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Blockchain in Banking

Blockchain is the distributed, decentralized ledger technology where transactions are created in a group of verified blocks, which adds up to an evolving chain, are visible to all participants and are unalterable. Each transaction is recorded on multiple electronic ledgers and cannot be manipulated by any one party. Every block in the blockchain consists of a set of transactions, which are agreed upon by the participants using a consensus protocol.

It is billed as having lot of potential to disrupt conventional banking, which is based on a centralized ledger, with banks playing a key role in intermediating transactions.

Blockchain as you know is the technology underlying bitcoins and other cryptocurrencies. Now its transparency and foolproof features is drawing the attention of banks.

Below are some areas in banking where blockchain is making an entry and impact:

Cross Border Payments: Funds transfers across borders is a lucrative, fee earning business for banks, but it is handicapped with limitations due to involvement of multiple parties, correspondent banks, intermediaries as well as the fee levied per transaction. World Bank and the IMF studies show that average fees levied by bank is 7% of the amount remitted. Straight Through Processing cases are few and far between. This is where a blockchain solution comes in.

JP Morgan sponsored Interbank Information Network (IIN) has a network of 320 banks which have agreed to swap information on global payments over blockchain. Their goal is to free payments from the lengthy and costly delays that affect around 1.5 per cent of cross-border payments by making information about the transfers instantly accessible to every bank in the payments chain so that missing or incomplete payments information can be quickly fixed and the payment can go through.

Syndicated Lending: This is a prime candidate for blockchain intervention since it involves multiple banks coming together to structure a complex, big ticket loan. Spain’s BBVA and two partner banks have completed the first syndicated loan on blockchain. BBVA used a private blockchain network to arrange a $ 150 m syndicated loan for Red Electrica, the Spanish grid operator, with co-lenders MUFG of Japan and BNP Paribas of France. Legal advisers Linklaters and Herbert Smith Freehills also had access to the system which allowed all parties to exchange information instantly.  The information was time-stamped, to show exactly when each event occurred, and the network was secured with user codes. Once the contract was signed, it was given a unique identifier that was recorded on the Ethereum blockchain, preserving its authenticity.

Trade Finance: Letters of credit (LC) a key trade finance method wherein banks pay based on complying documents has also scored early success using blockchain. LCs are heavily dependent on multiple documents being discrepant-free and are manually exchanged between importer-exporter banks, shipping companies and insurance providers. By using blockchain, as was done by Singapore’s DBS, all parties in a trade transaction could simultaneously view all documents and fix the errors,  without any need for back and forth amendments.

Foreign Exchange: HSBC has processed more than 3 m FX transactions worth $ 250 bn using blockchain technology in the past year. HSBC conducts thousands of foreign exchange transactions within the bank, across multiple balance sheets, in dozens of countries. Its tool called FX Everywhere, uses distributed ledger technology to drastically increase the efficiency of these internal flows. Multiple executives at the bank can simultaneously use the system to view trades from execution to settlement, reducing the risks of discrepancy and delay.

Mutual Funds: In a traditional fund transaction, companies ranging from transfer agents to asset managers often have to input the same information, which is costly, time-consuming and open to error. Blockchain eliminates most of the laborious practices. Calastone is betting on the power of blockchain to transform fund management by moving more than 1,700 financial companies — for which it processes mutual fund trades — to the online ledger.

‘Smart’ Insurance: Drought spells disaster for many farmers in the developing world, as most lack crop insurance. Now, however, more than 20,000 farms in Ghana, Kenya and Uganda have access to simple and affordable crop insurance via their smartphones. The policies or “smart contracts” currently under development are based on blockchain. This avoids the need for paperwork and means payouts can be triggered automatically when certain conditions are met, such as a specific number of days of drought. The system developed by US-based WorldCover uses high-resolution satellite images to detect rainfall and plant growth data. Even a farmer with limited literacy can understand an agreement which says, ‘I’ll pay you if it doesn’t rain for a week.’

 

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Posted on Oct 14, 2019
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