The need for finance has evolved from providing a physical pound in your pocket or card in your purse, where you pay at a till, to being seamlessly integrated into a new, always on, connected lifestyle. It is not surprising that banks are among the growing number of financial services giants investing in blockchain startups.
Banks essentially serve as secure storehouses and transfer hubs for value. Blockchain, as a digitized, secure, and tamper-proof ledger can address the same function. Indeed, Swiss bank UBS and the UK-based Barclays are both experimenting with it as a way to expedite back office functions and settlement.
Integrating Blockchain tech in banking
Blockchain can reduce many costs for banks, providing a boost to productivity and making it easier to offer products and services to a global clientele. They can also reduce risk in the industry, particularly in wholesale finance. Settlement times for many financial instruments take days, sometimes weeks, tying up capital and exposing industry participants to huge counterparty risks.
Blockchain promises to radically simplify many business processes, reducing risk and boosting transparency. This explains why more than 45 leading banks, including Credit Suisse, RBC and UBS, have joined the R3CEV Consortium to develop blockchain infrastructure for banking and why IBM launched the Hyperledger project, counting Deutsche Bank, DTCC, the London Stock Exchange Group, Wells Fargo and State Street as members.
Entering blockchain, the vast global distributed ledger running on millions of devices and open to anyone, where not just information but anything of value — money, equities, bonds, titles, deeds, contracts and virtually all other kinds of financial assets can be moved and stored securely and privately- and where trust is established, not by powerful intermediaries like banks, governments and technology companies, but rather through mass collaboration and clever code.
The impact of Blockchain into banking
Authentication of identity and reputation
Today we rely on rating agencies, financial data analytics firms, and retail and wholesale banks to establish trust, verify identity in a transaction and decide who merits access to the system. In contrast, reputation accrues on the blockchain itself. Blockchain technology lowers and sometimes eliminates the need for trust altogether in certain transactions.
Payment system
Payment card networks and money transfer services solve the double-spend problem, making sure that no dollar is spent twice as it moves from one person to another. The blockchain can do this by consensus for the movement of anything of value — currencies, stocks, bonds and titles — of any size or distance, dramatically reducing friction and democratizing economic growth and prosperity.
Savings
Retail and investment banks, brokerage houses, and asset management firms are the repositories of value. Large institutions use so-called risk-free investments such as money market funds or Treasury bills. The blockchain can replicate all these instruments peer-to-peer.
Loans
Retail, commercial and mercantile banks along with credit scoring and rating firms facilitate the issuance of credit card debt, mortgages, corporate and municipal bonds, T-bills, and asset-backed securities. On the blockchain, anyone could check creditworthiness before issuing, trading and settling traditional debt instruments directly, reducing friction and increasing transparency. The unbanked and entrepreneurs everywhere could access loans from peers.
Exchanges
Trading is the exchange of financial instruments for the purpose of investing, speculating, hedging and arbitraging. It includes post-trade clearing and settling. Blockchain cuts settlement times on transactions from days or weeks to minutes or seconds. This efficiency creates opportunities for the unbanked to participate in wealth creation.
Venture capital and investment
Investing in an asset or enterprise gives individuals the opportunity to earn a return, be it capital appreciation, dividends, interest or rent. Raising money normally requires investment bankers, venture capitalists and lawyers to name a few. Blockchain technology automates the matchmaking, enabling more efficient, transparent and secure models for peer-to-peer financing, recording dividends and paying coupons.
Insurance and risk management
Risk managers attempt to protect individuals and companies from uncertain loss or catastrophe not just through insurance but through myriad derivatives meant to hedge against unpredictable or uncontrollable events. Blockchain supports decentralized models for insurance, making the use of derivatives far more transparent. Using reputational systems based on a person’s social and economic capital and online behavior, insurers will have a more meaningful picture of the actuarial risk.
Accounting
Accounting is the systematic recording and reporting of financial transactions. It is a multibillion-dollar industry controlled by four massive audit firms. Yet traditional accounting practices are not keeping pace with the velocity and complexity of modern finance. The blockchain’s distributed ledger will make auditing transparent and in real time and enable regulators to more easily scrutinize financial actions within a corporation.
The Anglo African team can assist you in unlocking the full potential of blockchain and in transforming the old money machine into a prosperity platform for all. If you have any queries or if you would like further information, please contact us on 2331636 or by e-mail at contact@angloafrican.com .
