FinTechBlockchainIs 2018 the year blockchain moves into the financial mainstream?

Is 2018 the year blockchain moves into the financial mainstream?

Ivan Gowan, CEO at fintech company, Capital.com, discusses the future of blockchain in the financial sector.

Blockchain is the buzzword of the moment in the finance industry, but unlike so many other fluctuating trends we have seen, it genuinely has the potential to revolutionize the financial industry in a wide range of applications. These include accelerating the security, transparency, and speed of a wide variety of transactions and enabling “unbanked” sectors of society to access finance.

However, for the remainder of 2018, the impact of blockchain is likely to be more limited to continue its existing role in supporting cryptocurrencies such as Bitcoin and Ethereum. The primary developments will be in regulation and the underlying platform could boost blockchain’s presence in mainstream tech.

The problem with blockchain is that it still suffers from a “Wild West” reputational issue and perhaps its support of Bitcoin and other cryptocurrencies has tarnished it with the same “dodgy dealings on the dark web” brush.  This year could see its reputation improve with increased transparency and safety.

Blockchain browsers are increasingly providing an understanding of the source of cryptocurrencies and their transaction history, which will help financial institutions comply with tough anti-money laundering legislation. As blockchain continues to become more transparent, we may see an open-minded approach from the world’s regulators, which could encourage financial institutions to adopt the technology.

Currently, many banks seem keen to investigate uses for blockchain around payment services and back-office administration but are stymied over a lack of clarity around the compliance issues of integrating distributed ledger technology into their operations. A clear directive from regulators, giving banks and other financial services the space they need to innovate and adopt the technology as they see fit, would go a long way to accelerating blockchain’s transition. This year will see the first steps taken towards a more supportive, progressive regulatory environment that encourages innovation and adoption.

Regulations

As the optimism around blockchain’s potential in the finance sector continues to grow, a number of trends have emerged that adapt the technology well. For example, the payment sector is one of the obvious targets for blockchain innovators. The mechanisms by which financial institutions transfer trillions of dollars are highly regulated and yet suffer from multiple inefficiencies, often taking days to transfer assets. Blockchain could offer a much faster, more transparent platform through which payments are processed, its distributed ledger offering a completely verifiable, auditable and secure payment platform.

There are a number of businesses making initial moves into offering blockchain-based payment systems. Santander recently launched a trial cross-border payment service running on Ripple’s blockchain-based platform and in 2017, Mastercard unveiled a B2B payment platform using blockchain.

While financial services businesses are dipping their toes in the blockchain waters, the technology has some way to go before it reaches full adoption. As a muddied regulatory landscape appears to be one of the restraints on blockchain innovation by major financial institutions, 2018 brings hope that clearer regulation around blockchain will enable the sector to harness the technology.

Trade finance is another outdated process that is ripe for disruption at the hands of blockchain. Letters of Credit (LoC) and bills of lading are still used in paper format, sent by fax or post around the world. Blockchain holds particular value in this area of the finance sector because people in globally need access to the same financial data when shipping goods around the world, and blockchain can offer an independent, verified and secure shared record of this data.

Trade finance

For trade finance to truly gain the benefits of blockchain, the entire trade ecosystem needs to be digitized, and that may take time. Trade between importers and exporters is typically financed through LoCs which currently guarantee around $2 trillion of transactions, but this process is increasingly outdated and susceptible to fraud, as well as typically taking five to 10 days to process.

Recently, HSBC completed the first commercially viable, trade finance transaction using a single distributed ledger platform when a shipment of soybeans was transported from Argentina to Malaysia. Through using a single digital platform, HSBC cut the processing time for this trade to just 24 hours, in perhaps the clearest example yet of blockchain changing the trade finance game.

As regulators around the world implement increasingly strict anti-money laundering rules, it is important for financial institutions to know who their customers are.  Blockchain, with its cryptographic protections and ability to share a constantly updated record with multiple parties, could boost the capability of institutions to verify their customers’ identity, and extend financial services to those without formally recognized documentation. Not only would this make compliance with anti-money laundering rules more straightforward, it would also massively reduce the cost and complexity of managing the identity verification process.

We are currently at the beginning of the blockchain technology cycle. The technology presents multiple exciting opportunities for the finance sector, but these developments are unlikely to be transformative this year. Instead, 2018 is likely to hold more progressive regulation, enabling financial institutions to take the first really concrete steps towards integrating blockchain.We could see multiple advancements in the technology itself, such as improved transparency, less energy consumption and increased scalability, all of which will help to encourage adoption by the financial sector.

 

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