Of all the potential applications of Blockchain technology, perhaps trade and finance are the area that would see the greatest impact on the global economy.
Major banks are already scrambling to develop their own Blockchain capabilities, and the rise of cryptocurrencies like Bitcoin are already transforming the way we think about digital transactions.
The underlying technology of cryptography and distributed ledger technology is proving its viability every day and its rapid development has big implications for traditional finance operations like clearing and settlement, syndicated loans and trade finance.
However, it is important to understand that most Blockchain activities by major institutions fall under the ‘proof of concept’ category and are still at the research and development stage. Regulation and standardisation of the technology is the next step, given how the recent trend of ‘Initial Coin Offerings’, or ICOs, for the purposes of fundraising has created a lot of debate and attracted intense regulatory scrutiny.
Even so, progress is being made at an extraordinarily rapid pace. Experts, consultants and industry observers agree Blockchain tech will have a major role to play in modernising the key areas of finance operations.
Transforming Payment Systems
Many central banks across the world are looking for ways to integrate cryptocurrencies and Blockchain systems into their existing systems. In part, these initiatives are motivated by a desire to exert monetary control over emerging crypto technologies, but also to reap the benefits of transforming traditional payment systems. Commercial banks are already a step ahead, aggressively pursuing their own projects as they digitise more and more of their operations.
International transactions are already proving to be a hotly contested area, with banks realising that whoever implements a fast and reliable international Blockchain-based payment system first stands a good chance of monopolising the entire industry. Start-ups and small-scale independent research groups are involved in a bitter digital arms race with traditional financial institutions to develop and implement new payment solutions that can be reliably adopted worldwide.
Streamlining Clearing and Settlement processes
Of little interest outside the world of bankers and finance professionals, recordkeeping, post-trade clearing and settlement processes cost banks billions of dollars in operational costs every year. With huge parts of the system still relying on manual handling and cumbersome legacy systems, it’s an area ripe for Blockchain innovation. Digitising and streamlining these operations can save financial institutions billions of dollars every year.
There are multiple solutions being developed by various groups at present, but in time the industry will settle on one universal technology system to enable wide-scale adoption. There is a strong incentive to remove inefficient bureaucracy and its associated costs, especially given the scales at which major financial institutions operate.
Even in this day and age trade finance is still mostly paper-based, with documents like bills or letters of credit still being stamped, faxed, posted and couriered around the world.
Digitising the process through Blockchain tech seems like an ideal solution, promising to speed up and automate large parts of the manual tasks and verifications involved. But many experts believe digitising finance is pointless without digitising trade operations first. This means the hard and complicated work of integrating shipping companies, agents, freight operators, ports, customs and insurers into a universal digital system.
The trading sector exists as an ecosystem, with many diverse services and operations at very different stages of technology adoption having to find a way to work together effectively.
Digitising the entire ecosystem may well prove to be extremely costly and time-consuming, if not downright impossible. Despite the challenges, there are many start-ups around the world attempting to develop solutions to the challenge, with Blockchain tech being the favoured candidate to solve these problems.
Taking the Hassle out of Identity Verification
We rely on banks to safeguard and mediate all our transactions. They protect us against fraud, verify transactions and keep a record of our finances.
Regulatory bodies hold banks accountable for their practices, making sure everything is above board and ensuring transparency, fining banks whenever something unsavoury happens. As a result, keeping track of customer identities, verifying and updating them is a huge liability for banks. They’ve been trying for years to develop some system to automate the process, but are constrained by accountability to regulators and compliance with consumer privacy rights. Many in the industry believe Blockchain may be the answer. With its secure crypto protection and distributed capability to be updated by multiple verified parties, a universal Blockchain ID for customers may be the future of banking. This would allow banks to automate the transaction tracking process securely without violating consumer privacy, and combat illicit activities like money laundering which carry huge penalties for banks.
Identity lies at the core of any Blockchain system. Without a reliable user authentication mechanism, the whole purpose of a distributed ledger falls apart. But the way Blockchain is designed means identities are not only verified and secure but can be used across the network safely and securely, providing customers with a universal ID that grants them secure access from anywhere in the network.
Automating syndicated loans
Still a cumbersome manual process, syndicated loans can take several days, sometimes weeks, to be processed and settled by a bank. When a loan changes banks or a borrower changes repayments, much of the documentation and processing is paper-based and done manually.
Blockchain could take a lot of the pain out of the system and automate the process. The challenge, however, is that every bank has its own closed data system, which means customer IDs do not port to other banks. There are considerable challenges to creating a common platform, from both a technological and policy standpoint. There is also the question of whether it is even desirable to do so.
These reasons illustrate why Blockchain is not a universal solution for every problem. It is an important tool with the potential to revolutionise many systems, but it is still part of a vast ecosystem of diverse technological standards and platforms. The real value of Blockchain technology lies in showing how business processes can be streamlined, automated and secured. As the technology matures, it will find more and more applications within the current ecosystem, helping modernise different aspects of the finance world.