Blockchain technology is transforming the world. It's changing the way people spend money, make investments, and more. As a result, blockchain is also providing banks with new information and new ways to handle transactions and more.
Learn about the five blockchain functions for banks by reading the information here.
1. Clearing and Settlement
While this isn’t necessarily the most exciting part of banking, the process used to record loans and securities can cost investment banks billions of dollars to run.
It has been estimated that the largest investment banks may be able to save upwards of $10 billion by implementing the use of blockchain technology. This is due to the fact that it could help improve the efficiency related to clearing and settlement.
The first notable impact of blockchain technology has been seen in clearing houses. Today, these are still managed by a myriad of messages, as well as manual reconciliation process. This offers a significant opportunity for blockchain to restructure the entire industry.
Within the United States, DTCC is currently working with Axoni, R3, and IBM to shift the post-trade clearing of various single-name default swaps onto a system of blockchain technology. The goal is to have this done by the end of next year. If this is successful, then the same will be done with other derivatives that are processed by the US clearing house.
While there are a myriad of ways blockchain can be used, in the next few years, as this tool becomes clearer, it is likely that the entire industry will line up behind it. It isn’t in these institutions to keep the inefficiencies and bureaucracy of the current set-up in the back office.
There are central banks across the globe that are exploring the possibility of shifting portions of their payment systems to blockchain technology, or by using it to launch digital currencies. This is in part because of the response to the challenge that the current standalone cryptocurrencies, including bitcoin, may present in regard to the control the banks have over the current and future monetary policy.
This also highlights how central bankers are beginning to “wake up” to the possibility of benefits offered by the technology to the overall payments system.
All banks are starting to look at it, experiment with it and are waiting to see who is going to make the first move. There is quite a bit of complexity involved with putting an entirely new payment infrastructure in place with plenty of players that will make it worthwhile.
Meanwhile, commercial banks are beginning to get tired of having to wait for central bankers to take the lead and have begun their own projects. For example, the UBS in Switzerland has developed a “utility settlement coin,” which is designed to create a digital currency for use in financial markets by issuing tokens that are convertible into cash that can be deposited into or at central banks.
While it is going to be several years before central banks will be in the position of issuing digital currencies, many banks are starting to take steps in this direction. There are some of them that are searching for an alternative means while being able to retain settlement finality because the assets are being backed by the central bank.
In the realm of cross-border payments, there is an increasing tussle going on. On one side is Swift, which is a bank-owned messaging system that is used for sending trillions of dollars’ worth of payments, and on the other side, there are more firms that are trying to use blockchain technology to cut time and costs, which is led by San Francisco based Ripple.
While Swift is currently experimenting with blockchain technology, the rivalry it has with Ripple is still intense. Ripple has set a conference on October 16 to 18 with Ben Bernanke, the former chairman of the Federal Reserve, serving as the keynote speaker. This event will clash with the Sibos event held by Swift, which is going on at the same time and in the same location. This is a clear example of an upstart parking all its tanks on the lawn of the incumbent.
3. Trade Finance
To date, trade finance is primarily based on paper, including letters of credit or bills of lading, which are sent by post or fax around the globe. This is a process that is seen by many bankers as being one that is crying out for some type of modernization. Some believe that blockchain is going to be the obvious solution, especially as more parties are having to access the same, exact information.
According to some experts, trade finance is the most obvious sector for implementing blockchain technology. Right now, the process is extremely old. This is proven because much of it is still being handled via fax machines and the use of a physical stamp and paper is necessary to complete transactions.
A problem, however, according to some experts, is that banks aren’t going to be able to achieve the benefits of blockchain if they are acting alone. Not only will the shipping companies, the freight providers, and the agents have to be included in the process, but also the insurers, customs, and ports. The moment a physical stamp is needed on a document it won’t be a digital process.
A vital part of banking is the verification of customers, as well as counterparties. If this isn’t available, then lenders are going to lose their roles of being the trusted guardians of people’s assets and money. Also, regulators make it the banks that are responsible for checking that a customer is not an illicit actor or criminal, and if the bank is wrong, they have a fine imposed on them.
For years, banks have been attempting to create some type of shared digital process for recording customers identities and to keep the updated. Currently, they have still failed to find the best formula due to some different conflicting demands, as well as the issue of determining liability. There are a number of startups and others who think that blockchain may be the best solution due to cryptographic protection and the ability it has to share a record that is constantly updated with several parties.
According to experts in the industry, identity could be a huge benefit for banks that implement the use of blockchain technology.
Currently, there are several start-ups that are working to build blockchain systems for the purpose of customer identification, which includes Credits and Blockstack, Cambridge Blockchain, and a company called Traddle.
Identity is also an important part of R3’s efforts behind the building of Corda. This is a blockchain based operating system specifically designed for banks. The fact is, with this system, identity is a core component of this, and if the issue of identity isn’t solved, then the blockchain won’t work on any of the applications. A good way to think about this is by imagining that a ledger is built, and no one knows who is on the ledger.
5. Syndicated Loans
When any United States based company works to raise money through a syndicated loan, it will take about 19 days in order for the transaction to be settled by the banks. When the loan moves from ownership between banks or if the borrower pays the loan off early, then quite a bit of the communication process is still handled via fax. This is one area that has had quite a bit of innovation in the recent months.
There are currently 19 financial institutions, including Credit Suisse that have formed a consortium by working with Synaps to begin putting the syndicated loans on a blockchain system.
This is a smart vehicle for managing the lifecycle of a loan. It is expected that the consortium is going to have a few loans on the platform within the next few years.
One of the main challenges is to find a way for the separate blockchains to “talk” to one another so that when the ownership of a loan changes, it is reflected quickly across all systems.
This new project is going to involve various agent banks and providing a “golden source record” for the loans administered, which would then be accessed by various lenders.
The Bottom Line
However, similar to trade finance, blockchain technology on its own isn’t going to solve all of the inefficiencies that are present in the syndicated loan market. In addition to the implementation of blockchain technology, a change in the business process is necessary.
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