Perhaps more than any other technological innovation of recent years, blockchain has the potential to tackle and eradicate many of the problems currently plaguing the financial services industry, certainly in terms of handling trust, risk, costs and time.
Blockchain itself has been around for more than 10 years, although for most of the time since its inception in 2008, it was inextricably linked with the cryptocurrency Bitcoin. However, in recent times, it has become increasingly apparent that there are other strings to blockchain’s bow, which make it a powerful technology to reckon with.
The next two years could prove to be a pivotal period for the use of blockchain, and key to that is the way in which blockchain addresses the issue of digital trust. In the financial services sector, those who fail to see the potential gains are playing a high-risk game.
Delivering transactions, transparency and trust
Trust and confidence underpin almost every aspect of personal and business life. In the digital space, the need for trust becomes amplified. Blockchain is an open and decentralized ledger that holds time-stamped records of information in public. No one individual, organization or entity has control over that ledger, meaning it cannot be removed or tampered with – authentication is hard-wired into it. This creates an extremely efficient set of circumstances with the potential to remove layers of additional processes and therefore reduce time and transaction costs.
Across digital identities and registries, clearing and settlement, as well as information exchanges, financial organizations from all corners of the world are involved in blockchain pilots. It has a role to play in securing customer data, providing transparency of transaction histories and delivering efficiencies by breaking down operational silos.
Providing a cast-iron guarantee on the trustworthiness of data is what sets blockchain apart.
Boosting confidence can help grow markets, but just as importantly, it can help overcome the problem of digital laggards being left behind. In some countries, there is a growing digital divide, and this is not good for anyone. Service providers have to juggle online and offline channels to meet the needs of disparate customers.
Being able to visualize some of the potential applications of blockchain starts to open a greater understanding of how it can benefit businesses and customers alike.
Here are five examples of where blockchain can have a real impact:
- Instant settlement: Trading to settlement in a single, real-time transaction chain, free of settlement deadlines, margin calls and related costs, will become the norm in bilateral trades, reducing counterparty risks.
- Maintenance of land registry records: Ownership and transfer of title become unequivocally demonstrable, making the sale of assets free of false ownership claims, as well as preventing the fraudulent sale of land and property. Properties will become a lot more fungible like other financial investments, unlocking value for landowners who do not have other financial assets.
- Product provenance: Commodities such as precious stones and minerals can be marked and traced to ensure the quality of the product traded, as well as its origin. Commodity delivery can become a reality from exchanges, rather than be only cash-settled, leading to more efficiency and transparent price discovery.
- Information: Be it prices, rates, corporate announcements, they can all be published and made instantly available across the market and the larger ecosystem, taking away errors, and the need for scrubbing.
- International remittances: For millions of migrant workers, sending money home is a fundamental part of their lives. Blockchain will allow such transactions to take place instantly and at a fraction of the current cost.
Coexistence across ecosystems and value chains
Quartz blockchain solutions from TCS are aimed at helping financial institutions deliver enterprise-class solutions and create ecosystems that deliver exponential value to their customers and markets.
Systems based on blockchain cannot operate as islands. That outlook runs contrary to the very ethos of an open, distributed ledger. To work, blockchain demands a frictionless exchange of data in industry-standard formats, and complete interoperability with existing messaging systems and networks.
But the TCS approach using Quartz Gateway is to ensure that this does not require root and branch-style infrastructure rebuilds. In a modern ecosystem, like an integrated, international supply chain, not every player needs to replace their systems to take advantage of blockchain. The onus will simply be on them to integrate with the new blockchain-based system and tweak their existing system to work with it.
Coexistence is key to blockchain gaining critical mass, not just in the finance sector but in others too.
The government sector, for example, has been an early adopter in many countries and this is likely to increase further, as blockchain can help developing countries in particular leapfrog incremental technology generations. Where separate, long-standing, legacy IT systems are not commonplace in different silos of public life, there is a real opportunity to forge ahead in key areas.
We also envisage that blockchain will be a powerful force in the intersection between different verticals, like hospitals and insurance companies, and hence a cross-industry approach and synergy is needed.
Words of caution
When e-commerce first came along, some retailers were quick to see its potential, others were not. The same thing can be said of the development of omnichannel retail, too; some retailers have configured their stores, fulfillment and customer service to meet these challenges. Others have not – and they have struggled.
The same could happen to those in the financial services world who do not fully grasp the opportunities blockchain represents. But at the same time, it is important to see the pragmatic applications of this breakthrough technology and not get caught up in the hype.
Blockchain is a disruptive technology and as it evolves, markets are finding newer ways to leverage its benefits. It is therefore critical for a financial institution to adopt a solution, like Quartz, that is designed with market dynamics in mind.
Sound business process identification and design thinking are needed, which demands a greater level of domain knowledge and analytical capability, in order to ‘design for blockchain’.