Does blockchain mean the end of centralized banking? Probably not but certainly the banks are becoming aware of the distinct advantages of using blockchain to reduce costs improve efficiency, and boost up their bottom line.
Many of the banks functions are costly and inefficient even in these days of high speed computers and swift communications technology. Centralized banking means that constant verification of transactions of varying types need to be continually done and many of these still rely on antiquated processes including paper trails and fax machines with transactions taking days to complete.
For example, the clearing and settlement of loans and securities costs billions of dollars in administration and It has been estimated that by using blockchain technology investment banks would save something on the order of 10 billion dollars a year with the improvement in efficiency. According to Richard Lamb of Accenture, "The first place we will see it have an impact is clearing houses, such as Deutsche Börse, the Australian Stock Exchange and Depository Trust & Clearing Corporation [DTCC]." He added, "Today it is managed through a myriad of messages and manual reconciliation. There is a big opportunity for blockchain to seriously restructure that industry."
The Australian Securities Exchange is looking at blockchain as a way to improve their post-trade clearing and settlement. This is only one of many projects around ther world being explored and implemented in the Fintech arena. Stuart Graham, chief executive of financial analysis company Autonomous Research, believes the industry will eventually take up blockchain as the winning solution to old and tired methods of settlement. "Over the next couple of years, as the winning tool becomes clear you will see the whole industry line up behind up it," he says. “It is in none of their interests to keep all the bureaucracy and inefficiencies of the current back-office set-up."
Payments are another area ripe for change. Central banks across the world are looking at the advantages of shifting all or part of their payments systems onto a blockchain as a more efficient and reliable speedy process. "Everyone is looking at it, experimenting and waiting to see who moves first," says Simon Whitehouse at Accenture. "There is a great complexity involved to put in a new payments infrastructure with enough players to make it worthwhile." Some Commercial banks, have started already on their own projects. For example, Switzerland's UBS has devised the "utility settlement coin," aiming to create a digital currency for use in financial markets by issuing tokens convertible into cash on deposit at central banks. "We accept that it will be quite a few years before central banks could be in the position of issuing their own digital currencies, so therefore we would look for them to be issued via an alternative means and yet be able to still retain settlement finality because they are assets backed by funds at a central bank," said Lee Braine in the chief technology Office of Barclays' investment bank, which is working with UBS on the project. In the field of cross-border payments you have the existing Swift, the current bank operating messaging system and the increasingly popular newcomer blockchain technology of Ripple which promises to be more reliable, faster and cheaper.
Trade finance is still an old world paper based system where bills of lading and letters of credit are still being sent by fax or post around the world and costs billions to maintain as well as being slow and inefficient. Blockchain is the obvious solution here especially when you consider that many parties need access to the same information or data. "It is literally Dickensian, because it is so paper-based," says Mr Whitehouse at Accenture. "This is a very important element of the supply chain and blockchain can offer a vast amount of elements in this area. For instance, if you are shipping goods from China, as many as 50 people need to access the data." Charley Cooper, managing director of R3, says: "Trade finance is an obvious area for blockchain technology. It is so old it's done with fax machines and you need a physical stamp on a piece of paper."
"It could take you a day to ship oil from Singapore to Malaysia and a week to deal with a the paperwork," says Vivek Ramachandran, head of innovation for commercial banking at HSBC, the world's largest trade finance provider. "Digitising trade finance is quite a pointless exercise - you need to digitise trade." He says, "You have to include not only the shipping companies, the agents and the freight providers, but also the ports, the customs and the insurers," says Mr Ramachandran. "The moment you need a physical stamp on a document, it can't be digital." Mr Ramachandran has predicted five years is needed to digitise the entire trade systems, such as sugar or energy, but once blockchain is fully embedded it will save billions in time, and increased with the potential to be "genuinely game changing."
Identity Verification of customers has increased in importance over recent years particularly with increased regulations and banks now held more accountable for their clients and customer's money as well as verifying that customers and not engaged in criminal or illegal activities. Blockchain is the answer to a shared digital utility to record and update customer identities.
While most people are not aware of Syndicated loans this is still big business for banks. With the current systems in place it takes almost 20 days to raise money for a syndicated loan and most of the communications are done through a fax machine. Emmanuel Aidoo, head of blockchain at Credit Suisse, says, "This is an area that hasn't had an awful lot of innovation." Now Credit Suisse is forming a consortium with 19 other financial institutions to start putting syndicated loans on blockchain systems. "It is the perfect vehicle for managing the lifecycle of loans," says Mr Aidoo, adding that the consortium expects to have put one or two loans on its platform within the next year (2018). He pointed out that the importance of separate blockchains able to communicate with each other so changes to a loans ownership can be efficiently communicated across all systems. "Blockchain is not a silver bullet, it will not fix it itself, it will take business process changes," he said.
Several banks and finance houses are working on projects including IBM backed Hyperledger Fabric Project, The Credit Suisse join consortium Utility Settlement Coin (six banks including Barclays, HSBC, State Street, MUFG, Credit Suisse, Canadian Imperial Bank of Commerce) and R3's blockchain consortium, all designed to incorporate blockchain into the banking community. In addition there is the Batavia Blockchain Project spearheaded by IBM and includes the Bank of Montreal, Erste Bank, Commerzbank and Caixabank. And they are advanced enough along to be expecting to used the blockchain technology this year using smart contracts and allowing immediate transfers of funds.
According to technology company IBM, the rate at which banks are adopting the blockchain is 'far faster' than originally thought. It found that 15 percent of the 200 global banks surveyed intended to roll out, full-scale, commercial blockchain products in 2017. Interestingly, it found that medium to large institutions, with more than 100,000 employees, were leading the charge. A further 65 percent are expected to have blockchain projects in production within the next three years. As the report states, 2017 appears to be the year when banking on the blockchain 'shifts from zero to sixty.' An additional IBM report has revealed, "Our survey of commercial and retail banks reveals that the industry is hurtling toward blockchain adoption far faster than many expected."
To recap, the areas ripe for blockchain intervention include timely clearing and settlement of cross-border payments and remittances, fraud and error reduction, lower administrative costs, trade finance, identity, the removal of paper trails, and syndicated loans. Seeing the light other major banks have now adopted or are starting to adopt the blockchain technology include Goldman Sachs, Bank of America and Merrill Lynch. It seems that Blockchain will eventually make its way into and become standard use in the banking fraternity in the not too distant future.
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