Financial institutions are looking to blockchain for benefits in trade finance, KYC, and payment settlements.
At its core, blockchain is a distributed ledger of information that marketed as inherently secure, since it has no single owner or point of control. While blockchain technology has been used most famously in cryptocurrencies like Bitcoin, it has serious implications for any application where businesses need to move anything of value: physical, intangible, or data-based.
While banking might not seem an industry that would jump at the opportunity to introduce new technology into its everyday practices, particularly in light of the slow-moving progress toward EMV adoption in the United States, blockchain has seen an enormous amount of attention and pick-up in the financial industry over the last few years.
Last week IBM and Thailand’s Kasikornbank Pcl announced a partnership for blockchain services. By using IBM’s Bluemix blockchain service, which is built on top of the open-source Linux Foundation’s Hyperledger platform, the bank hopes to certify original documents and speed up the letters of guarantee certification process.
Under the IBM-Kasikornbank project, a system called OriginCert API is used to certify letters of guarantee quickly on an electronic platform. The OriginCert API service can also be used by other participating commercial banks and organizations that need speedy, accurate and secure LG issuance. Kasikornbank is also reportedly in talks with other banks in Thailand to connect each other using blockchain.
In a release from April, Kasikornbank said that blockchain could reduce costs and increase cross-border settlement efficiency. Nitin Gaur, director of IBM Blockchain Labs, said the project was primarily aimed to mitigate credit default risk.
Trade finance, settlements, KYC
Letters of guarantee are often used in trade financing, which has a long paper-based trail of contracts, and where settlement can take weeks. A report from Barclays said use of blockchain in trade finance has a number of benefits, including:
- Reducing costs and lengths of transaction reconciliation. IBM has a pilot with UBS Bank for export-import transactions, in which the length of settlement reportedly dropped from one week to one hour. Barclays, for its part, has reported that two partners—argricultural co-op Ornua and food product distributor Seychellles Trading Co., were able to transfer trade documentation through a blockchain platform. Meanwhile, Bank of America, HSBC, and the Infocomm Development Authority of Singapore (IDA) have built a blockchain application, based on the Hyperledger protocol, to replicate the letter of credit transaction process between banks, exporters and importers.
- Secure transfer of value and endorsement, due to the immutability and digital uniqueness inherent in blockchain, and prevention of documentation fraud..
- Overcoming Chinese walls of data privacy among counterparties by using tokenization as a form of cryptography, whereby parties are only allowed to access permissioned information.
- Smart contracts offer the possibility of self-executing contracts triggered by the efficient exchange of digital data, potentially revolutionizing the long-serving Letter of Credit.
- Internet of things (IoT) which is still in the early stages of application to trade finance could be used to move physical assets while they are simultaneously tracked and purchased. (In October, IBM partnered with Walmart to better track the pork supply chain in China, so that they could pinpoint the exact origin of a contamination, deal with the issue, and give customers more confidence in their purchases.)
A May 2016 report from the Euro Banking Association stated that the adoption of cryptotechnologies in trade finance still faces a number of challenges, including an unclear legal and regulatory environment, the need to ensure the confidentiality of data, the need to provide the stability of the technology, and the challenge of creating a “network effect” to spur adoption of distributed ledgers in the trade finance space. But if such challenges can be met, blockchain has a number of benefits, including:
- Ensuring full transparency of the value chain.
- Reduced error rates and credit risk.
- Lower costs, improved convenience, and a level playing field for all participants.
- Improving liquidity and working capital.
- Upgrading the reconciliation process and providing additional financing opportunities.
Hurdles to blockchain
Significant transactions need to be supported by a complex legal framework, and blockchain simply doesn’t have one yet. Many applications bound by complex regulatory requirements, such as hospitals navigating patient records, most likely won’t see significant blockchain investment for a number of years.
When it comes to IoT, hurdles still remain particularly in the vast quantity of data that is collected and shared among the network. Because blockchain does not rely on a single, central server, but rather distributes and replicates the data across every node, IoT devices will need to be built with more storage capacity. This creates yet another technical hurdle for manufacturers—devices can only be so small if they need large storage capacities and the processing power to churn through ever-increasing ledger sizes.