“The world needs banking but it doesn’t need banks.” Alex Mashinsky Founder of Celsius Network.
In fact it seems the banks need Blockchain and the idea behind cryptocurrencies such as Bitcoin. On occasion an industry will be disrupted and a great change will take place. The Internet, for example, changed many industries including media and communication and ther Smart phone has also changed many lives.
One industry that has resisted change is the banking industry. They like doing things the old way. Of course the internet has been adopted in the interests of speeding up processing and transactions and databases have reduced the employment in the banking industry but a major change in operating basis has, up to now, remained unchanged.
With the advent of blockchain this is poised to change and many banks can see the writing on the wall. Blockchain can make a significant difference to banking operations not the least of which is a tremendous saving in operational costings. Many banks are now sitting up and taking notice of this potential saving and seriously looking at how blockchain can reduce some of their costs while at the same time enhance their security and provide a better return on investment (ROI). It is really only a matter of time before central banks adopt blockchain to settle high-value, interbank fund transfers, according to the head of Ripple, whose technology has won support from former Fed Chairman Ben S. Bernanke.
As the technology, which is based on encrypted distributed ledgers, catches on, central banks around the world will be afraid to miss out, Ripple Chief Executive Officer Brad Garlinghouse said recently in an interview with Bloomberg. “Once that movement takes hold, that acceleration goes quickly,” At the Singapore FinTech Festival Garlinghouse said, “Is it one year or is it five years? It’s probably somewhere in between.”
Central Banks Some central banks who are exploring the potential of blockchain technology include:
Bank of England: Conducted a proof of concept test with Ripple, integrating the company’s blockchain technology for simulated cross-border payment.
Bank of Canada: Collaborating with Payments Canada and TMX Group to experiment with an integrated securities and payment settlement platform.
Monetary Authority of Singapore: Leading a group of banks, the city’s stock exchange and technology companies to explore applications for payments
Hong Kong Monetary Authority: Developing a cross-border network for trade and trade finance with Singapore’s MAS Australian Banks including the Commonwealth, ANZ and Westpac.
In addition a number of other entities are also exploring the potential of a blockchain based payments system including SWIFT and the Enterprise Ethereum Alliance.
Garlinghouse doesn’t see these as competitors. Rather, “There’s a massive difference between testing something and deploying it at scale,” he said. “Industries from finance to health care to utilities are working with blockchain, with the goal of radically changing how payments are tracked, securities and derivatives trades are processed, and health records are stored, among potential uses. Ripple refers to this as the “internet of value,” where money travels as far and as fast as information moves on the internet.” He stated, “Companies often go public so that they have a security they could use to make acquisitions,” he said. “Our hurry to go public may be lower because I can use XRP as a strategic asset to invest in an ecosystem and to maybe make acquisitions.”
Harvard Business Review claims that blockchain will do to banks what the internet did to media. ‘And, as of 2016, 60% of financial organizations plan on using blockchain for international money transfers, 23% for security clearing and settlement, and 20% for Know Your Customer (KYC) regulations and anti-money laundering services.’
Incentives for the banking industry to use blockchain include less expensive than current systems and faster transactions. The ROI for banks is of primary concern so when it comes to spending less money banks are right up with the best of them so this very much in line with the current push to lower their costs and increase their efficiency in an uncertain regulatory market and continual low interest rates affecting their bottom line. As Blockchain is far less expensive than current methods banks are now seriously looking at this technology. For example, currently processes for international payments, keeping up with KYC and reporting regulations are still almost pre internet days and cost billions to maintain. The use of blockchain technology would reduce that cost by at least 70 percent and that is something the banks just cannot afford to ignore. ‘Each year, businesses send about $150 to $300 trillion for payment across national borders. Fees for those transactions average around 10%, and the money transfer takes about two to five business days. That’s a lot of paying fees and waiting for money transfers. Similarly discouraging, financial institutions currently spend between $60 million and $500 million just to keep up with KYC regulations.’
Now blockchain technology would remove much of the overhead costs for customer identification. report by PWC puts this clearly, “Blockchain systems could be far cheaper than existing platforms because they remove an entire layer of overhead dedicated to confirming authenticity. In a distributed ledger system, confirmation is effectively performed by everyone on the network, simultaneously. This so-called ‘consensus’ process reduces the need for existing intermediaries who touch the transaction and extract a toll in the process. In financial services, that includes those who move money, adjudicate contracts, tax transactions, store information and so on.”
In a discussion regarding blockchain and KYC regulations, an Accenture representative said, “We think identity could be big. We can easily see how you could move [Blockchain] to the massive area of ‘know your client’ and anti-money laundering, where the costs are huge for banks and the costs of messing it up are also huge.” As Identity fraud already cost victims over $16 billion in 2017. It is easy to see how blockchain could save $20 billion per annum just in infrastructure costs alone. So for banks, adopting blockchain is really a no brainer. The question is how will they adopt and incorporate blockchain into their system and when?
Banks, like any other culture suffer from a cultural lag. (The term cultural lag refers to the concept that there is a lag between the introduction of some innovation or new concept and the time it is taken on board. It does not necessarily apply just to technical innovation but can also apply to social changes as well as strategic and management changes. The term was first coined way back in 1922 by the noted sociologist William F. Ogburn in his work “Social change with respect to culture and original nature”. His theory of cultural lag inferred that there is a period of maladjustment while the present culture is struggling to adapt to the new.) So it is not a question IF the banking industry will accept blockchain and eventually Bitcoin, but more a question when.
