Blockchain has great potential to change the face of the financial sector. In this two-part series we are analyzing some examples of different banking services that could be interrupted by blockchain.
In part 1 we talked about the use of blockchain payments, liquidation and settlement systems and fundraising. In this article we investigate securities, loans and credit, commercial finances and look beyond the hype.
By hogging traditional securities such as stocks, bonds and alternative assets and putting them on public blockchains, blockchain technology could create more efficient and interoperable capital markets.
- Blockchain removes the intermediary in the transfer of property rights, lowering the exchange fees of the assets, giving access to wider global markets and reducing the instability of the traditional securities market
- Moving securities to blockchain could save $ 17B to $ 24 billion a year in global trade processing costs
To buy or sell assets such as stocks, debt and commodities, you need a way to keep track of who owns what. Financial markets today do so through a complex chain of brokers, exchanges, central security deposits, clearing houses and depository banks. These different parts have been built around an outdated card ownership system that is not only slow but can be inaccurate and prone to deception.
Suppose you want to buy a share of Apple stock. You can place an order through a stock exchange, which corresponds to a seller. In the old days, it meant spending money in exchange for a certificate of ownership for sharing.
This becomes much more complicated when we are trying to execute this transaction electronically. We do not want to manage the daily management of activities, such as exchanging certificates, accounting or managing dividends. So we outsource the shares to depository banks for security reasons. Because buyers and sellers do not always rely on the same custodian banks, custodians themselves must rely on a trusted third party to retain all paper certificates.
Establishing and clarifying an order on an exchange involves more intermediaries and points of error.
In practice, this means that when you buy or sell an asset, that order is forwarded through an entire group of third parties. The transfer of ownership is complicated because each party maintains its own version of the truth in a separate ledger.
Not only is this system inefficient, but it is also inaccurate. Securities transactions take 1 to 3 days to settle because everyone's books need to be updated and reconciled at the end of the day. Because there are so many different parties involved, transactions often need to be validated manually. Each party charges a commission.
Blockchain technology promises to revolutionize financial markets by creating a decentralized database of unique digital assets. With a distributed ledger, rights can be transferred to an asset using cryptographic tokens, representing off-chain resources. While Bitcoin and Ethereum have achieved this with purely digital resources, the new blockchain companies are working on ways to make the real world concrete. activities, from shares to properties in gold.
The potential for interruption is enormous. The four largest depository banks in the United States – State Street, BNY Mellon, Citi and JP Morgan – each manage over $ 15 billion in assets under custody. While commissions are typically less than 0.02%, profits are derived from the simple volume of activity. Using blockchain technology, tokenised securities have the potential to completely eliminate intermediaries such as depository banks, reducing exchange fees.
Moreover, through smart contracts, tokenised securities can function as programmable actions, distributing dividends or executing share buybacks through a couple of lines of code. Finally, putting real-world resources on blockchain technology has the potential to usher in broader and more global access to markets.
Some examples of titles treated through blockchain
Polymath is one of the blockchain technology companies that wants to help migrate trillions of dollars of financial securities to the blockchain. Polymath is creating a marketplace and platform that helps people issue security tokens and implement governance mechanisms to help these new tokens meet the regulations. So far, Polymath has announced partnerships with SPiCE VC, Corl and Ethereum Capital to launch security tokens on the platform.
In the meantime, the same financial institutions are not yet firm. The Australian Stock Exchange announced an effort to replace its accounting, settlement and liquidation system with a blockchain solution developed by Digital Asset Holdings.
In June 2017, the blockchain chain focused on the company – since it was incorporated into a new company called Interstellar – has successfully orchestrated real-time transactions between Nasdaq and Citi's banking infrastructure through l & # 39; integration. Meanwhile, the CEO of Overstock has launched a trading platform called tZero, which wants to create an obscure pool with blockchain, or private exchange, for securities that could be listed on the Nasdaq.
While tokenised resources are an extremely promising use for blockchain technology, the biggest obstacle is regulatory. It is still unclear whether proprietary blockchain technology is legally binding, while tokens remain an ambiguous term that does not currently have a legal position. The regulatory and legislative orientation will be the key to the success of these nascent projects.
2. Loans and credit
By eliminating the need for gatekeepers in the credit and credit sector, blockchain technology can make it safer to borrow money and offer lower interest rates.
- Blockchain-enabled loan offers a more secure way of offering personal loans to a larger group of consumers and making the loan process cheaper, more efficient and safer
- The first securities lending in live securities occurred in 2018 with a transaction of $ 30.48 million between Credit Suisse and ING
The consumer worlds, the financial institution and the blockchain are slowly converging. Another area where such convergence has the potential to completely disrupt the way finance operates today is loan and credit.
Traditional banks and lenders subscribe to loans based on a credit reporting system. Blockchain technology opens up the possibility of peer-to-peer loans, complex scheduled loans that can approximate a loan or syndicated loan structure and a faster and safer loan process in general.
