rather than eliminate the role of an intermediary, it creates potential for a new role, a “message composer”, that can programme ownership, rules and logic inside transactions. This role would reduce counterparty risks and the dependency on clearing and settlement. 

Unsurprisingly, financial institutions are actively exploring blockchain to address some of today’s challenges. Take our work with Fnality International, for instance.

Lloyds Banking Group forge partnership with Fnality International

Fnality International is a payments company building in Financial Markets Infrastructure (FMI). Their infrastructure combines traditional and digital finance to improve wholesale settlements.

To achieve this, Fnality leverages blockchain technology to a closed network of regulated financial institutions and operates an account at the central bank, which allows settlement in a digital representation of central bank funds.

Just last year, we – alongside shareholders Santander and UBS – used the Sterling Fnality Payment System, underpinned by an Omnibus Account at the Bank of England, to complete the world’s first payment on a fully regulated DLT-based wholesale payment system, settling in a digital representation of central bank funds.

Participants use their pre-funded balance to make near-instant transfers to other participants on a 24/7 basis. This combines the safety and credit risk of central bank funds in a systemic wholesale payment system with the functionality and resilience of blockchain technology. 

Going forward, Fnality will expand into multiple currencies that will coalesce inside a network of networks. This will allow members instant, atomic exchange of currencies or payment for an asset that settles safely and in risk free central bank money.