Blockchain in practice – a present for the future of the financial industry

Blockchain is best known, for now at least, as the technology that underpins Bitcoin and other virtual currencies. It is ironic, then, that the uncertainty and lack of regulation around virtual currencies risks tainting the reputation of blockchain, as the technology has enormous potential to transform full parts of economy and society, from helping the management of the political elections to the tracking of the supply chain of a global food corporation.

Blockchain – a digital distributed transaction ledger where identical copies of a transaction are maintained on the computers of members of the network – is of interest for any activity that involves transferring ownership of an asset.  The key features that make blockchain so promising are as follows:

  • It is a digital technology, eliminating the need for paper-based recording
  • The distributed ledger brings security and integrity to the data. Data is co-validated by members of the network and transactions are inalterable once stored on the blockchain. As the ledger is distributed to all participants, there is no single point of failure; transactions are secure, verified and trusted.
  • Blockchain is highly customizable. Transactions’ validation method, roles, and permissions can be designed to specifically fit a given purpose.
  • Transactions recorded on the Blockchain are immutable, meaning that they cannot be erased. This gives permanence and confidence that historical transactions cannot be erased for ‘convenience’
  • Blockchain transactions also support the idea of ‘provenance’. This means that transactions can be traced from its origins. A popular application of provenance is the tracking of perishable goods like fresh seafood from source to table.

The financial sector has not been the only industry to notice blockchain’s game-changing potential. There are, of course, hurdles to overcome – not least in integrating a system that is so different from today’s. But the huge potential of blockchain is rapidly becoming a reality for major banks and financial institutions. At Accuity we are involved in a number of blockchain-based projects with our clients. We see the potential for disruption in three critical areas for the industry:

Cross-border payments

Blockchain has the potential to reshape the way correspondent banking services are delivered. Blockchain can greatly speed up and simplify what has always been a slow and expensive process, allowing international payments to be made in minutes or even seconds and giving parties access to end-to-end, real-time tracking.

The technology still has some way to go but it is significant to note that more than 100 financial institutions have already signed up with market disruptor Ripple who are looking for opportunities to improve cross-border payments and remittances processes.  R3 also promises to disrupt current methods of onboarding customers that are part of any ‘Know Your Customer’ (KYC) compliance regime for financial institutions. Irrespective of the channel used, the need for sanctions checks of transactions is still required, and Accuity is actively exploring ways to make transaction screening and KYC checks more efficient, accurate and cost effective by collaborating with these blockchain based firms.

Trade finance

The traditional paper-based trade finance processes are fraught with delays and the potential for costly errors that disrupt everyone involved. The supply chain of the physical goods being shipped is entirely separate from the financial supply chain, amplifying the potential for confusion, fraud, and mistakes. ‘Smart contracts’, driven by blockchain can revolutionize the process.

Smart contracts are self-executing. They provide for reconciliation that every party can see and trust, and real-time, secure information for everyone involved; everyone (participants, financiers, customs and logistics handlers) has access to the same data, at the same time. They also, as a beneficial by-product, remove the need to file, store or exchange physical documents.

Know Your Customer

KYC is a notoriously labor-intensive and time-consuming process. While automation has enhanced its efficiency, blockchain brings the potential for even greater improvements. Blockchain cannot remove the need to perform due diligence on new and existing customers, but it could introduce a far greater level of trust and efficiency into the process.

A few institutions, including Crédit Mutuel Arkéa, are already experimenting with blockchain to mutualize their KYC data internally. The rationale is that a client should not be required to go through a separate KYC process for each product or service they subscribe from Crédit Mutuel Group (banking services, insurance, asset management and so on).

In the long term, we could go much further; blockchain could provide a distributed, secure and indisputable source of data on customers, including complex financial and legal relationships, to those that need access to it. Multiple institutions could rely on a shared ledger of customer information, which would be updated in real time, with every KYC check undertaken by a participating institution. In theory, blockchain technology could lead to a KYC infrastructure where individuals and companies manage their own records and give access to financial institutions when subscribing to a banking product or service. Such a system would also allow Financial Intelligence Units to review in real time all KYC-related data collected on an individual by several financial institutions (when investigating a suspicious activity report, for example).

A mutualized KYC source that would cross multiple institutions through several jurisdictions will, of course, require wide industry cooperation and agreement. This is one of the many challenges that must be overcome if we are to realize the full potential of blockchain in financial services. But the will to act collaboratively is there. The wide AML community, including regulators, recognize that the sharing of information is a key to effectively tackling money laundering and terrorist financing. Another challenge will lie in the necessary balance to be found between the need for transparency and the consideration for privacy. Blockchain provides the perfect technology to share information securely and conditionally, giving access only to authorized members of the network, who for specific purposes are deemed legitimate.

The technology is still relatively new but developing quickly; the journey towards a blockchain-enabled world will take time and investment.  We see various Blockchain platforms developing, including the Bitcoin Blockchain, Ethereum, R3’s Corda, HyperLedger, Chain, Stellar, Factom and many others.  There will be a need to either have these Blockchains ‘speak’ with each other or ultimately consolidate  It will also take cooperation between institutions, disruptors, and regulators – in developing blockchain’s use, but also in creating the right standards around data sharing and process standardization. But if we get it right, blockchain will transform our world.

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