How can blockchain shape our digital banking future?

In today’s globalized environment, with regulatory demands and competition from FinTechs and others, institutions that cannot meet these challenges may not be viable in the long term.

by Nacho González, Blockchain Research Line Expert, Atos

Regulatory demands and competition from FinTechs, disruptors and others, especially in today’s globalized environment, are posing a long-term viability challenge to those institutions that cannot match these agile digitally focused organizations.

With the emergence of blockchain technology, a new revolution is underway: the industry is embarking on transformation, from operational processes to different business markets such as payment services, real estate, insurance, asset management, crowdfunding and lending to leverage the advantages it offers.

Blockchain is the first technology that offers a way to fully manage digital assets in a trusted, traceable, automated and predictable way. What distinguishes blockchain is that each ‘block’ is linked and secured using cryptography. Trust is distributed along the chain and relies on cryptography eliminating the need for a trusted third party to facilitate digital relationships and ledgers.

Enhancing digital finance processes

In the financial services ecosystem, the most significant business areas are clearing and settlement, trade finance, cross-border payments, insurance and anti-money laundering. This is where the Distributed Ledger Technologies (DLT) aspect of blockchain can be applied. In particular, we can point to the Australian Stock Exchange, which has since moved all of its financial asset management to a DLT platform.

Within clearing and settlement, we don’t currently have a common way forward regarding which stages of the lifecycle of a transaction (pre to post-trade, execution to settlement) can be encompassed by the blockchain. Looking at this practically, we continue to see holes such as information sharing with pre-existing legacy systems, compliance and regulatory concerns, along assets segregations. We need to address these issues before we can scale blockchain for such processes.

Yet in the financial processing industry, DLTs provide a compelling set of benefits:

• Traceability. Products and assets can be followed and scrutinized in live time. Once held in a ledger, the data is then immutable; access can be given by those who participate in the system/network, whilst preventing private information from being disseminated to any other sides. In addition, any additional asset data can be provided for use in various manners going with or going from the new owner.
• Clarity. Clear, easy to understand information regarding a transaction will help to encourage customer trust. Balancing transparency and privacy are integral features of blockchain. Identity is hidden within cryptography in the blockchain, therefore the connection of public key identities with individuals who use it is a hard connection to make. Combining this with the means of the data structure within a blockchain (in which a transaction is linked to a public key identity), allows for an unmatched level of transparency with privacy.
• Accountability. Within the chain of blocks, transactions are kept in sequence and indeterminably. This allows for accountability and auditability at every stage, not needing any outside players.
• Security. Every single transaction is verified by the network using cryptographic algorithms, assuring the authenticity and immutability of the information. The users have control over their own assets and transactions also using cryptography. Blockchain is therefore innately secure. Of course, there are theoretical scenarios where a blockchain can be counterfeit, for example modifying one single transaction in more than 51% of the network, but technical limitations make this scenario hypothetical, rather than a real threat to data integrity and immutability.
• Collaboration. DLTs enable each party to easily and securely share finance-related trade data. The level of collaboration (which information each party can share and who can access what) is determined by the configuration of the network/system, so this is a highly customizable solution easily adaptable to any regulatory, technical or functional requirement.
• Efficiency. Transactions are completed between involved parties with no intermediaries. Features like smart contracts provide automation of commercial actions, for example, cutting-edge initiatives such as Etch, an automated smart-contract based platform for wage management.

The beginning of the end of traditional banking?

Most key players in the industry have reacted to blockchain and are deploying DLT applications in their day-to-day operational processes and applying them to different services provided by institutions. These include JP Morgan Chase in the US (with its Blockchain Center of Excellence), Banco Santander in Spain (supporting initiatives such as RippleNet and Hyperledger or with We.trade trading platform deployment) or Mitsubishi UFJ in Japan (with the launch of a blockchain-based payments network).

The implementation and deployment of fully operational trusted and authorized interaction networks among corporations, B2B networks, service providers and financial institutions will be highly disruptive. This does not herald the end of the banking industry as we know it but blockchain, as part of widescale digital transformation, will add significant value. The question is whether traditional players are going to lead this transformation or new players will emerge.