Ripple Blockchain and Payments Report 2020: from rippling to spreading out

| 11-11-2020 | Carlo de Meijer | treasuryXL

Ripple, the blockchain payments platform, recently launched its third annual “Blockchain in Payments Report 2020: From Adoption to Growth”. The survey that was conducted in the August-September period this year amongst 854 respondents from payment services providers in 22 countries gives us some interesting and positive insights in the global adoption of blockchain-based payments and digital assets. Ripple believes that the COVID-19 pandemic has accelerated positive change in the global payments industry towards accepting blockchain technology.

Present challenges in payments

The respondents in the survey highlighted blockchain’s increasing role in payments. They are nowadays confronted with a number of challenges limiting their growth possibilities, including finding international partnerships, pre-funding accounts, accessing working capital, and building payment technology. According to the respondents blockchain technology could be the solution that would enable payment providers to overcome these challenges.

State of Adoption

The report found that the blockchain industry is in its final phase of adoption. Survey results show that the majority of the survey respondents are adopting blockchain for production use. It shows that 34% of participants are in the production of some solution with blockchain technology. 24% of the participants expect to complete production and move on to a pilot test and a proof-of-concept (POC) within the next two years. The rate of adoption across business types differs slightly, with digital banking/fintech businesses leading. They are followed closely by retail banks, and money transmitter or payment providers.

In emerging markets, 37% of participants are in production to implement blockchain technology. Asia and the Pacific (APAC) is thereby the leading region with 41%, followed by Latin America (LATAM). Emerging markets are recognizing that responsible usage of blockchain and digital assets can “unleash tremendous potential for their economy”. Both will drive greater financial inclusion and economic growth. Mature markets stand to benefit as well.

Use Cases

Of the respondents 59% is in production or near production for blockchain-based payments related use cases. Slightly over one-third of the report’s respondents currently use blockchain technologies for sending or receiving payments for customers.

But a key point revealed by the Ripple report is the diversification in use cases by companies using this technology. The survey showed that blockchain is now scaling beyond just payments. 98% of respondents running a payments blockchain POC have also deployed the technology for non-payments use cases – the most common ones being supply chain management (62% in production) and trade finance (51% in production). This demonstrates that blockchain can be leveraged across the enterprise.

Cross border Payments

Blockchain technology is not just adopted for in-country uses. As blockchain payments solutions continue to solve for many of the pain points related to cross-border payments, adoption has steadily grown. In fact, real-time settlement for cross-border payments is seen as a business necessity for many, as well as in demand by consumers and businesses.

Digital Assets

Another key finding in the report is that digital assets are increasingly being considered for facilitating payments, especially when connected with blockchain technology. As there has been an increase in education and blockchain experience in the industry, both payment providers and consumer confidence in digital assets have risen. Business interest in digital assets has grown sharply as early adopters look to increase the speed in payment settlements. Across the board, the report found openness to more digital asset types whereby various whereby  cryptocurrencies, as well central bank digital currency and stablecoins were considered. Almost all respondents (99%) said that their respective institutions would consider using digital assets to instantly process cross-border payments or as a medium of exchange (up from 94% recorded in 2018).

“Companies view digital assets as a means to accelerate expansion to other countries and currencies. Interestingly, 82% of respondents not yet in pilot or proof-of-concept responded with the second highest interest in leveraging digital assets in cross border payments. Early adopters recorded the highest interest. Respondents are seeing the success of early adopters and looking to kick start their own adoption—with a large majority open to leveraging more digital forms of currency.” Ripple Report

For those making cross-border payments using digital assets, financial inclusion, reduced cash usage and availablity of liquidity are strengths that rank relatively high as well, but still below the transaction features of speed and security that make blockchain so popular for domestic payments.

What is driving adoption?

There were four key benefits mentioned driving blockchain adoption, namely, improved data quality, increased data security, cost savings, and business growth.

For digitally-led businesses, transparency, security and networking are key benefits of adopting digital assets in payments. Those who are not digitally-led especially value factors like speed. Many of these institutions surveyed adopted blockchain technology to increase speed to make cross-border payment transactions (40%), achieve high levels of reliability (27%), improve data transparency and realize long-term operational cost savings (32%). Interestingly, respondents from Latin America stood out by ranking growth as the highest benefit, followed by cost-savings, whereas more mature markets ranked cost savings and data transparency as the greatest benefit of blockchain adoption. Other key contributors to the success of blockchain are a variety of blockchain technology providers that are facilitating easier implementation through APIs, hosted services, and standardization.

