The introduction of enterprise-grade blockchain has encouraged large-scale investment into a variety of evolving protocols that meet payments systems’ threshold for privacy and permissions. In today's read, I've highlighted the most probable future use cases outside cross-border payments, obstacles that need to be overcome, and potential changes in regulation in the long term…!
To be fair, this might seem like a very far-fetched thing, but, as per my research and interviews with a couple of senior execs, we're looking at this technology gaining speed in less than 5 years!
Nearly all bank respondents are prioritizing payments solutions in the next 12 months. They say that the features of DLTs - Distributed Ledgers - are most complementary to the processes involved in running a payments' system.
A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. It is sort of like your average cloud, but with an important difference - there is no central administrator.
An example of such a technology? Yes, you guessed it right - Bitcoin
In the near term, there will be greater adoption of stablecoins - a larger subset, of which bitcoin is a part thereof. This will be driven by Bitcoin (Of course), Facebook’s Libra, and projects such as Fnality and JPMorgan’s stablecoin. Central bank digital currencies will become a reality, with the PBoC set to be the first issuer later this year. Interoperability across blockchain platforms will improve. The differences between the major blockchain protocols remain significant, but there is an open dialogue for collaboration and research into how assets on different chains can co-exist. Last year saw the deployment of multi-cloud blockchain, which is likely to result in successful cross blockchains pilots in the coming months.
Opportunity in trade finance
Most banks interviewed state that almost all options are open for the industry. They identify trade finance in particular as an area in which they expect blockchain to make significant strides within five years. DLT offers significant benefits of speed, transparency and the freeing up of capital. Several notable use cases in which bank consortia have developed capabilities in this area include We. Trade, a blockchain-based platform that was developed in 2017 by nine banks (Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale and UniCredit) to simplify cross-border trades. We. Trade was built on the Hyperledger Fabric platform and merged their trade finance blockchain platforms in 2018.
Yet problems persist in the trade finance application. One respondent notes that if they were to build a system, ‘it would only work if [we were] on both sides of the international trade and both clients agreed to use it, which does not always work. There are also issues of scale, with ‘smaller third parties’ warded off by the prospect of centralized, scaled international trade. As a result, trade finance is not as close a prospective application as cross-border payments, but one on which banks are working intensively.
Primary security issuance
Blockchain systems could facilitate the issuance of primary securities such as corporate bonds. Currently, issuance and payment of cash flows is largely tracked and performed on a manual basis. The immutable nature of blockchain transactions can help automate certain procedures in the bond life cycle via pre-determined smart contracts. For instance, issuance of bond proceeds can be done on a parametric basis, which is instantaneously activated once specific trigger conditions are met. In 2018, the World Bank issued bond-i, the first public bond created and managed via DLT. This two-year blockchain bond was managed by the Commonwealth Bank of Australia, raising $80m in its first issuance. There is likely to be similar issuance in the future.
Know-Your-Customer and identity
Blockchain can bring greater transparency and efficiency in complying with KYC obligations. Verifying consumer identities is a ubiquitous requirement across financial service providers to prevent funding of criminal activities, anti-money laundering and illicit flows of funds. As it stands though, KYC checks across institutions and jurisdictions are burdened by effort duplication. The unique digital identity of each participant in a blockchain network can help streamline authentication processes across a shared KYC infrastructure. This can create opportunities for implementing tamper checks, proof of origination and designated acknowledgement in business-to-business processes.
Success will drive wider adoption
The success of one use case is likely to drive the adoption of others across industry. One respondent says that as more of the industry ‘understand[s] what the core components are around consensus and mutability and what that single version of the truth enables or a golden ticket and how that golden ticket can then be used for other use cases, whether it's credit, regulatory reporting, cross-border payments or trade finance … then there are many additional services you can add to that. Therefore, as adoption increases, the maturing technology can help solve challenges of cross-platform interoperability.
TIIQU's technologies offer cutting-edge technology that is already transforming the way work is done. They identified the 3 main problems
Immutable anonymized credentials in the form of
Reusable verified identity