Blockchain use case - Finance

With the everchanging regulations and competitive landscape, just complying with rules and providing essential services for customers is not enough to become the industry leader. However, that comes with a great risk given the complexity of the business and billions at stake. The pace of adaption of technology is slow in financial services and banking than any other industry because of various reasons. Blockchain looks like a promising resort to most if not all the problems in this industry. Despite its potential, leading firms are still focusing on distributed ledger technology to solve practical issues. 

Several global security exchanges like NASDAQ and NYSE launched blockchain-based platforms. Regulators are working with exchanges to get the oversight on the working. Most industry players still struggle with how to audit systems with almost instant clearing and consensus-based verification.

 A major advantage of blockchain comes with its trust and data sharing. Big industry players can unite by sharing data and intellectual property to achieve greater efficiencies and innovation using blockchain.

Trade finance is a high volume, costly, and time-consuming. Financial institutions and shipping fleets have been experimenting with blockchain to create smart contracts between parties. Clearinghouses, custody providers, and others looking at what blockchain can bring to clearing, settlement, and other intermediated functions. 

Slowly, the world is moving from specifics of blockchain code toward bigger issues.

What will a world running on distributed ledger look like?

How will firms work together in multi-blockchain environment?

Is data sharing between various financial services possible? If so, what data can be shared? What should be shared?

What businesses processes will be completely redefined? 

Great opportunity or a Disruptive threat:

Distributed ledger technology, has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditing of operations, and other benefits.

Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.

“Gartner predicts that the enterprise-ready blockchain solutions will be ready by 2023 and by 2025 blockchain will incorporate complementary technologies such as AI and IoT, decentralized digital identity for delivering the full value proposition of blockchain.”

Benefits of using Blockchain in Financial Services:

According to the International Data Corporation (IDC), global investment in blockchain solutions is forecasted to reach $11.7 Billion in 2022.

Benefits of Distributed ledger technologies in banking and financial services:

With all the parties involved the settlements will become instantaneous, and also technology being distributed verification of identities of both the parties can also be performed within very little time. This will save a significant amount of time and money as it would remove the manual touchpoints in the middle and back offices.

Capital optimization:
One of the main features of Blockchain is that it removes the need for a trusted intermediary and makes peer-to-peer transactions possible. When Blockchain is applied in the financial services industry, it could remove the need for the fee-charging intermediaries such as custodian banks or clearinghouses. As such, Blockchain offers better capital optimization, due to a significant, reduction in operational costs for banks. 

Counterparty risks
One of the major risks involved in bank transactions at any point in time is counterparty risks. With transactions being instant, a significant part of the risk that the counterparty cannot meet its obligations can be totally removed, thereby reducing the substantial expense for banks.

Improved regulatory reporting and monitoring by central banks. Regulators can also have access to the blockchain.

A key feature of Blockchain is that any data recorded is immutable. Any data that is recorded on a blockchain can be tracked in real-time, leaving a very detailed audit trail. This will help in better error handling and reconciliation of records.

Diffference between Centralized and Decentralized Financial Services

Difference between Centralized and Decentralized Financial Services


Blockchain Solutions in Financial Services:

Capital Markets

Capital markets refer to the pairing of issuers with demand for capital, to investors with the corresponding risk and return profiles. Whether issuers be entrepreneurs, start-ups, or large organizations, the process of raising capital can be challenging. Firms face increasingly stringent regulations, longer times to get to market, volatility from interest rates, and liquidity risk. Particularly in emerging markets, they must navigate the lack of rigorous monitoring, thorough regulation, and sufficient market infrastructure for issuing, settlement, clearing, and trading. Blockchain offers multiple benefits for several capital market use cases:

  • Elimination of a single point of failure through decentralized utilities 
  • Facilitation of capital market activities streamlining processes, reducing costs and decreasing settlement times 
  • Digitization of processes and workflows, reducing operational risks of fraud, human error, and overall counterparty risk
  • Digitization or tokenization of assets and financial instruments, making them programmable and much easier to manage and trade. In token form, they gain wider market access through increased connectivity and the possibility of fractionalized ownership. This results in increased liquidity and decreased cost of capital.