Growth drivers

Ripple’s report identified that blockchain adoption is key to successful growth strategies for financial institutions. Nearly half of the respondents have said that they view blockchain technology as the fuel for business growth. Nearly four out of five (79%) of blockchain-based payment businesses reported growth in 2020, despite the impact of COVID. Blockchain solutions continue to scale as businesses introduce new services to existing customer segments or expand existing services into new regions. 44 percent of respondents have said that they have recorded strong business growth in the past year, citing innovation in payment tech as a key growth driver.

Early adopters of blockchain-based payment solutions have witnessed the highest levels of growth year over year. In the past 12 months, early blockchain adopters reported nearly twice as much business growth over other respondents. 45% of survey participants that were processing digital transactions, recorded a large amount of growth. The market opportunity for innovators in fintech/retail banks and those located in emerging markets is quite significant with expectations of strong, continued growth. First movers in blockchain payment adoption and less mature markets are likely to see the most growth going forward according to the report.

Obstacles/Barriers

Among the main obstacles to blockchain adoption, participants mentioned a lack of regulatory clarity, the amount of investment required to implement the technology, and security. This year, the report also revealed that price swings experienced by the top two digital assets (Bitcoin and Ether) influenced respondents’ perception of volatility, which posed an issue. However, the results show that digital assets are increasingly becoming an important part of the development of the blockchain industry especially in emerging markets. Less than half of the respondents in Latin-America and APAC worry about price volatility, possibly these regions use digital assets as a hedge against their own local fiat currency.

Forward Thinking

“What the Blockchain in Payments 2020 report makes abundantly clear is that blockchain is no longer an exotic, emerging technology. It is a mature technology that is being battle-tested and continues to advance, both in terms of use cases and adoption. And if 2020 is any indication, blockchain will play an increasingly vital role in payments in the years to come.” Ripple Report

What is also clear is that blockchain proof of concepts (POC) are becoming a thing of the past. Today, blockchain initiatives are “leap frogging into production, moving swiftly along the adoption curve towards the late majority phase”. Not only is growth indeed possible for blockchain and digital assets initiatives, but familiarity and positive sentiment continue to spread as well, accelerating the adoption growth path.

Ripple is also spreading out!

 

Carlo de Meijer

Economist and researcher

 

 

 

Corporates: Caveat IBOR!

03-11-2020 | treasuryXL | Enigma Consulting |

Many of the world’s leading benchmark base rates are about to change; this could impact your business in unexpected ways.

Since Roman times, the phrase ‘caveat emptor’ – let the buyer beware – has been used in agreements as a warning that a lack of due diligence could come back to bite you. For today’s corporate treasurer it might instead be more relevant to use (with apologies to the linguists out there) ‘caveat IBOR’.

For the past 40 years, IBOR has been the benchmark used to determine the interest rates applied to a myriad of financial products. All this is about to change: starting on 31st December 2021 many of these rates will cease to exist and be replaced by ‘Risk-Free-Rates’ (RFRs).

The potential impact of these changes is often seriously underestimated. Corporate companies need to prepare today to be ready for banks wanting to discuss changes to existing contracts in the coming months.

 

The 4 to 6 months ahead of us are arguably the most critical period in the transition away from LIBOR. The time to act is now.
 – FCA July 2020

 

Why should I care about the IBOR transition?

It is highly likely that your organisation will be affected by the IBOR transition. Most corporate organisations underestimate the impact, thinking that the ‘only’ thing that will change is a base rate and its calculation method. Before you join their ranks, take some time to reflect on the following:

  • The IBOR will cease to exist, starting on the 31st December 2021 and be replaced by Risk-Free-Rates (RFRs) with a different basis for calculation
  • These changes will impact financial (e.g. bond, (intercompany) loan, (multi-currency) credit facility) contracts as well as commercial contracts with an IBOR related ‘late payment clause’
  • This in turn will impact processes in the Treasury functions, with knock-on effects to supporting departments, Legal, IT systems, accounting, and tax reporting to name just a few
  • IBOR transition is progressing at a different pace across jurisdictions and financial products (e.g. loans, bonds, and derivatives), adding to the complexity of managing the transition

In the coming months you are going to be approached by your bank(s) to discuss changes to contracts maturing after 2021. To be prepared for these discussions, it is essential that you have a solid idea of what the repercussions of these changes will be on your organisation.