‘“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.” Say Charley Cooper, Managing Director, R3. He goes on, “Trade finance is an obvious area for blockchain technology.” And as we all know, wait times for personal and even business banking can be anywhere from one to three business days. Blockchain, on the other hand is more or less instantaneous. Testing the proof of concept on how fast you can make a cross-country payment using the technology, SAP, ATB Financial, and Ripple collaborated to send the first ever international blockchain payment from Alberta, Canada to ReiseBank in Germany. The result? According to Digitalist Magazine. “The CAD 1000 (€667 EUR) blockchain payment, which would typically have taken from two to six business days to process was completed in about 20 seconds. The proof of concept has since been enhanced, and we are able to complete the transactions in just 10 seconds.”
So it comes as no surprise that 40 of the largest banks on the globe are investing huge assets into blockchain. Bank of America is seeking blockchain patents. And Goldman Sachs, JPMorgan Chase, Citibank, and Bank of New York Mellon all created their own cryptocurrency. Those banks are investing for a good reason. Blockchain doesn’t just offer savings. It offers faster transactions. Which mean happier customers, lower overhead and more efficient processes.
Clearing and Settlement
According to Accenture investment banks could save $10bn by using blockchain technology to improve the efficiency of clearing and settlement. Richard Lumb, head of financial services says: “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 adds: “Today it is managed through a myriad of messages and manual reconciliation. There is a big opportunity for blockchain to seriously restructure that industry.”
Various Central banks across the world are exploring the potential for shifting parts of their payments systems on to blockchain technology including using it to launch digital currencies. This is probably a response to the threat cryptocurrencies such as bitcoin is posing to their control of monetary policy but more likely central bankers are waking up to the potential blockchain and crypto currencies can provide their antiquated system. “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, meanwhile, are growing tired of waiting for central bankers to take the lead and are pressing on with their own projects. Switzerland’s UBS for example, has come up with the “utility settlement coin”, which aims 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,” says Lee Braine of Barclays’ investment bank, who is working with UBS on the project.
The field of cross-border payments is undergoing a bun fight with SWIFT the current bank owned system and Ripple in San Francisco. This area of banking processes trillions of dollars’ worth of payments so is no small biccies. Swift is carrying out experiments with blockchain technology but its rival with Ripple is already ‘there’ as it were.
Trade finance still uses an antiquated system, of paper including bills of lading, letters of credit (LOC) sent by fax and sometimes even snail mail around the world. This is an area that is ripe for blockchain and the cost savings would be enormous, probably in the order of 95 percent. This is an area crying out for blockchain. “It is literally Dickensian, because it is so paper-based,” says Mr Whitehouse of 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, said: “Trade finance is an obvious area for blockchain technology.” However it would not be easy to just set up a blockchain. “Digitising trade finance is quite a pointless exercise — you need to digitise trade. 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. This has to be ecosystem driven.” However there are several start-ups working to digitise the bill of lading process, such as Wave of Israel, EssDocs of Malta and Bolero of the UK.
It takes on average 19 days for a syndicated loan to be settled by the banks. And when a loan changes hands between banks or a borrower repays a loan early, the communication is still done by fax. Emmanuel Aidoo, head of blockchain at Credit Suisse, says: “This is an area that hasn’t had an awful lot of innovation.” Credit Suisse is one of 19 financial institutions that have formed a consortium, working with Synaps to start putting syndicated loans on blockchain systems. “It is the perfect vehicle for managing the lifecycle of loans,” says Mr Aidoo, he added, “The consortium expects to have put one or two loans on its platform within the next year. He points out there is a drawback where separate blockchains need to talk to each other so changes to a loan’s ownership can be reflected in both blockchains. ‘The new project would involve the different agent banks each providing a “golden source record” of the loans they administer which could then be accessed by other lenders. However, like trade finance, he says “blockchain technology alone will not solve all the inefficiencies in the syndicated loan market. Blockchain is not a silver bullet, it will not fix it itself, it will take business process changes.”
In Australia the Westpac bank has been quietly working actively with fintech start-ups over the past couple of years. Working with Coinbase (Coinbase is one of the leading player in the bitcoin market globally with more than 2.2 million users and over 39,000 merchants), Westpac declined to comment on the motivations underpinning its interest in Coinbase.
As well as Westpac, the Commonwealth Bank and ANZ have all revealed testers of cryptocurrency platforms. “Internally, Commonwealth Bank has been testing crypto protocols and we are about to begin a wider experiment with one of our offshore subsidiaries to explore the benefits of intrabank transfers using these protocols,” a CBA spokesperson told Information Age. “The idea is to test in a controlled environment what a bank-to- bank internal transfer might look like using crypto rather than existing payment providers. We are ensuring our testing remains internal within Commonwealth Bank Group and we continue to comply with all legal and regulatory requirements.”
The National Bank of Australia (NAB) is the only one apparently not participating in any trials or tests in the currency arena recently telling the Australian Financial Review that “it does not trade in unregulated currencies.” How long that will last is anyone’s guess but mine is that it will not be keen to be left behind as the four main banks in Australia do like to keep up with each other.
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