Benefits of Blockchain
Blockchain’s promise is “the decentralization of trust, enabling value flow without intermediaries”. It allows financial transactions to be verified and cleared without the need for a trusted third party sitting between market participants. Removing intermediaries reduces costs and complexity.
The blockchain’s security and privacy protocols are based on the use of a “cryptographic hash function” — each block (of transactions) in the chain is identified by its own “hash” key. This approach was developed to prevent the “double spending” of Bitcoins. The complexity of the crypto hash function reduces the blockchain’s susceptibility to fraud.
The distributed ledger approach means that all the members of a financial market (the network) share an identical system of record, rather than each maintaining their own proprietary view of it. This replicated, shared ledger provides consensus, provenance, immutability and finality for the transactions concerned — payments, asset transfers, etc. This shared approach removes the need for reconciliations.
New transactions are only accepted for posting to the distributed ledger (through the creation of new blocks for the chain) once all the computers in the network achieve consensus as to their validity. The
verification of transactions by all network users reduces error rates and queries.
At the heart of blockchain is a new type of distributed database. This provides for the exchange of information in a synchronous and even manner, as well as allows it to be updated constantly, providing near-instant clearing and settlement. The provision of faster settlement means less risk in the financial system and so reduces the capital requirements of market participants.
The new distributed database functionality also allows code to run with the blockchain to modify data (both on and off the chain) automatically. This enables the blockchain to support self-enforcing
or “smart” contracts, allowing the automation of a
variety of business functions.
Supply chain and trade finance
• Plays directly to many of the blockchain’s principal strengths
• Mathematics is used to achieve trust between the parties to a transaction
- The current role of banks in trade transactionsis principally to accept risk, thereby allowing the
parties to trust each other.
• Allows shared access for all parties within the supply chain (buyers, suppliers, banks, logistics companies, insurance companies, customs and health authorities, etc.) to the single view of the truth
• A private, permissioned blockchain can restrict access only to those parties involved in the supply
chain concerned • The delivery and use of rich information — i.e., transactions on the chain would include invoice numbers, certificates of origin, bills of lading, bills of exchange, insurance documents, customs documents, health certificates, etc.
• “Smart contract” capabilities enable automated decision making and information handling.
In summary, the focus on blockchain has shifted and is now on understanding the technology and the value it offers, as opposed to some months ago when it was more of a collective huddle and a focus on collaboration and shared intent. However, there is still no clear emergence of where blockchain its in terms of technology, business benefits and application. “We don’t know who will own it and who will benefit so maybe the wrong group within a bank is looking at the benefit?” said one interviewee.
So where next? The banks did not plan for blockchain, but the direction is clear. Few people fully understand blockchain within banks, but everyone is asking powerful questions as to what it is and what it offers. It is not seen as a lethal threat to banking, but it is seen as disruptive new technology they have to understand more fully, and for which they must develop a strategic approach to deployment. As one interviewee said: “I actually don’t understand how we have reached such a stage of involvement in the bank without ownership or control. We need a blockchain czar.”
What is absolutely clear is the recognition that there is a need to separate the hype from the reality and from an executive and strategic perspective, to take a fresh look at what blockchain offers banks, and what banks must do to adopt it.
Source: ACI Worldwide