From IBOR to RFRs: a brief history

For the past 4 decades, IBOR (interbank offered rates, including LIBOR and EURIBOR) have been the benchmark for lending, hedge contracts, current accounts, valuation models etc. The (L)IBOR is calculated by processing hypothetical borrowing transactions that are submitted by a few ‘panel’ banks.
In 2012, the LIBOR scandal came to light: it was discovered that since 2008, panel banks had been colluding to illegally manipulate the rates. This set in motion that regulators, central banks, and market participants started a search for a safer alternative to the LIBOR. In 2017, the Financial Conduct Authority (FCA) announced that it would not compel or persuade panel banks to make LIBOR submissions after December 31st, 2021.

As a direct result, LIBOR term rates (1m, 3m, 6m, 12m) for USD, GBP, CHF, JPY, EUR will cease to be published as per December 31st, 2021. Other benchmarks such as EONIA and EURIBOR are similarly subject to an interest rate benchmark reform and it was decided to also discontinue the submission of EONIA after December 31st, 2021. Additionally, other benchmarks, such as JIBAR (ZAR), SIBOR (SGD), SOR (SGD) and Euroyen TIBOR (JPY) are undergoing comparable reforms[1]. See the sidebar (at the bottom of this article) for additional IBOR related details.

To minimise the possibility of fraud in future, global working groups have defined a new reference rate and calculation system. As a result, IBOR will be replaced by secured or unsecured transaction-based alternative Risk-Free Rates (RFRs) by the end of 2021. These new interest rate benchmarks are determined on the basis of transactions[2] and are therefore significantly more robust and resistant to manipulation.

Covid-19 will not buy you any time

After the worldwide outbreak of the Covid-19 virus, the world has changed rapidly. Uncertain times have arrived with a looming global economic recession. While many expected the pandemic to postpone the deadline, this does not to appear to be borne out by reality.

UK regulators have indeed postponed the deadline for the cessation of new issuances of GBP LIBOR-referencing loan products maturing after 2021 to the end of Q1 2021, instead of Q3 2020[3]. However, it is widely expected that the deadline for migrating existing LIBOR related contracts to alternative risk-free benchmarks will remain unchanged. Indeed, the FCA even emphasised in July 2020 that the LIBOR deadline is not going to change and that “The time to act is now.”

ISDA agreements and IBOR transition

On October 23, 2020 ISDA (International Swaps and Derivatives Association) finalised the protocols and other documentation by which outstanding derivatives contracts which reference LIBOR can be transformed in order to work with the new RFRs[4]. The FCA has repeatedly urged market participants from all sectors – sell side, buy side, non-financial, to ensure they are ready for the end of LIBOR by adhering to the protocol that ISDA is producing[5].

How will the IBOR transition impact you?

At a basic level, your corporate organisation’s existing IBOR-based interest rates will be replaced by new RFR-based rates. As these depend on a different underlying valuation methodology, any place in the organisation that currently relies on or makes use of an IBOR-based rate could potentially be impacted:

  • Corporates have a variety of products with financial contracts that refer to an IBOR related benchmark. These can be bond agreements, loan agreements, cash pooling agreements, (multi-currency) credit facility agreements, derivatives, intercompany loan agreements and many other instruments. In particular, larger organisations active across multiple regions in the world with more complex non-Euro instruments will be impacted
  • Commercial contracts with e.g. ‘late payment clauses’ with charges involving an IBOR related benchmark will also be impacted
  • Processes and other aspects related to these agreements and contracts across the Treasury functions (such as Corporate Finance, Risk Management and Cash Management & Working Capital) will need to be reviewed, and changed if impacted: Legal, IT systems and interfaces, reporting, accounting (e.g. hedge-accounting), Tax, policies, procedures, valuation models will all require attention
  • Interim milestones intended to smoothen the IBOR transition will lead to a cessation of the issuance of new LIBOR referenced products maturing after 2021. (For example, this will be the case for GBP LIBOR referenced bonds, loans, and derivatives; from Q2 2021, new GBP denominated issuances for these products will already refer to the alternative RFR.)
  • An additional complication is that the IBOR transition is progressing in different stages across different jurisdictions and different financial products
  • And, quite simply, there are many aspects that are as yet unknown, amongst which:
    • what the impact of applying hedge accounting to IBOR referenced instruments will be
    • whether and when alternative reference rate term structures will be available and for which products
    • how compounding daily rates over time will be handled in the absence of a term structure for cash management purposes
    • whether fallback language will be available
    • how liquid the market for (L)IBOR rates will be towards the end date of 31st December 2021
    • whether and when EURIBOR and other IBOR critical benchmarks will be discontinued

The magnitude of change is well-recognised by banks and financial institutions, and they are demonstrating an increasing sense of urgency to address contracts maturing after 2021. Be prepared for a call from your bank in the coming months!

