The burgeoning adoption of blockchain technology applications can be attributed in large part to the advantages of distributed databases. Initially perceived as a disruptive threat to the banking industry, blockchain is now being embraced and heralded as a conduit for innovation, optimization and growth.
Blockchain enables the digitalization and seamless transfer of value and data with transparent and embedded self-auditing mechanisms. It standardizes the most important component of any counterparty transaction: trust. Incorporating blockchain into the daily financial workflow begins with building awareness of its potential diversified use cases and applications.
Decentralization Encourages Trust
Decentralization extracts the leverage from intermediaries and spreads it throughout the financial network by cumulatively front-loading all data and linking it together. This creates a distributed database, also called a distributed ledger, that theoretically positions every counterparty to be on the same page.
This cuts down on processing costs while simultaneously speeding up transactions. The real-world benefits of blockchain technology applications can be easily grasped. For example, an equity transaction that typically takes three business days to settle could be completed in seconds through blockchain.
The Race Commences
The race to establish prevailing standards and infrastructures has spawned cross-industry FinTech partnerships. IBM estimates that 65 percent of the world’s major banks will integrate commercial blockchain by 2020, while 15 percent of surveyed banks expect to launch a blockchain solution in 2017, and 91 percent of banks are investing in this technology for deposits.
The World Economic Forum assesses that 80 percent of all banks are actively pursuing blockchain projects. Banks should carefully assess the following blockchain technology applications early to plan out the logistics, benefits and costs of integration.
A smart contract is the virtual “middleman.” They are pre-programmed blocks and self-executing contracts that set parameters and instructions to trigger actions when conditions are met. They function like the traditional middleman would within a financial transaction, but in an embedded, automated and frictionless manner, absent from human execution errors.
Smart contracts are essential components for blockchain applications. Unlike Bitcoin, enhanced cryptocurrencies like Ethereum and Ripple also serve as platforms that enable programmable smart contracts. However, it’s important to account for security considerations, as sometimes human coders can introduce vulnerabilities.
Private or permissioned blockchains integrate smart contracts to authenticate identity and transactions, and access records using a robust identity and access management (IAM) system. Since the user has control over what information is processed, it allows for quicker and frictionless credit processing, underwriting, lending transactions and enhanced fraud prevention from the immutable and distributed structure of blockchain.
Blockchain enables true P2P/P2B mobile payments and transfers that process instantly with no wait times — even on international transactions involving different currencies. The funds circumvent intermediaries like PayPal, Western Union and Moneygram, saving time and processing fees. Digital cash remains in the sender’s possession until the transaction is completed. As one use case, Abra integrates blockchain and human ATMs to enable instant global payments between phone numbers at no charge.
Risk Management Systems
Blockchains are a rich source of robust high-integrity data that can be analyzed using artificial intelligence (AI) technology to develop self-improving risk management systems with dynamic predictive analytics.
Financial institutions spend an average of $60 million on customer due diligence processes, including know-your-client (KYC) and anti-money laundering (AML) regulatory compliance. KYC requests can delay new client onboarding by an average of 24 days, with transaction delays between 30 to 50 days.
Smart contracts can optimize the onboarding process. The distributed structure of blockchain alleviates the information and process duplication currently plaguing onboarding. The immutable factor ensures that all transactions are permanently updated on the chain and shared with financial institutions, accommodating ongoing KYC compliance.
Similar to mobile payments, B2B blockchains expedite cross-border payments and authentication processes to enhance international commerce transactions. IBM created the Digital Trade Chain, an open business blockchain powered by Hyperledge Fabric to optimize trade finance among seven major European banks including Deutsche Bank, HSBC and Société Générale. IBM estimates blockchain can generate over $100 billion in efficiencies from global supply chains.
Private Sector Securities
Blockchain is a liquidity boon for private companies seeking funding. A collaboration with CitiConnect for Blockchain now enables seamless end-to-end transaction processing through Nasdaq’s Linq blockchain platform for private company securities. International investors have access via Citi’s Worldlink cross-border payment system.
For optimizing private equity fund administration, Northern Trust launched an IBM technology-based blockchain managed by Unigestion. This blockchain example seeks to provide maximum transparency for regulators, investors and counterparties while increasing efficiency and security.
Blockchain reduces the time of settlement periods from one to three days down to minutes, bringing an entirely new level of speed to financial trading. In one application, the R3 consortium released an open source working proof-of-concept bond trading platform that demonstrates the advantages of distributed databases.
With these different blockchain applications, financial institutions can not only increase efficiency and compliance within their daily workflow, but they can generate an expandable infrastructure for all types of transactions.
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