The byzantine world of bonds and bank guarantees is about to get the blockchain treatment, with an Australian startup using the building block of cryptocurrencies to take paper documents out of the equation.
Lygon CEO Justin Amos: “The problem is with paper and it is what we are here to fix.”
Sydney-based Lygon, backed by Australia’s biggest banks and tech giant IBM, says paper-based bank guarantees that underpin hundreds of thousands of business contracts locally are simply no longer fit for purpose.
Instead, Lygon is pitching its platform to digitise the entire process, in a manner akin to what PEXA has done for property conveyancing. Bank guarantees are used for everything from shop leases to the deposits that businesses need to secure new equipment or a work project.
“It’s about the synchronisation of the industry,” said Lygon chief executive Justin Amos.
“Everyone is on the same page with everything, at all times, in real time.”
Lygon says its system gives all parties access to the document on an enterprise-based distributed ledger system, with IBM operating as the backbone offering bank-grade security.
With heavyweight backers behind it, Lygon has already executed a blockchain-based payment guarantee in a commercial contract for law firm Piper Alderman.
Mr Amos said the conversation began four years ago in a meeting with Westpac and its commercial lease customers. As the discussions unfolded, the paper guarantee stood out as a major pain point for all parties concerned.
“It takes six weeks to get a guarantee or, I’ve got to somehow manage this bearer instrument in a safe, or I might have to pay a custodian for it, or I might lose it, or we don’t have an operational process that correctly manages this,” Mr Amos said.
The paper chase is a nightmare for businesses and legal firms trying to keep track of the one document that is in the hands of a single party in the transaction chain. And that piece of paper has huge implications for other business decisions such as the provision of credit.
That’s why three of Australia’s big four banks, Westpac, ANZ and the Commonwealth Bank, are investors in Lygon, along with IBM and Westfield shopping centre operator Scentre Group.
But Lygon sees a potential market beyond the 400,000-odd bank guarantees in existence at any one time. According to Amos, the digitisation of guarantees could see it easily replace the need for bonds and cash deposits in areas as diversified as bail bonds and rent bonds.
“The guarantee is better because everyone can actually interact with a guarantee. And you can have multiple parties in a trust account, all with digital guarantees, all (connected) into other financial institutions’ systems,” said Mr Amos.
“So everybody kind of wins.”
Expanding the market for bank guarantees as a digitised product will be a game-changer, Mr Amos added.
“It skyrockets the number of bank guarantees that could replace cash deposits.
“Everybody has made a cash deposit, whether it’s renting an apartment or a car. Payment guarantees are very prevalent.”
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