Blockchain unleashing laudable potential for the financial industry

March 30, 2017

It is vital for the finance industry to innovate and to investigate new technologies to improve their products and services. If the incumbents do not change their offering and innovate, newcomers will disrupt their business with Blockchain FinTech startups that are building new ways to handle your financials. Blockchain, or distributed ledger platforms for that matter, offer a lot of benefits for financial institutions. The fact is, it is time to change for financial institutions and benefit from the possibilities of distributed and decentralised networks and technologies.

Benefits of Distributed Ledger Technologies

There are quite a few benefits for the financial services industry to be achieved by using distributed ledger technologies (for the sake of keeping things simple, traditionally, the financial services industry is known for its legacy systems and some banks have stacks of legacy systems, some of which 30-40 years old. It is, therefore, not surprising that the financial services industry has embraced Blockchain to improve many of their out-dated systems and, a long the way, save a lot of money using a distributed ledger, banks can trade faster and cheaper and become more efficient.

  •  Instant Settlements

Transactions can be done in minutes or seconds, while currently, settlements can take up a week. With Blockchain, settlements become user-optimised, which will save a significant amount of time and money, for both parties involved. Blockchain will remove the need for a lot of middle office and back office staff at banks, as transactions settle instantly. As such, banks have an important drive to explore Blockchain for improving settlements and some banks explore internal options first, while others explore options between banks first

  • Improve Capital Optimisation

One of the main features of Blockchain is that it removes the need for a trusted intermediary and makes peer-to-peer transactions possible. When Blockchain is applied in the financial services industry, it could render useless the fee-charging intermediaries such as custodian banks (those that transfer money between different banks) or clearers (those vouching for counterparties credit positions). As such, Blockchain offers better capital optimisation, due to a significant, reduction in operational costs for banks. In addition, when banks share a Blockchain, the total costs of that Blockchain and the surrounding ecosystem might be higher than individual costs of managing transactions at a bank. However, the costs are shared among all participating banks and as such there is a significant cost reduction.

  • Reduced Counterparty Risks

When transactions are settled near instantly, it will remove a significant part of the risk that the counter party cannot meet its obligations, which could be a substantial expense for banks.

  • Improved Contractual Performance due to Smart Contracts

When banks and financial institutions are using smart contracts, it will improve contractual term performance as smart contracts execute automatically once certain pre-set conditions have been met. It is important that those smart contracts are firmly rooted in law and comply to any regulatory compliances, across jurisdictions if needed. Because of this, R3CEV had to tailor-make the smart contracts within their distributed ledger platform. Especially complex financial asset transactions can benefit from Blockchain, due to automatic settlement using smart contracts under the control of an incorruptible set of business rules.

  • Increased Transparency

Increased transparency among financial institutions and as such improved regulatory reporting and monitoring by central banks, if the regulators also have access to the blockchain.

  • Increased Financial Solutions in terms of Crisis

Increased options for financial solutions in times of crisis due to crypto or digital currencies or tokens. When the Bitfinex hack happened, the solution that they developed was compensating the customers, who all shared equally in the loss, with a tradeable Recovery Right Token (RRT). One token was valued at $1 loss and each token could be seen as an IOU. Customers could trade the token for the market price (if they did not believe in the recovery of Bitfinex or if they did and wanted to make a profit), they could exchange it for equity (which happened with nearly half of all tokens) or they would be bought back by Bitfinex for $1 some time in the future. After an initial drop in price of the RRT to $0.30, it now trades at around $0.80 and Bitfinex is back to operating as before. An interesting example of an innovative financial solution, thanks to the Blockchain. It is quite likely that without it, Bitfinex would have gone bankrupt and all customers would have lost all their money.

  • Reduced Error Handling and Reconciliation

A key feature of Blockchain is that any data recorded is immutable. Any data that is recorded on a blockchain can be tracked in real-time, leaving a very detailed audit trail. As such, it eliminates error handling and reconciliation.

The Anglo African team can assist you in unlocking the full potential of FinTech for the prosper of your business. If you have any queries, or if you would like further information, please contact us on 2331636 or by e-mail at contact@infosystems.mu.

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