By Alex Lielacher
A recent report by Accenture suggests that the implementation of blockchain technology in financial services could save banks up to $12 billion per year. Since the distributed ledger technology can be utilized to improve operational inefficiencies and reduce administrative costs, the report concludes that banks can reduce those costs by up to 30 percent when adopting blockchain technology.
The technology, however, will not only impact back- and middle-office functions. It will disrupt a range of aspects within the financial industry.
1. Cross-Border Money Transfers
One of the most cited areas of disruption for the blockchain is in the international money transfer space. The digital currency bitcoin, the first application built on top of the blockchain, already enables cheap and fast international remittances. Banks, however, are working on their own blockchains for cross-border transactions that reduce costs.
For example, the French bank BNP Paribas announced in December last year that it had successfully conducted its first real-time, cross-border transaction with two of its international, corporate clients using blockchain technology. This suggested that the blockchain may become an industry standard for international money transfers in the future.
2. Securities Settlement and Clearing
Settlements and clearing are one of the most discussed areas of blockchain disruption in finance. By building settlement and clearing systems on the blockchain, stakeholders believe that they can not only substantially reduce costs, but also drastically improve inefficiencies in this market segment by leveraging the distributed ledger technology.
Several global stock exchanges, including Nasdaq, the Australian Stock Exchange and the Hong Kong Stock Exchange, are currently trialing blockchain-based securities settlement systems to increase speed and reduce costs. While the Depository Trust & Clearing Corporation, the biggest securities clearer in the U.S., announced that it will rebuild its credit default swaps settlement and clearing platform on top of the distributed ledger technology earlier this year.
3. Trade Finance and Supply Chain
The blockchain’s ability to securely record, store and transfer data makes it an excellent technology to apply in the trade finance and supply chain sector.
Several major European banks announced earlier this month that they have signed a memorandum of understanding to form a consortium that will work together to build a blockchain-based supply chain management and trade finance platform for small and medium-sized enterprises (SMEs) in Europe named the Digital Trade Chain. The Digital Trade Chain will allow all stakeholders in a cross-border trade finance transaction to securely track the transaction throughout the entire trade process in a completely transparent manner using either a mobile or web-based application. This new system is intended to encourage more cross-border transactions among European SMEs once it officially launches.
The insurance industry is another area where the blockchain has the potential to entirely change the current status quo. There are numerous “insurtech” startups currently working on disrupting this sector using artificial intelligence, peer-to-peer models and blockchain technology.
The insurance sector is particularly primed for the use of smart contracts. The insurance policy of the future could easily be built into a blockchain-based smart contract that pays out the policy automatically if certain conditions are met.
There are already startups building new insurance business models using blockchain technology and smart contracts. An example would be the Ethereum-based, peer-to-peer unemployment insurance provider Dynamis, which utilizes policyholders’ social capital instead of traditional underwriters.
Since the 2008 financial crisis, compliance has become an increasingly important area in the financial industry. Bank are being scrutinized much more closely by regulators today than ever before. Hence, banks have been investing heavily in compliance in the last few years.
Running know your customer (KYC) and anti-money laundering (AML) checks is currently time-intensive and inefficient. By building a compliance framework on top of the distributed ledger technology, many of the inefficiencies would be alleviated and the entire process could be streamlined at a lower cost than systems. A fintech startup that has already established itself in this area is London-based Coinfirm, which offers a blockchain-based compliance-as-a-service platform that facilitates client onboarding, AML analysis, counterparty risk management and more.
Blockchain technology will not revamp the financial industry overnight, but it is evident that it will become an integral part of the financial sector over the course of the next five to ten years.