16 October 2017

Financial Times: Five ways banks are using blockchain

Clearing and settlement, trade finance and syndicated loans are ripe for modernising. Combining shared databases and cryptography, blockchain technology allows multiple parties to have simultaneous access to a constantly updated digital ledger that cannot be altered.

The technology, which underpins cryptocurrencies such as bitcoin, was initially treated with scepticism by banks. However, this has changed dramatically. Blockchain is the hottest buzzword in the sector, even if the recent flurry of cryptocurrency fundraisings via "initial coin offerings" is attracting intense regulatory scrutiny.

Many of the new ventures by banks involve them setting up a consortium of like-minded companies or carrying out a "proof of concept" to test the potential of the new technology. In almost all cases there is little to show in terms of commercial significance. So which the areas of banking stand a serious chance of being transformed by blockchain?

• Clearing and Settlement - It is not the sexiest area of banking, but the tangled web that records loans and securities costs investment banks billions of dollars to run. Accenture has estimated that the biggest investment banks could save $10bn by using blockchain technology to improve the efficiency of clearing and settlement.
• Payments - Central banks across the world are exploring the potential for shifting parts of their payments systems on to blockchain technology or even using it to launch digital currencies. This is partly a response to the challenge that standalone cryptocurrencies such as bitcoin could pose to their control of monetary policy. It also underlines how central bankers are waking up to the potential benefits of the technology for the payments system.
• Trade finance - Trade finance is still mostly based on paper, such as bills of lading or letters of credit, being sent by fax or post around the world, and seems to many bankers to be crying out for modernisation. Many believe that blockchain is the obvious solution especially as numerous parties need access to the same information.
• Identity - Verification of customers and counterparties is a vital for banking. Without it, lenders would quickly lose their roles as trusted guardians of people's money. Regulators hold banks responsible for checking that customers are not criminals or illicit actors, and fine them if they get it wrong. Banks have been trying for years to set up a shared digital utility to record customers' identities and keep them updated. They have failed to find the right formula, undone by conflicting demands and the problem of deciding liability. Some believe that blockchain could offer a solution because of its cryptographic protection and its ability to share a constantly updated record with many parties.
• Syndicated loans - When a US company raises money via a syndicated loan it takes on average 19 days for the transaction to be settled by the banks. When a loan changes hands between banks or a borrower repays a loan early, much of the communication is still done by fax. Emmanuel Aidoo, head of blockchain at Credit Suisse, says: "This is an area that hasn't had an awful lot of innovation." Credit Suisse is one of 19 financial institutions that have formed a consortium, working with Synaps to start putting syndicated loans on blockchain systems. "It is the perfect vehicle for managing the lifecycle of loans," says Mr Aidoo. He says a key challenge is to find a way for separate blockchains to talk to each other so that changes to a loan's ownership can be quickly reflected across all systems.

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