When you fill out a request for a bank loan, the bank must assess the risk that you will not pay them back. They do this by looking at factors such as your credit score, debt / income ratio and ownership status of the home. To obtain this information, they must access the credit report provided by one of the three major credit bureaus: Experian, TransUnion and Equifax.
Based on this information, banks assess the risk of default on commissions and interest earned on loans.
This centralized system is often hostile to consumers. The Federal Trade Commission estimates that one in five Americans has a "potentially relevant error" in the credit score that adversely affects their ability to obtain a loan. Furthermore, the concentration of this sensitive information within three institutions creates a lot of vulnerability. The Equifax equation of last year exposed credit information to over 145 million Americans.
The alternative loan that uses blockchain technology offers a cheaper, more efficient and safer way to provide personal loans to a large pool of consumers. With a decentralized and encrypted record of historical payments, consumers could apply for loans based on a global credit score.
While the blockchain projects in the loan space are still in their infancy, there are a couple of interesting projects out there around loans, credit and P2P infrastructure.
Example of loan improved by blockchain
One project, EthLend, raised $ 16.2 million through ICO. EthLend wants to create a decent decentralized peer-to-pe loan application on Ethereum. It works like this: when a borrower issues a loan request, a smart contract is created with the loan amount, the interest rate and the time period. The borrower is giving away token to EthLend as a guarantee. If the loan is not paid on time, the creditor receives the tokens as collateral.
The Dharma, for example, is a protocol for tokenised debt. It aims to provide developers with the tools and standards necessary to create online debt markets. In the meantime, Bloom wants to bring credit scoring to the blockchain and is building a protocol for managing the identity, risk and credit score using blockchain technology.
Although most of these projects focus on creating liquidity through loans around people's existing cryptographic assets, they are also kicking off the infrastructure that will allow greater blocking of loans through blockchain.
3. Commercial finance
By replacing the cumbersome and burdensome process of producing policies in the commercial financial sector, blockchain technology can create greater transparency, security and trust between the parties worldwide.
- The use of blockchain and distributed ledger technology (DLP) can support cross-border business transactions that would otherwise be uneconomical due to costs related to business processes and documentation. It would also reduce delivery times and reduce the use of paper.
- With around 80-90% of world trade based on commercial finance, the influence of blockchain on the market would be felt globally in all sectors using cross-border trade
Commercial financing exists to mitigate risks, extend credit and ensure that exporters and importers can engage in international trade.
It is a fundamental part of the global financial system, yet it often still works on antiquated, manual and written documentation. Blockchain represents the opportunity to simplify and simplify the complex world of commercial finance, saving billions of dollars every year from importers, exporters and financiers.
Like many other industries, the commercial finance market has suffered years of logistical setbacks due to obsolete, outdated and uneconomic manual documentation processes. The physical letters of credit, provided by the bank of one of the parties to the bank of the other party, are often used to ensure payment is received.
Blockchain technology, allowing companies to securely and digitally demonstrate the country of origin, product and transaction details (and any other documentation), could help exporters and importers to provide each other more visibility on moving shipments through their pipelines and a greater guarantee of delivery.
One of the biggest risks for the commercial parties is the threat of fraud, which is greater due to lack of confidentiality and poor supervision of the flow of goods and documentation. This opens up the possibility that the same shipment is repeatedly mortgaged, an unfortunate event that so often happens that commodity trading banks cancel it as a business cost.
Through blockchain technology, payments between importers and exporters could take the form of a token, depending on the delivery or receipt of the goods. Through smart contracts, importers and exporters could establish rules that would ensure automatic payments and exclude the possibility of lost, expired or repeatedly mortgaged shipments.
The adoption of blockchain technology in commercial finance could mean greater trust among the commercial parties, increasing global activities, while concealing confidential information such as prices and trade secrets when necessary.
It would also offer buyers more detailed information on where their goods originated and when they were shipped. In traditional systems, this information is often incomplete. But blockchain would allow consumers to be updated at every stage of the trade, further increasing trust and transparency.
Examples of commercial financing on blockchain
Probably, the time has come for blockchain in commercial finance, with more companies and banks waiting to find a solution that will stick.
Standard Chartered and HSBC are two banks that have joined consortia dedicated to the use of blockchain technology to set up commercial finance.
One of these consortia is Voltron, managed by R3 and CryptoBLK, which manages a blockchain platform for digitizing paper credit letters.
Beyond the Hype
The break does not happen overnight. Blockchain technology is still in its infancy and much of the current technology has yet to be perfected. The hard believers in the cryptocurrency believe that it will completely replace the banks.
Others think that blockchain technology will integrate the traditional financial infrastructure, making it more efficient. With global banking currently a $ 134T sector, blockchain technology and DLT technology may disintermediate major banking services.
If you have lost the first part about the potential of blockchain, you can read here the examples of banking services.
Extract originally published by CB Insights, as Blockchain could disrupt banking.
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