What should you do to prepare?

As the deadline approaches, you will need to know your level of exposure and impact in order to prevent surprises. What will the impact of the IBOR transition be on your TMS and ERP systems, your credit facilities, bank loans, cash pooling, bonds, ISDA agreements and intercompany agreements? What impacts will these have on your processes and supporting systems? Which complexities will need to be managed?

Having this information at hand will enable you to be a proper sparring partner for your banks when they renegotiate contract terms.

Depending on the complexity of your contracts, the IBOR phase out could substantially affect your corporate organisation. Prevent unnecessary loss by preparing yourself, following this three-step approach:

1. Assess impact

The first step you should take is to analyse the IBOR related contracts in use throughout your organisation. Determine which contracts have an IBOR related component and the size of the exposure. Once you have assessed the complexity of your IBOR related contracts, analyse the impact on related areas (ranging from Tax and Legal to IT systems, and procedures, reporting, accounting (e.g. hedge-accounting), and the like).

2. Plan actions

On completing your impact assessment, create a detailed action plan. Define a project team governance to manage this action plan and the status of the transition across different areas, business lines, and geographical locations. In particular, take care to ensure external resource availability regarding e.g. Legal counselling and system provider experts, as demand for these specialists will rapidly increase as the IBOR transition deadline approaches.

3. Act and implement

Step three is the implementation of your action plan throughout the affected areas of your organisation. In this ‘Act’ phase it is important to maintain the conversation with external parties, such as banks and system providers. It is also of vital importance to support the implementation across all relevant business lines and functions, maintaining support for go-live readiness in line with the defined action plan and deadlines.

 

A golden opportunity

The good news is that there is still time to assess the impact of the pending IBOR changes on your organisation and to act upon it if needs be. The sooner you have an idea of the potential consequences for your organisation, the sooner you will be able to mitigate these. This understanding will also give you more leverage in the coming discussions with your bank(s).

Moreover, the IBOR phase out may bring a golden opportunity for corporates to re-evaluate the current contract agreements and look for better deals. Consider this: during the IBOR migration contracts are in fact ‘renegotiated’ and banks will need to come up with a new offer. Will you take that offer as a corporate client? That all depends on your level of understanding and preparation.

IBOR may well be a golden opportunity, but it is up to you as a corporate treasurer to seize it by acting rather sooner than later! Corporates: Caveat IBOR!

If you are interested in how we can help you to assess your IBOR related contract complexity or if you want to understand how we can support your corporate organisation in the IBOR phase out transition, you can contact us on:

[email protected] or look at www.enigmaconsulting.nl

Daniel Pluta

 

 

 

[1] A more extensive overview of IBOR benchmarks and related alternative risk free rates can be found on the website of The Investment Association (in cooperation with Linklaters): Table Interbank Offered Rates (IBORs) and Alternative Reference Rates (ARRs), version September 24, 2020

[2] Source: Interest rate benchmark reform – overnight risk-free rates and term rates, Financial Standards Board, July 12 2018

[3] Source:  Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans, Bank of England, March 25 2020

[4] Source: ISDA launches IBOR fallbacks supplement and protocol October 23, 2020

[5] Source: LIBOR transition – the critical tasks ahead of us in the second half of 2020, Financial Conduct Authority, July 14 2020

SIDEBAR

Selected Highlights of IBOR Phase Out Related Facts[1]

General

  • LIBOR term rates (1m, 3m, 6m, 12m) for USD, GBP, CHF, JPY, EUR will cease to be published per December 31st, 2021
  • Overnight, transaction based “alternatives” for these currencies are already live: ESTER (EUR); SONIA (GBP); TONAR (JPY); SARON (CHF) and SOFR (USD)[2]
  • EONIA is based on Ester + 8.5 basis points (since October 2nd, 2019). EONIA will cease to be published per December 31st, 2021
  • As of October 2019, EURIBOR is published as a hybrid rate (mix of actual transactions + panel consultation) and will continue to be published. EURIBOR is expected to be continued into the foreseeable future, however discontinuation is still a possibility. At the time of writing, it is uncertain if and when this will happen
  • Various consultation groups are assessing reform proposals and alternatives, such as:
    • Working Group on Sterling Risk Free Rates regarding GBP LIBOR
    • Alternative Reference Rates Committee (ARRC) regarding USD LIBOR
    • Working Group on Euro Risk Free Rates regarding EONIA and EURIBOR
  • Financial institutions have performed a global impact assessment on their financial contracts and have created IBOR migration teams
  • Across different jurisdictions and different financial products, the IBOR transition is progressing in different stages
  • Calculation methodologies across different alternative RFRs could differ and a term structure is still missing for most of the alternative benchmarks

