• Blockchain technology has received strong interest from financial institutions as it helps remove inefficiencies in trade settlement processes 
  • Different engagements with regulators are visible and their support is a key enabling factor in the development of blockchain technology
  • With multiple proofs of concept and protocols, interoperability will be the key in the future of blockchain

Distributed ledger technology or commonly known as blockchain, is generating significant excitement in the banking industry. The inherent principles to share, record, create communities as well as improve transparency and efficiencies, offer significant potential for adoption across financial services industry. Blockchain currently finds use cases across multiple business segments with the most common use cases in payments, settlements, trade finance, reconciliation and securities, among others. The technology is undergoing rapid transition as banks and fintechs increasingly explore multiple proofs of concepts to solve specific business issues and remove existing inefficiencies in the system.

A discussion on “Blockchain 2020” at Sibos 2016 focused on areas ranging from recent developments, key technical and business impediments to the adoption of blockchain technology as well as the delivery of its application in the next few years. The discussion focused on the following key elements.

Key use cases and applications 
Banks increasingly consider blockchain as an important business opportunity for the future as they explore adoption of blockchain across a spectrum of businesses. Blockchain-based smart contract – a self-executing code that automatically implements agreement terms between parties – is one critical element in streamlining the processes.

Justin Chapman, global head of market advocacy and innovation research at Northern Trust, explained that with technology still evolving, they are exploring blockchain around a smaller ecosystem and a value proposition that could be contained with highly manual process. This value chain should be proven, piloted and managed in parallel to existing processes. 

Blockchain’s application in digitising trade and removing current inefficiencies in trade settlement process has garnered strong interest from banks. Vivek Ramachandran, global trade and receivables finance, HSBC, highlighted that there is two trillion dollars of trade today which hinges on the exchange of paper. For instance, it takes a day to ship oil between Singapore and Indonesia and a week to complete the multiple documents and get the trade settled. Centralised ledgers have not been able to solve this problem and the distributed ledger technology could be effective here. The banks are looking to replace the old methods of letter of credit and bill of lading. He pointed that this has the potential to impact economies, for example, the Asian Development Bank’s estimated that $1.4 trillion of trade are not financed because either the paper work is cumbersome or banks are too demanding. Organising multilateral agreements like this may be difficult and hence, bilateral initiatives are becoming apparent.

Niche use cases for implementation of blockchain technology are also emerging. Philippe Denis, chief digital officer, BNP Paribas, explained that they are exploring business issues on specific topics with its clients in order to identify what blockchain could bring to the table as a solution. The bank has announced the delivery of a real production live blockchain solution on crowd equity funding by the end of the year. It also plans to implement blockchain solution for crowd lending.

Key considerations and challenges
Blockchain technology is unique as it cannot be implemented by just an individual bank but needs an ecosystem with an industry-wide approach. With multiple proofs of concepts being announced, the banks should work together to ensure that multiple ecosystems can operate cohesively. Collaboration will be key in the future. There are multiple consortiums emerging in blockchain today such as R3 and Hyperledger. Ashwin Kumar, group head of business and product development, Clearstream, pointed that it is through the consortiums and market infrastructure that the adoption of this technology will be widespread. There will probably be multiple protocols in the future and they will need to be interoperable. Scalability of blockchain solution is an essential requirement that banks should aim to achieve. They need to successfully demonstrate in their use cases the ability to meet the requisite volume of transactions, manage governance and operating issues while maintaining the efficiency as well as security.

Confidentiality and data privacy requirements also have to be addressed and the industry should establish guidelines for sharing amongst banks. Management and governance of data accessibility as well as privileges on the shared ledger are other key elements that banks have to manage when they move from proof of concept to product delivery.

With recent cyber attacks, managing cyber security threats in technology application is of paramount concern for most banks as they build their prototypes and use cases. Strong governance that comes with acceptance of this technology is imperative.

Immutability of the data is important as it is an inherent element of blockchain that ensures data on the blockchain cannot be altered in order to gain the trust of parties as well as regulators. Removal of “immutability” will introduces security and regulatory issues, and also raises question on the way to manage a transaction when something goes wrong that needs to be fixed. David Treat, managing director, Capital Markets, Blockchain lead at Accenture, spoke about a concept of “pragmatic immutability” in blockchain where it is immutable 99.9% times but it has a mechanism that provides a predefined governance model and technical means to make an edit, if required.

Potential timeframe
Blockchain technology is still developing and how it will unfold over the next few years remains to be seen. For instance, it has taken two decades for internet technology to evolve to its current shape. A smaller network of participants is likely to introduce an application faster while a larger network will take a longer time due to higher volume and latency of products in the ecosystem.

The success for blockchain adoption is also dependent on development of a consortium or interactive network of banks and it will take time before the entire ecosystem can progress on the new technology protocol.
Banks need to identify the right technology initiative so that they can garner support within the organisation. Currently most banks are adopting a niche implementation approach. Treat, pointed that it will probably take years for markets infrastructure of true capabilities to be available but in the meantime, there will be a steady stream of systems graduating from the prototype of proof of concept phase to more digestible solutions across whole portfolio. Government support would be a key enabler for success with this technology. Different levels of engagement with regulators such as sandboxes, experiments in proof of concept and changes in regulation are already visible. Many regulators are encouraging blockchain, considering its inherent key features that render it conducive from compliance perspective. Though some of the regulators are actively engaged in experiments, a wholesale change in regulatory framework may take time, necessitating law changes in certain jurisdictions.

The future
Blockchain technology is rapidly evolving and business needs will determine how this shapes in the future. Ramachandran noted that there is significant excitement with its potential impact and capabilities but with many multiple initiatives, the industry attention gets dispersed. A collaborative industry-wide effort in solving the few pain points may help to achieve greater long-term success.

The future is likely to see multiple protocols because different use cases will emerge to solve particular business issue. Many young consortiums are working on business use cases but they still have to develop to reach industry standard before banks can rely on them. A strong collaborative effort and interoperability would be essential to grow in the long run.