By the end of this year, Accenture predicts that Blockchain will enter early adoption phase forcing financial industry to explore new business models with this revolutionary technology. The Tipping Point is expected to arrive by 2018 and the technology will continue to grow till 2025 when it will become the mainstay of financial services.
What is Blockchain?
Blockchain is a public distributed database which is constantly synchronized and secured with cryptography. Though people largely equate it with Bitcoins; it’s a gross misappropriation. To put this in perspective, Bitcoin is related to Blockchain as email is to the internet.
Blockchain = Database
Why is Blockchain so revolutionary?
Decentralization
…Blockchain technology facilitates peer-to-peer transactions without any intermediary such as bank or governing body… – Don Tapscott
It might sound counterintuitive that something which by definition negates central authority is getting investment from central banks and governing bodies. One of the financial industry’s inherent attraction towards Blockchain is its efficiency: as a common, ubiquitous ledger technology, Blockchain promises to remove all sorts of friction traditionally created in financial networks where numerous intermediaries work with their own sets of technology infrastructure. By removing both the intermediaries and their involved tech- inefficiencies, the financial industry will be able to ensure that there is no duplication of records, fewer reconciliation discrepancies and settlements are faster.
Early Adoption
Although, there is also a large room for other industries to innovate and explore, banking and financial services see immediate benefits with Blockchain facilitating Letter of Credits, Payment Remittances, Corporate Debt or Bond, Trading and Repurchase Agreements.
Payments
Bitcoin = Payments; that’s probably a more apt analogy. Bitcoin and 100 other similar currencies have held traders interest in the market. Still, their usage for day-to-day payments hasn’t captured public’s imagination. Nonetheless, the promise of instant payments across geographies is very interesting and banks want to bring this medium into common usage. Yet, regulation of crypto-currencies like Bitcoin is a challenge. At present, different countries have different regulations for Bitcoins and its counterparts. As the Blockchain technology evolves, it’s likely that Payments being only one of its many possible applications will find its place within a regulatory framework which is common to all countries.
"When we talk about cashless economy, we look towards Sweden. However, it’s Africa which leads mobile banking. No one could have predicted the success of mobile phones in India…it will not be a surprise that the biggest uptake of digital technologies like Blockchain will come up from countries in the so-called third world"
Sandeep Agrawal Founder & CEO, Credencys
Trade Finance
Albert Einstein once commented, “The hardest thing in the world to understand is the income tax.” Perhaps, one should have invited him to comment on the practices in international trade. Letters of credit and bills of lading follow tedious information flows, generate daunting paperwork and it’s not rare for businesses to identify these procedures as a bottleneck. Blockchain can be the holy grail of Trade Finance automation.
Blockchain apps can facilitate information sharing between exporters, importers and the banks involved in the transaction on a common private distributed ledger. Such apps would improve speed, provide automation via self-executable digital smart contracts and improve real-time data visibility for all parties involved in the trade deal. Global banks have already done successful POCs and the technology is up for grabs. 2017 is likely to be the year when a larger number of banks, corporate clients, and shipping companies will come to a consensus to increase the Blockchain adoption in Trade Finance.
Capital Markets
The prospect of Blockchain transforming the capital markets has attracted huge attention and it has the biggest number of startups to its account. NASDAQ was one of the first to join the bandwagon announcing its POC on Blockchain-based transaction on 30th Dec 2015. Since then, Nasdaq Financial Framework has listed more than 100 of its market operator clients using its Blockchain services. According to Coindesk, 10 more bourses from Australia, Dubai, Germany, Japan, Korea and London have reported progress on investigating and implementing the technology.
Major Challenges
ROI: Implementation of Blockchain within their existing infrastructure might not be lucrative for most organizations. This could perhaps be addressed with the creation of shared Blockchain where banks or governments would invest in building the infrastructure.
Incentives: However, the present financial ecosystem has several players whose priority for using a shared Blockchain can perhaps create a conflict. This might deter large-scale adoption, again rendering shared Blockchains unviable.
Regulation: As discussed earlier large scale adoption is further restricted by regulatory differences. It is not always easy for regulatory bodies to enforce KYC and anti-money laundering rules with cryptocurrencies – a fact which drives its popularity in dark net, drugs and mafia.
Security: At the end of the day, Blockchains will run on the internet – which can make any security expert shift uncomfortably in his/her seat. Hackers have already looted Bitcoin exchanges; hence, Banks will have to evolve secure standards to avoid such losses.
Simplicity: The internet would not have been successful if users were expected to learn DOS commands and use the CLI interface on their PCs for ordering a Pizza. Until user-friendly Apps are developed, Blockchain will continue to deter more people than it will attract.
The way organizations respond to above challenges will define their future. In one of our previous articles, we have already described Blockchain as a disruptive technology. More enterprises than ever are engaged in Blockchain PoCs and if you belong to Banking and Financial Services industry, then chances are that you will face more immediate competition in Blockchain innovation in the coming years.
Credencys Solutions Inc is a leading software development services and solutions provider which has helped numerous businesses in building strategies for their business growth. Subscribe to our blogs for getting similar articles on management, strategy, leadership and more.
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