The previous article of this series focused on building context to bring forth why moving our existing monetary system to a futuristic blockchain system is the next natural step in the evolution of “money”. We looked at the features of a blockchain platform which would aid in such a move. However, the financial markets are far more complex and composed of numerous other instruments that people trade rather than just a currency.
This part will explore the features of blockchain which will enable institutions to transform and interlace traditional banking and financing systems with it. As previously discussed, and proved, if enough people participate in a given blockchain network and support the protocols for transactions, the nominal value that can be attributed to the “token” increases and becomes more stable. Take, for instance, Bitcoin (BTC). Like the simple paper currency, we’re all used to, cryptocurrencies such as Bitcoin and Ether can be utilized for all the former’s purposes from buying food to ships and from loaning money to insurance.
Chances are you are already involved with a bank or any other financial institution that makes use of blockchain ledger technology. The most significant uses of blockchain tech in the finance industry will be in setting up payments infrastructure, fund transfer technologies, and digital identity management. The latter two have traditionally been handled by legacy systems in the financial services industry. These systems are slowly being migrated to blockchain systems owing to their efficiency in handling work like this. The blockchain also offers high-quality data analytics solutions to these firms, an aspect that is quickly gaining prominence because of recent developments in data sciences.
Considering the start-ups and projects at the cutting edge of innovation in this space first seems warranted due to their products or services already doing the rounds in the market today.
Starting with PayPal, an online payments company started in 1998, and now among the largest of such platforms, it is considered to be a benchmark in terms of operations and technical prowess. PayPal derives largely from the existing monetary system. Its contribution to innovation came by how it collected and leveraged consumer data to provide services online at instantaneous speeds. Online transactions are taken for granted today with minimal innovation in the industry in terms of the tech that it’s based on. Having a solid foundation is a good thing, but that won’t give anyone an edge over their competition in this fast-paced IT world with new standards and technology being pioneered every other day. In 2014 PayPal subsidiary, Braintree announced partnerships with popular cryptocurrency payment solutions including Coinbase and GoCoin, in a bid to gradually integrate Bitcoin and other popular cryptocurrencies into its service platform. This basically gave its consumers a chance to explore and experience the side of what’s to come under the familiar umbrella cover and reliability of PayPal. In fact, ride-hailing company Uber had an exclusive partnership with Braintree to allow customers to pay for rides using Bitcoin.
Ripple is making it easier for people to operate between multiple blockchains. Ripple has been in the headlines for moving ahead with regional banks in the US, for instance, to facilitate transferring money bilaterally to other regional banks without the need for a 3rd party intermediary resulting in reduced cost and time overheads. Ripple’s Codius platform allows for interoperability between blockchains and opens the doors to smart contracts programmed into the system for minimal tampering and confusion. Built on technology that is highly advanced, secure and scalable to suit needs, Ripple’s platform currently has names such as UBS and Standard Chartered on their client's list. Many more are expected to join in.
Kraken, a US-based cryptocurrency exchange operating in locations around the globe is known for their reliable crypto quant estimates even providing Bitcoin pricing data real time to the Bloomberg terminal. In 2015, they partnered with Fidor Bank to form what was then the world’s first Cryptocurrency Bank offering customers banking services and products which dealt with cryptocurrencies.
Circle, another FinTech company is currently among the largest of its sorts involved with allowing users to invest and trade in cryptocurrency derived assets, similar to traditional money market assets.
Companies such as Wyre and Stellar today have managed to bring down the lead time involved in international wire transfers from an average of 3 days to under 6 hours. Claims have been made saying that once a proper regulatory system is in place the same 6 hours can be brought down to a matter of seconds.
Now while all of the above have focused on the start-up projects involved, it has to be remembered that the reach and capabilities of the older more respectable financial institutions should not be ignored. Institutions that have existed for decades if not centuries moving billions of dollars worldwide are equally interested in leveraging the blockchain and its potential.
