KuppingerCole Report
Advisory Note
By Bruce Hughes

Blockchain Impact on the Financial Industry

The Financial industry is estimated to spend over US$1bn on Blockchain projects over the next two years. This report provides an overview of impact Blockchain is having within the Financial Sector, the benefits that can be achieved, the challenges and the changes to expect from this emerging technology.
By Bruce Hughes

1 Introduction

The Financial Services sector has for many years been faced with complex and costly processes, intermediaries and their own legacy and hierarchical systems which when put together result in increased costs, inefficiencies and processing time. The emergence and prominence of bitcoin and its underlying technology Blockchain with open source, real-time payments capabilities and without centralized regulatory authority has sparked the Financial Services industry into exploring how Blockchain technology might be applied to mainstream banking and insurance sectors.

The features of Blockchain technology such as the distributed shared public ledger, chained blocks, digitally signed transactions and Blockchains’ integrity algorithm have the potential to significantly transform the Financial Services landscape by improving the speed of transaction execution, reducing documentation with digital distribution and effecting significant cost reduction.

Blockchain technology goes further than just a distributed ledger. Another initiative gaining acceptance is Smart Contracts that use computer protocols to facilitate, verify, or enforce the negotiation or performance of a contract or that obviate the need for a contractual clause. Proponents of Smart Contracts claim that many kinds of contractual clauses may thus be made partially or fully self-executing, self-enforcing, or both. Smart Contracts aim to provide security superior to traditional contract law and reduce other transaction costs associated with contracting.

There are a number of challenges in bringing Blockchain technology to market in the Financial Services sector such as regulatory compliance, confidentiality, data protection, scalability etc. but the technology has got gravitas; many financial organisations, groups and technical organisations are actively involved in proof-of-concepts, pilot projects and protocol setting standards.

This paper explores the initiatives underway in the Financial Services sector, the challenges faced and the benefits of adopting Blockchain within a number of the business streams of the Banking and Insurance industries.

2 Overview of Blockchain

Blockchain is the underlying technology behind bitcoin. Bitcoin is known as a “trustless” model, the participants/users are referred to as “min ...

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3 Challenges

To enable the Financial Services sector to deploy Blockchain-based distributed ledger technology with real customers, there are Regulatory, Legal and ...

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3.1 Regulatory

There is a significant cost for every bank to be compliant with growing regulatory requirements – AML, FATCA, APRA, KYC and so on. Compliance costs ...

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3.2 Legal

The following is a brief list of emerging Blockchain application areas that may have legal implications: financial transfers, multi-signature transact ...

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3.3 Innovation

Banks appear to working hard on innovation capabilities that are largely targeted on product innovation far more than process innovation which may inh ...

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3.4 Scalability

The Blockchain (with bitcoin) was designed to scale across a wide network with thousands or even millions of participants; individual nodes were not i ...

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4 Benefits

There are many benefits associated with deploying Blockchain-based technology and applications in the Financial Services sector. These range from the ...

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4.1 Lower Operating Costs

Blockchain technology can modernise, streamline and secure cumbersome administrative functions, eliminate errors, lower operating costs and associated ...

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4.2 Efficient Regulatory Reporting

Allowing Regulators read only access to the comprehensive audit trail that records any movement of assets and to be tracked back to origin, Blockchain ...

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4.3 Shortened Settlement Times

Blockchain can add speed, efficiencies, enable disintermediation and reduce transaction costs to the settlement process. It can reduce risks that cou ...

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4.4 Disintermediation of the Market

A well implemented Financial Services Blockchain solution would eliminate much of the slow and expensive post-trade and clearing eco-system. It has t ...

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4.5 Delivery vs. Payment Transformation

The majority of financial assets such as bonds, stocks, loans and derivatives only exist in electronic form. With Blockchain bi-lateral trading in-pl ...

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4.6 Lower Risk of Fraud

Because of Blockchains’ distributed consensus approach in which multiple copies of a shared single ledger are being constantly evaluated to prevent ...

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4.7 Easier Access to Trade Finance

Currently, cross-border payments remain slow and expensive. Significant savings can be made by banks and customers by bypassing existing internationa ...

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4.8 Collateral Management

Collateral management is a critical topic now because the volumes of business at stake are huge, new regulations are introducing increasing complexity ...

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5 Use Cases

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5.1 Banking Sector Use Cases

The Banking sector is very active in its pursuit of faster and less costly solutions to its largely legacy transaction processing infrastructure and B ...

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5.1.1 AML & KYC Registries

Anti-money laundering and Know Your Customer (KYC) registries are being trialled by using proof-of-stake protocols and identity management Blockchains ...

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5.1.2 Asset Registries

Blockchain technology asset registries could be deployed to manage virtually any asset class (e.g. ships, aircraft, automobiles etc.) and provide a co ...

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5.1.3 Collateral Management

Banks are investigating the use of Blockchain for collateralized trading markets including OTC derivatives, repo and securities lending.

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5.1.4 Intra Group Payments

Banks are exploring the use of Blockchain to move money country to country across their own networks for faster processing and lower costs.

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5.1.5 International Funds Transfer

The current process for cross-border payments relies on intermediaries (correspondent banks) before reaching the ultimate physical location. The proc ...

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5.1.6 Regulatory Reporting

By its nature the Blockchain is an unaltered chronological record of transaction history, delivered in a fully transparent and accessible form.

Many ...

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5.1.7 Securities Issuance and Settlement

The Securities Exchange Commission has approved the issue of public securities via Blockchain-based technology. This signals a significant shift in t ...

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5.1.8 Syndicated Lending

Syndicated Lending is a prime candidate for Blockchain technology. The current settlement time for a syndicated loan is around 20 days, heavily paper- ...

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5.1.9 Trade Surveillance

Blockchain can become a platform for trade surveillance as the focus shifts to the front office and sellside firms using Blockchain derived metadata t ...

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5.2 Insurance Sector Use Cases

Blockchain technology could also have a disruptive effect on the Insurance sector. To-date the Insurance sector has lightly embraced the technology u ...

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5.2.1 Identity Ledgers

In the majority of security breaches, hackers change identities of people or create new ones. They often create fake accounts with root level access o ...

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5.2.2 Insurance Contracts

Blockchain can facilitate the setup and management of insurance contracts using Smart Contracts technology to ensure data accuracy, correct payment an ...

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5.2.3 Risk Management

Blockchain technology could favour the emergence of alternative risk management models shifting away from risk pooling, the predominant model in insur ...

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5.2.4 Live Use Case

Everledger has developed a diamond register using Blockchain technology. Diamonds are a global problem, in terms of document tampering and fraud. For ...

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6 Changes to Expect

Financial institutions are looking into Blockchain to help them maximise operational efficiencies such as faster settlement and clearing times, better ...

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7 Summary

Blockchain technology is being taken seriously by the Financial Services sector and it may prove to be a great disrupter to the traditional ways of co ...

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