Blockchain To Ease Compliance Burdens

Fintech collaborations may be on the verge of yielding concrete solutions for monitoring and compliance.

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Blockchain is billed as having the power to end banking as we know it. Well . . . yes and no. Blockchain, minus bitcoin, is about to bring changes to banking, but those changes might not be as revolutionary as some would have us believe.

The flurry of activity to uncover the benefits of distributed ledgers in financial services does have far-reaching implications for the industry, however, thanks largely to the blockchain’s capacity to transform how transactions are recorded, reconciled and reported, all while ensuring greater security, lower error rates and significant reductions in cost.

James Wallis, vice president for the global payments industry and blockchain at IBM, says trade finance is the top use case for the blockchain in transaction banking, with wholesale and international payments second.

Budd, Deutsche Bank: Converting business processing logic into legally binding clauses is not easy, yet it’s key to unlocking the efficiency of this technology.

“We are seeing a number of companies now doing proofs of concept that will run over the next six to nine months,” Wallis says. “And in 2017, we might see some small-scale production projects, with organizations doing a shadow blockchain alongside their current processes, then switching over to fully using blockchains in the future. To get to real scale, you will need to have multiple participants—a number of banks, companies or trading partners; a true ecosystem is still two to three years away.”

Edward Budd, chief digital officer for global transaction banking at Deutsche Bank, agrees with this time frame but insists that the benefits and adoption time frames will vary for securities, payments and trade finance products.

“We have consistently said the adoption would be a step-by-step process, not an overnight revolution, with some commercially viable implementations by the end of 2017 and in early 2018,” Budd says.

For blockchain to become mainstream, Budd points out, there needs to be “appropriate configuration to ensure we meet data privacy regulation,” which would include assurances on security, resiliency and recovery. Further mainstream adoption will require interoperability between distributed ledgers.

“It may take another five to 10 years before distributed ledger technology becomes truly mainstream,” he says. “That brings us to 2027, the year the World Economic Forum predicted that 10% of global GDP will be stored on blockchains.”

Transformative Teamwork

Collaboration has become a key driver, whether it’s banks teaming up, such as the partnership between DBS and Standard Chartered to develop a distributed ledger for trade finance in Singapore; banks deploying the solutions of distributed ledger companies, such as Ripple; or consortiums like R3 and the Linux Foundation.

Cooper, R3: We always intended to build a financial-grade distributed ledger that supports the whole financial services community.

IBM is an active participant in the Linux Foundation Hyperledger Project, along with a slew of big names in finance, such as ANZ, State Street and J.P. Morgan, and similar heavy hitters from the tech side, including Intel, Cisco and NTT Data. Wallis describes the project as a blockchain “fabric,” a cross-industry collaboration to support development of multiple use cases with various players contributing their unique expertise.

“Ripple has an end-to-end vertical capability with use cases like remittances, [while Bitcoin rival] Ethereum has typically been used for smart contracts,” Wallis explains. “Hyperledger is designed to support regulated industries and known entities working on a blockchain. We think it has, by design, capabilities that will allow multiple use cases and [will] operate in the permissioned world [where only authorized participants can validate transactions].”

As part of the Linux Foundation project, IBM is making tools available in the Cloud environment to help developers get started quickly. “We are working with a number of clients on proofs of concept or first projects to define a use case and test out the technology on it,” Wallis says. “We are working with clients on the technology level, the build level and the application level.”

With 50 members, R3 is the largest consortium of its kind in the financial markets, and managing director Charley Cooper says part of R3’s role is to set standards for the emerging blockchain technology.

“The model of major financial institutions working collaboratively to build technology and develop standards is best suited to that purpose,” Cooper says. “By becoming a central point for rigorous and robust testing for our own shared-ledger platform, Corda, as well as many others, we’re already playing an active role in the development of those standards.” Cooper says that from the outset, this initiative was intended to build a financial-grade distributed ledger that would support the whole financial services community.

“R3 believes that the power of this tech comes from its network effect,” Cooper adds. “R3 has a growing number of nonbank members, so the technology we develop will by its very nature meet the standards required by different types of financial institutions from all corners of the globe.”