As we already mentioned in the previous article, JP Morgan recently unveiled their plans to exploit cryptocurrencies and the underlying ledger like the functionality of the blockchain for enterprises. The project, called Quorum, is defined as an “Enterprise-ready distributed ledger and smart contract platform”. The main goal being that gradually the bulk of the bank's operations would one day be migrated to Quorum thus cutting significant investments that firms such as JP Morgan need to make in order to guarantee privacy, security, and transparency. They’re claimed to be the only player in the industry now to have complete ownership over the whole stack of the blockchain, protocol, and token system. They also released a cryptocurrency called JPM Coin meant to be used in transacting high volume settlements instantaneously. JPM coin is among the first “stable coins” to be backed by a major bank such as JP Morgan. A stable coin is a cryptocurrency whose price is linked to an existing major monetary system. Quorum is also touted for its capabilities to process almost 100 transactions a second which is leaps and bounds ahead of its contemporaries.
Barclay’s, a British multinational financial giant is reported to have registered two blockchain-based patents supposedly with the aim of streamlining fund transfers and KYC procedures. Barclay's proposals though are more aimed toward improving their banking operations’ efficiency. One of the application deals with creating a private blockchain network for storing KYC details of consumers. Once verified, stored and confirmed, these details are immutable and nullifies the need for further verifications down the line. If implemented the protocol will do away with the need for multiple verifications of KYC details. Developing and densely populated countries such as India where a bulk of the population is yet to be inducted into a formal banking system will find the innovative KYC system useful in reducing random errors and lead times involved in the process. Barclay’s is also rumored to be exploring the capabilities of a blockchain system to address credit status ratings and insurance claims.
Such blockchain backed systems are designed to eliminate needless maintenance costs and leverage the power of smart contracts for enterprises which operate in industries where discretion, security, and speed determine competitive advantage. Being enterprise products, they’re built on protocols that ensure complete transaction and contract privacy along with a consensus mechanism which essentially nullifies corruption and bribery.
PwC’s Global Fintech Report from 2017 states that by 2020, an estimated 77% of all Fintech companies are estimated to switch to blockchain based technologies and processes concerning their operations. A whopping 90 percent of their respondents said that they were planning to adopt blockchain technology as part of an in-production system by 2020. Their judgments are not misplaced as significant cost savings and transparency gains from a regulatory point of view are guaranteed by moving to a blockchain based system.
Since regulatory capabilities are built into the blockchain platform by default the migration of firms from legacy systems to modern networks running blockchain ledgers is a welcome move for industry regulators as well. Transactions and trade movements can be verified and tracked on the fly once and for all rather than after. This, in the long run, will likely result in better regulation and risk management. Not to mention improved accountability from the part of firms and individuals alike.
While considerable investments in the space and leaping innovations are courtesy of large investments by established corporates it is misleading to think that such measures wouldn’t permeate the benefits to the end user. As banks and financial institutions start to adopt the blockchain, it will result in increased cost savings and efficiency for them which will ultimately mean good for the end consumer too. The added benefits of transparency and fraud protection will improve customer sentiments and more importantly improve the trust that people place on the banking and financial system. A much-needed revolution in the financial services industry is possible with blockchains and their integration into traditional services. In the next part of this series, we will discuss about Blockchain in real estate.
-  35 Amazing Real World Examples Of How Blockchain Is Changing Our World.
-  Blockchain | PayPal Government Relations.
-  Coinbase adds support for PayPal and Credit Cards.
-  Ripple Vet Launches Codius, an Easy-to-Use Smart Contract Tool.
-  Standard Chartered to extend use of RippleNet to more countries.
-  Fidor and Kraken Team Up For Cryptocurrency Bank.
-  Circle Internet Financial, Inc.: Private Company Information - Bloomberg.
-  Wyre: The Blockchain Platform Taking The Lead In Cross-Border Transactions.
-  Quorum | J.P. Morgan.
-  Barclays Files Two Digital Currency and Blockchain Patents with U.S. Patent Office.
-  Global FinTech Survey 2017