For what are global banks and insurers falling over one another to explore the potential? What is the rising technology that Richard Branson and Bill Gates admire? What the Wall Street and Silicon Valley are excited about is blockchain.
It is a tamper-proof electronic platform for crypto-currencies like bitcoin to be traded through a digital public ledger or decentralised database that connects the worldwide users to exchange currency, purchase insurance schemes without any financial intermediaries whatsoever. Also, it makes possible to sell real estate, event tickets, stocks, and almost any kind of property or right without an intermediary. It can send money and soon will send any form of digitised value - from stocks and bonds to intellectual property, art, music and even votes - directly and safely between users without going through a bank, PayPal or Western Union, social network, government or other middlemen. Of course, this does not mean that middlemen or intermediaries will wind up. Rather, the technology provides opportunities for innovative companies and institutions in the middle to streamline processes, increase their metabolism, create new value and enter new markets. Blockchain could also help reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.
Blockchain emerged in the wake of the global economic crisis, when a pseudonymous person or persons named Satoshi Nakamoto released a new protocol for 'A Peer-to-Peer Electronic Cash System' using a cryptocurrency called bitcoin. There has been a dubious analogy between blockchain and bitcoin - precisely, if blockchain were your smartphone, then bitcoin would be the app you prefer to use in your smartphone.
So, apart from the cryptocurrencies, many innovations and applications can be built over the blockchain. The users are not confined to consumers; blockchain can be used or accessed by banks, regulators, exchanges and large marketers. So, where are the banking giants worldwide heading towards?
Till date, around 24 countries have invested in blockchain technology, US$ 1.4 billion has already been invested over the past 3 years to initiate blockchain-based transactions and over 90 central banks have engaged in discussions regarding digital ledger technology.
Apart from unregulated crypto currency trading, blockchain can increase the simplicity and efficiency of future financial infrastructure and processes. With robust collaboration of users, innovators and regulators, blockchain can eliminate human efforts and enable real-time monitoring of transactions. It also disregards the third-party involvement for transaction validations, thus accelerates settlement time and reduces transaction costs. Along with many other technological advancements in the banking sector which are yet to be experienced like biometrics, cloud computing, predictive analytics, simulation-based forecasting and robotics - blockchain is not a solution to all problems; rather it is a developed version of distributed ledger technology. The two basic components of any blockchain transactions are - digital identity profile and smart contracts.
Unlike the generous banking technologies like credit cards, SWIFT, ATMs and digital banking throughout the past decades, blockchain integrates a wide array of banking services under a single language or platform. By initiating blockchain, banks simplify its core functions like global payments, trade, finance activities, compliance, deposits, fund raising and investment management.
Most of the global payments involve senders, receivers, senders' banks, receivers' banks, regulators, local clearing networks, SWIFT and correspondent banks. Blockchain allows direct interaction between sender and beneficiary's bank through real-time settlement of international money transfers which result in reducing operational costs, human errors and accelerating outcomes.
Global payment arrangement invariably involves various correspondents and parties which prolong the settlement time through manual and repetitive business processes. As banks hold funds in nostro accounts for a specified time, it spikes hedging and opportunity costs; also due to demanding regulatory requirement, banks need to maintain multiple operation teams with robust database system to record various data sources and channels. Smart contract, the basic component of blockchain, enables AML alerts to regulators, provides reports on-demand basis and guarantees delivery of payments without correspondent banks. The transaction history can be accessible any time by the related parties and transactions. Seamless KYC can be done through digital identity profile and it can remove repetitive human endeavours.
Other types of transactions or lending which call for integrated controls and collective decision-making, like syndicated loans, can also be aided by the innate features of blockchain. Currently, syndicated loans are being impacted by time-intensive review, lack of technology integration among the syndicate and inefficient fund disbursals as the lead arranger facilitates the interest and principal. Under the blockchain, the lead arranger can access digital identity profile of the borrowers and check the KYC activities and financial records. Then the lead arranger automates a smart contract populated in a pre-specified underwriting template among the syndicate and regulators where they can check and assess the real-time financial records and close the deal with minimal manual efforts, paper-works and possibility of human errors. Thus, blockchain enables syndicate financings with automated diligence, technology integration and reduced counter party risks.
Trade finance arrangement through letters of credit or open account system poses risks and delays due to manual review of sale agreement by issuing banks, delay in invoice factoring due to manual validations, absence of reliable authentication tools for bills of lading and overall delayed timeline backed by manual AML reviews, un-identical technology platform in different countries and involvement of multiple intermediaries/ correspondents. Using blockchain technology, issuing bank reviews the export-import agreement, drafts the LC and submits to the advising bank.
After receiving, the advising bank reviews and generates the smart contract with bank's digital sign/seal or unique identifier and requests the exporter to initiate shipment. Here the regulators and intermediaries, like customs, inspection companies and freight can access the smart contract and continuously update their status regarding that particular transaction; and attach their electronic vouchers and shipping documents as a part of complying presentation. The importer digitally acknowledges the receipt of goods and issuing bank initiates the payment to advising bank via smart contract. Thus it provides real-time review, transparent factoring of bills, disintermediation, regulatory transparency, title of the goods, automated settlement and reduced transaction fees.
And, in the area of compliance and regulatory reporting, banks are required to engage huge investment and manpower to comply with the central bank, tax authorities, auditors, accountants and shareholders. If the required vast data are maintained in a smart contract efficiently and if all stakeholders can access it anytime, it would significantly increase data transparency, elevated accountability, reduced errors and level of cost savings.
The first era of internet brought us access to information. The next era of blockchain would gift us internet of value, artificial intelligence and cryptography. It enables trusted transactions among two or more total strangers, authenticated by mass collaboration and powered by self-interests of the related parties. Innovators are programming the blockchain to record anything of value to humankind - birth and death certificates, marriage registers, deeds and titles of ownership, rights to intellectual property, educational qualifications, financial accounts, medical history, insurance claims, citizenship and voting privileges, location of portable assets, job recommendations and performance ratings, charitable donations tied to specific outcomes, employment contracts and anything that can be expressed in code.
Since a number of global giant banks like ING, RBS, UBS, Scoatia Bank, J.P. Morgan, UniCredit, Deutsche Bank, Bank of America, Mizuho, Barclays, BNP Paribas,Banco Santander, Wells Fargo, Citi Bank N.A. and Commerz Bank AG are being listed in the blockchain consortia, Bangladesh, an emerging tech-interested country, needs to adapt to this financial market and strategy.
Since the majority of fraud and forgeries have taken place where manual and human efforts were prevalent, blockchain ensures maximum transparency with minimal manual efforts to conduct a transaction. Blockchain would not be a panacea - rather it is the platform for future financial infrastructure which provides operational simplicity, automated compliance, data transparency, regulatory efficiency, integrated technology and cost efficiency.
The writer is a senior manager of a private bank adnaan.
