Distributed General Ledger — A Solution to Overlapping Madness
What’s the deal with overlapping accounts?
One of the goals of distributed ledger technology (aka ‘blockchain’) is to seamlessly tie the delivery of goods and services together with their respective payment, where today these are separate and disjointed legs of the same transaction.
When a company provides goods or services to another, they tend to expect payment in return. For hundreds of years, companies have recorded such sales or purchases on their respective ledgers. These general ledgers represent what they own (their assets) and what they owe (their liabilities) and both companies will endeavour to ensure both ledgers match.
In order to do this, they rely on sharing purchase orders, invoices, payment instructions and receipts. These formal documents are followed up with a range of communication including meetings, emails, facsimile and phone calls. All of these resources and efforts are exhausted, simply to try and keep the two over lapping accounts (sales and purchase in this example) matched on their respective ledgers.
A company will likely have many of these overlapping accounts between themselves, their clients and suppliers. As you can imagine, keeping these all aligned becomes a tremendous drag on all parties involved.
Where do bank fits in?
Banks will also have a general ledger representing their assets and liabilities. One of the liabilities on this ledger will be the deposits their corporate customers have made into the bank. The bank calls these deposit ‘accounts’ on their ledger, but the corporate customer will see these as ‘cash (or bank) accounts’ on their ledger.
Just another case of overlapping accounts between two general ledgers which need to be aligned. Another case of expended effort and drag.
In order to make payments between corporate customers at different banks, banks also need to have relationships with each other. Be it between a corresponding bank, a central bank, a reserve bank or a clearing bank.
Each bank will hold deposits with these other banks to cement the relationship. Bank A will hold a nostro account to record the banks money held in a deposit at another bank B. Bank B will hold a vostro account to record the deposits they have received from bank A. All of these banks might have many of these types of vostro or nostro accounts on their respective ledgers and guess what, each bank needs to keep all these overlapping accounts aligned. More madness, more drag.
Distributed General Ledger
One way of keeping all the overlapping accounts aligned would be to share all the transactions on a single public ledger and have all the corporates validate each other’s transactions. The main disadvantage of this approach is that all transactions can be seen by all parties.
A second way would be to allow each corporate to connect their general ledger with the general ledger of their clients, suppliers and banks. Over time a private peer to peer network of inter-connected corporates would emerge where they only share data with their clients, suppliers and banks, similar to the internet.
Either way we have a Distributed General Ledger, one which allows goods and services to flow one way and payments and settlement to flow the other, where each corporates’ general ledger is seamlessly aligned with their clients, suppliers and banks.