Blockchain in Finance: How Far We’ve Come

Many leading enterprises, such as Deutsche Bank, the US Federal Reserve, Barclays Bank, and Citigroup have already adopted blockchain, possibly due to so-called “blockchain FOMO” (fear of missing out) around leadership positions. According to PwC, 90% of North American and European banks spent over $1.4 billion on blockchain in 2016. However, this technology has not yet been fully deployed at a massive scale. In fact, many banks and insurance companies have been unsatisfied by the results and put their solutions on hold. The question remains: Will these companies go back to implementing blockchain? The latest news in financial services indicates they likely will.

In April 2018, the Spanish bank, BBVA, became the world's first financial institution to issue a loan of €75 million using blockchain technology. BBVA presented a blockchain strategyt based on three “E” pillars: execution, ecosystem, and experience. The bank is working on building blockchain solutions that provide a complete digital cycle of interaction with customers. In addition, they plan to contribute to developing expertise and regulatory frameworks, anticipating the disruptive impact of decentralizati on on the overall system. The company also plans to launch a blockchain academy to foster learning throughout the organization, training employees on blockchain basics and preparing for changes in the future.

Why Blockchain?

Blockchain’s attraction largely comes from its transparent nature. Blockchain is a peer-to-peer network of computers that validate and secure transactions. Its data structure retains cryptographic data about transactions, agreements, and contracts. These networks can be either public or private. In a public blockchain structure, users create and share transactions that can be immediately verified without a certain authority. In a private blockchain structure, the permission to check transactions is kept within the organization. Blockchain grants all business members equal access to the overall transaction history, which cannot be changed after confirmation. This technology simplifies many traditional banking processes, reducing processing time and minimizing the cost and number of rule exceptions. Transaction solutions based on blockchain have four major benefits: reliability, transparency, high speed, and reduced costs.

And while blockchain is not a silver bullet that can be applied everywhere, there are four major business problems that blockchain helps to resolve.

Fraud Reduction

Today, the banking sector suffers from increased fraud and cyberattacks. The main vulnerability is the centralized database, the single place where all data is stored. Unauthorized access to such databases exposes huge risks. Blockchain dramatically eliminates these risks by providing a technology with decentralized data storage. Fraud and cyberattacks now become more difficult to commit, as they require attacks on multiple nodes.

Know Your Customer (KYC)

The term Know Your Customer (KYC) is widely used in the banking sector to refer to the process of a business verifying the identity of its clie nts and assessing potential risk.

According to a Thomson Reuters Survey, financial institutions spend an average of over $60 million on KYC and due diligence—every year. This includes tracking bank clientele to avoid potential financial terrorism and money laundering, as well as regulatory compliance.

Blockchain can improve the efficiency of compliance and reduce operational costs by storing information about verified clients at the blockchain node. Doing so allows other banks, insurance providers, and accredited organizations to access and benefit from that data. In short, blockchain eliminates the need continually restart the KYC process.

Trading Platforms Without Intermediaries

Trading blockchain platforms have no need for centralized identification or intermediaries. They also reduce the risk of double spending in the securities-trading supply chain. Such platforms operate with digital tokens, which are traded and transparently tracked on a blockchain-based exchange. The digital token acts as a certificate of authenticity, making the forgery of securities much harder than paper documents.

Instant Payments

Using blockchain technology to make payments between banking institutions or customers makes it possible to significantly optimize costs as well as improve the safety and speed of domestic and cross-border transactions.

Recently, the blockchain-based global trade finance platform, Batavia (jointly developed by UBS and IBM) successfully completed its first real cross-border transactions. Initial pilot transactions included the trading of cars from Germany to Spain, and raw textile materials f or furniture production from Austria to Spain. In the process, a connection was established among all parties (suppliers, buyers, and financial institutions) engaged in conducting transactions.

Challenges on the Way

However, the adoption of the blockchain technology itself does not guarantee the successful implementation and resolution of the business problems mentioned above. Upon building a solution, a financial services company can encounter many environmental factors that can impact the system in an unpredictable way. Such factors include, but are not limited to the actual situation of the market, the number of financiers and requests for finance in the trading platform, the changes to regulations, and the edge cases that destabilize the system.

As blockchain solutions are deployed on a massive scale it is crucial that these systems scale. Today, this is an issue to some extent, according to TechInAsia. For example, the average number of transactions that a popular platform like Ethereum can perform is only ten per second. In contrast, financial companies like Visa process between 5,000 and 8,000 transactions per second. This introduces some limitations, and increases the cost per transaction in blockchain based solutions. But the situation is likely to change in the near future. Blockchain companies are working hard on providing a scalable infrastructure so that blockchain platforms can become mainstream.

Financial Sector Transformation

What will the financial sphere look like with blockchain? We have numerous reasons to anticipate a revolution that will completely change the industry. Old processes and piles of paper documents will be replaced with digital innovations based on mutual cooperation and trust. Fraud could disappear for good due to highly secure systems.

The potential and opportunities that blockchain h olds lead us to believe that changes are already inevitable. Building this new global infrastructure is just a matter of time and effective cooperation between financial institutions.

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