FinTech Network recently published a report explaining potential applications of blockchain, called: Four Blockchain Use Cases for Banks. The report explains how a blockchain enables the creation of a ‘digital ledger,’ which allows participants within its network to access the ledger without a central authority or ‘middleman’ to enable payments. The technology uses cryptography to ensure that data is very difficult to change or remove, and thus may be applied to many use cases for banks.
Case 1: Fraud Reduction
The first case of blockchain explored by FinTech Network in its report is the replacement of bank ledgers in centralised legacy IT systems. With decentralised databases, banks are able to protect themselves against new technologies and hacking threats. Real-time execution of payments allowing complete transparency of transactions for network participants. Since all attempts to hack or change data become part of the data itself, suspicions activity is obvious. The report also cites that Nasdaq made its first trade using blockchain technology on 20th December 2015. However, it warns that the technology does not eliminate fraud entirely. An example is the digital heist of blockchain on Hong Kong’s Bitfinex platform worth $72 million.
Case 2: Know Your Customer
The second case of blockchain is related to Know Your Customer (KYC). As part of regulatory measures, banks have high compliance costs. KYC procedures are time-intensive. This negatively impacts customer experience and causes compliance difficulties with different regulatory standards in different countries. As seen with the case of SWIFT, blockchain may streamline this process. By enabling banks to store KYC customer data in statements and documents, secondary KYC for other banks is made easier. This reduces the time spent on KYC procedures for every new customer in an organisation thus improving customer verification process. Since data is irreversible, customer information is reduced to a “single truth”, thus minimising duplications and errors. Though partly uncompromising of privacy, as organisations can rely on blockchain verification without checking documents, there remain security concerns over what information is necessary for KYC. Furthermore, cross-border collaboration is required to determine what is acceptable for KYC documentation.
Case 3: Trading platforms
Thirdly the report mentions blockchain’s capacity to reduce fraud, costs and risk by applying blockchain to trading platforms. By creating a history of individual assets, blockchain enables exchanges of assets without intermediaries while concurrently ensuring traceability and authenticity. “Digital tokens” track an asset’s movement. These give a “certificate of authenticity” across the supply chain. While security is a concern, the challenge is solved by creating security keys. These only allow permission-based access to the information on a trading platform. The report uses a non-banking example of Everledger, which uses blockchain to track diamond certification.
Case 4: Payments
The final application of blockchain technology is for payments which currently rely on intermediaries like banks, central banks, and payment schemes. Blockchain modernises payments. It reduces time lags by allowing 24-hour real time settlements and save banks operational costs. Currently, Ripple is using this open source approach for its “real-time gross settlement system” on remittances and currency exchange. Banks like UBS, Deutsche Bank, Santander, BNY Mellon and LHV Bank are testing uses of the technology. Nevertheless, amongst the barriers to implementation are system compatibly with different organisations, cross-border collaboration between banks and the need for further proof of concept.
The report concludes by mentioning key advantages around blockchain technology: quick transactions, less friction, higher robustness, and better transparency for businesses and customers. The report is careful to highlight the challenges that arise for banks and fintech firms as they explore blockchain’s implementation. The main concern is privacy. An open ledger system implies difficulty protecting customer privacy even with strong encryption. Secondly, the question of system integration across existing payment platforms and banking facilities remains unresolved. This requires collaboration amongst many parties. Building on collaboration, regulation is an area of high uncertainty with respect to blockchain as there is no central organisation that monitors its protocols. Finally, a significant challenge exists in making blockchain widely applicable as questions remain about data limits, verification processes and transaction speed.
To access the full report on Four Blockchain Use Cases for Banks by FinTech Network, click here.