Investment Management

Venture capital firms, private equity firms, real estate funds, and specialty markets are facing demands to improve liability risk management, adapt more dynamic decision-making structures, and address the increasing complexity of ever-changing regulations. Blockchain can effectively streamline asset and stakeholder management. It allows: 

  • Automated fund launch
  • Seamless stakeholder engagement with digitized assets and services
  • Digitization of portfolio and existing holdings for wider market access, liquidity and fractionalization
  • Customizable built-in privacy settings for transaction confidentiality
  • Voting and other shareholder rights and obligations programmed into digital assets, resulting in seamless user experience and reduced risks of human error
  • Creation and enforcement of incentive mechanisms to promote participation and punish nefarious activity
  • Improved governance and transparency for investors and stakeholders
  • Efficient cap table management
  • Automated fund administration
  • Automated transfer agency in asset management

Cross border payments and remittances

Global payments and remittances today are executed by a number of intermediaries that exact tolls for their service. It takes 2 to 7 days and costs a global average of 6.94% to send $200 between countries. This means that remittances are directly reduced by $48B through fees, intermediaries, and financial institutions. Blockchain can streamline payment and remittance processes, reducing settlement times and significantly reducing costs. It allows:

  • Rapid and secure domestic retail payments
  • Rapid and secure domestic wholesale and securities settlement
  • Rapid and secure cross border payments
  • Real-time gross settlement between central banks, commercial banks, and independent banks
  • Digitized KYC/AML data and transaction history, reducing risks of fraud and enabling real-time authentication
  • Automated regulatory oversight and auditing
  • Multiple forms of payment-enabled on blockchain: Tokenized fiat, stablecoin, and cryptocurrency

Banking and lending

Core banking comprises of transactions, loans, mortgages, and payment services. Many of these services depend on legacy processes of execution. For example, between information verification, credit scoring, loan processing, and distribution of funds— it takes 30 to 60 days for individuals to secure a mortgage, and 60 to 90 days for small or medium enterprises to secure a business loan. Blockchain can streamline banking and lending services, reducing counterparty risk, and decreasing issuance and settlement times. It allows:

  • Authenticated documentation and KYC/AML data, reducing operational risks and enabling real-time verification of financial documents
  • Streamlined credit prediction and credit scoring markets, instantaneously informed by the collation of user activity and sanctioned data across a network
  • Automated syndicate formation, underwriting, and disbursement of funds i.e. principal and interest payments, reducing cost, delay and friction of syndication
  • Facilitated collateralization of assets because digitization enables real-time asset management, tracking, and enforcement of regulatory controls
A prototype model of implementing Blockchain in Banking Services

A prototype model of implementing Blockchain in Banking Services


Trade finance

Trade finance refers to the infrastructure, processes and funding that support international trade supply chains. The industry continues to rely on paper-based processes that are susceptible to security vulnerabilities. Individual transactions can take as long as 90-120 days in order to process letters of credit, verify documents, and establish trust among stakeholders. Blockchain can digitize the entire trade finance lifecycle with increased security and efficiency. It can enable more transparent governance, decreased processing times, lower capital requirements and reduced risks of fraud, human error, and overall counterparty risk. It allows:

  • Digitized and authenticated documentation (i.e. letters of credit and bill of lading) and KYC/AML data with real-time verification of financial documents
  • Asset digitization to enable faster settlement times
  • Creation of more efficient financing structures through shared secure networks and digitized processes
  • Creation of a consistent financing vehicle for the entire trade lifecycle, eliminating the legacy practice of negotiating independent finance vehicles for each stage of the trade

Blockchain adoption across the world

  • State bank of India tied up with a start-up called Prime chain and created a consortium of leading Indian banks called “BankChain” to research potential of blockchain in banking with a goal to put all core transaction-related processes on a blockchain.
  • Royal Bank of Canada introduced its blockchain-based system to store credit score records that will allow users to understand how they are measured. Their main objectives were increased transparency and immutability.
  • Mizuho, Sumitomo Mitsui, and Mitsubishi UFJ Financial, in Japan, have joined forces to create a cloud-based DLT platform for money transfers between individuals that can be used by each of these banks.
  • Singapore’s central bank and a financial regulator along with the Association of Banks in Singapore revealed in October that they had a new set of blockchain prototypes for decentralized inter-bank payment and settlements.
  • JPMorgan has teamed up with RBC and the Australia and New Zealand Banking Group to launch a new initiative, known as the Interbank Information Network (IIN).
  • In a bid to aid the transfer of payments between its U.S. and Canadian banks, the Royal Bank of Canada (RBC) is experimenting with the blockchain.
  • Microsoft and Bank of America Merrill Lynch are working together on a project to use the blockchain to make trade finance transactions faster, cheaper, safer, and more transparent.
  • Goldman Sachs set up a microsite explaining the benefits of the blockchain technology.