Ways To Design Blockchain For Banks
As we know, the banking and financial sector is probably the one that is most likely to be challenged – or disrupted – by blockchai n technology . Today, in autumn 2017, the world of crypto-currencies, including Bitcoin, remains the only real and universal application of the blockchain. It should be noted, however, that there are more and more attempts here and there and that the year 2018 will probably see other sectors beginning to “block” but this is not the subject.
The banking sector must understand the technology to avoid being overwhelmed by the news. Of course, banks will always exist, no matter the bright future (or no …) crypto-currencies. But it is essential that the industry adopts blockchain for it to be profitable. In terms of banking specialties, we can count 5 activities that could profoundly evolve with the blockchain.
Methods of payment
Payment is, of course, the activity we think about first in view of the emergence of Bitcoin and crypto-currencies. These are not regulated by the banking sector, which can not ipso facto control the circulation of money as it usually does for all other payment methods, including cash since it is necessary to draw money from a distributor.
For the banking sector, and especially central banks, the main idea would be to create a cryptocurrency specific to a bank, a state or a region. The advantage would then be to compete with unregulated crypto-currencies. It would be a safe bet that the majority of the general public will trust more money from a bank than another created by independent developers. And this, no matter the degraded image of the banks. It sounds caricatural but how many people turned away from banks after the 2008 crisis? Personally, I do not know any, including me. Banks will always have a say.
If the national modes of settlement should not, in the short term, really suffer from the emergence of the blockchain, it is less the case for cross-border transfers. Indeed, it has been several years since start-ups such as TransferWise or Worldremit have diverted millions of people from their traditional bank to make a transfer to a foreign account. They make it possible to reduce the two main difficulties: on the one hand the astronomical banking fees for a simple transfer, on the other hand the duration of the treatment which is in general of 10 to 15 days. Thus, for 3-4 € fee, the money is sent to a foreign account in 2 or 3 days. And a simple credit card can suffice! The arrival of the blockchain in this sector would further reduce costs, which would then be close to zero, and the transfer would be almost instantaneous … Banks take the good train!
Identity verification remains a major difficulty for banks. French legislation has recently evolved to require players to control the source of funds. More generally, this practice is now globalized and known as ” knowyourcustome r” or KYC. The aim is, of course, to prevent money laundering from illicit activities such as terrorism, organized crime or drug cartels.
To date, the idea of a single register has come its way but, for obvious security reasons, it was never put in place. The confidentiality of the data is indeed essential and a fallible network would be a disaster. What can the blockchain and its cryptography do in this area?
On the one hand, it would significantly reduce the costs of identity verification through a simpler and much more secure system. Because the blockchain is inherently a foolproof system, the cost of securing data is considerably reduced. The registry would also be distributed and potentially available to all interested parties. This would put an end to the centralized system of a bank. An individual could not then have a “double banking identity”, a kind of Doctor Jekyll and Mister Hide with the good side to Credit Agricole and the dark side to Scotiabank Panama (we caricature a bit) since the two banks would have access to same register.
In the world of international trade, there is documentary credit, an indispensable document for a transaction between an importer and an exporter. The paper is the basic support (invoices, insurance and transport documents, etc.) and the procedure is long (signature, verification, control of the goods, payment …) because many people have to access the information of the the most secure way possible. However, to date, only paper allows this possibility.
With a blockchain technology developed, we immediately imagine the undeniable advantages. End of the paper, instant checks and payments because everyone can have access to the same information at the same time from anywhere on the planet. The goal is simple but complicated: to bring together a wide range of actors and banks to make the registry important. To date, the activity is the most advanced since experiments already exist. For example, the Israeli start-up Wave has set up a blockchain platform that allowed Barclays Bank to validate a trading transaction. To be continued…
Clearing and settlement procedures
When I saw these terms contiguous for the first time, I confess my ignorance. It took me a little to understand that it was a common practice and known but that we did not designate with a specific name. For simplicity, clearing allows the bank or financial institution to receive the assets corresponding to the transactions made on the markets. As for the settlement-delivery, it allows the delivery (or delivery) of a title against payment in order to fulfill the contractual obligations after the negotiation of a transaction. These are, for example, the classic stock market transactions that anyone can do daily.
However, this activity, if it is lucrative for the bank, is extremely expensive, especially, again, because of the costs associated with securing transactions. Blockchain technology could revolutionize this sector of the banking business. Indeed, the validation of a transaction takes several days due to the verification of the data. A check that would become obsolete with the blockchain, saving a lot of time and money. To date, projects exist but it will take several years to see one emerge because the work is immense.