ISDA (International Swaps and Derivatives Association)

  • On May 14, 2020 a summary of the response to the “ISDA 2020 Consultation on How to Implement Pre-Cessation Fallbacks on Derivatives” was published. The majority of market participants support a combination of pre-cessation and permanent cessation fallbacks without optionality or flexibility in the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol[3]
  • On July 21, 2020 Bloomberg and ISDA announced that Bloomberg Index Services Limited (BISL) had begun calculating and publishing fallbacks that ISDA intends to implement for certain key interbank offered rates (IBORs)[4]
  • ISDA launched the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement to implement the new fallbacks for legacy and new derivative contracts on October 23, 2020. From effective date January 25, 2021, all new cleared and non-cleared interest rate derivatives that reference the definitions will include the fallbacks[5]

SIDEBAR

Central Counterparty Clearing houses

  • On July 27, 2020 LCH, Eurex Clearing and CME Group implemented a discounting switch from EONIA to Ester for cleared OTC EUR denominated derivatives related to Price Alignment Interest (PAI[6]) and Price Alignment Amount (PAA) regarding Settle-to-Market collateral[7]
  • On October 19, 2020 LCH, Eurex Clearing and CME Group implemented a discounting switch from EFFR to SOFR for cleared OTC USD denominated derivatives related to Price Alignment Interest (PAI) and Price Alignment Amount (PAA) regarding Settle-to-Market collateral

USD LIBOR transition and Alternative Reference Rates Committee (ARRC)

  • The ARRC issued a deadline on September 30, 2020, in order to establish RFP processes to facilitate the eventual publication of (a) forward-looking term SOFR rates and (b) the ARRC’s recommended spread adjustment for transition of legacy contracts[8]
  • From September 30, 2020 onwards, new syndicated business loans must include ARRC hardwired fallback language
  • From October 31, 2020 onwards, new bilateral business loans must include ARRC hardwired fallback language
  • From December 31, 2020 onwards, no new Floating Rate Notes referring to USD LIBOR and maturing after 2021 should be issued

GBP LIBOR transition and Working Group on Sterling Risk Free Rates

  • New bonds issuances maturing after 2021 and referring to GBP LIBOR should be ceased after Q1 2021[9]
  • New loans issuances maturing after 2021 and referring to GBP LIBOR should be ceased after Q1 2021
  • Initiation of new linear derivatives linked to GBP LIBOR that expire after 2021 should cease after Q1 2021

 

[1] The list of highlights does not have the intention to give a complete overview of all events and only reflects recent developments

[2] A more extensive overview of IBOR benchmarks and related alternative risk free rates can be found on the website of The Investment Association (in cooperation with Linklaters): Table Interbank Offered Rates (IBORs) and Alternative Reference Rates (ARRs), version September 24, 2020

[3] Source: Summary of Responses to the ISDA 2020 Consultation on How to Implement Pre-Cessation Fallbacks in Derivatives. A pre-cessation announcement would be an announcement that the IBOR benchmark is no longer representative of the interbank lending rate. A cessation announcement would be a public announcement that the administrators of different IBOR benchmarks have or will cease to provide IBOR benchmarks

[4] Calculations published by BISL include the adjusted RFR (compounded in arrears), the spread adjustment and the ‘all in’ IBOR fallback rates for the following IBORs across various tenors: the Australian Dollar Bank Bill Swap Rate (BBSW), the Canadian Dollar Offered Rate (CDOR), Swiss franc LIBOR, EURIBOR, Euro LIBOR, Sterling LIBOR, HIBOR, Euroyen TIBOR, Yen LIBOR, TIBOR and US Dollar LIBOR (see https://www.isda.org/2020/07/21/bloomberg-begins-publishing-calculations-related-to-ibor-fallbacks/ )

[5] Source: ISDA launches IBOR fallbacks supplement and protocol October 23, 2020

[6] PAI is the overnight cost of funding collateral. It is debited from the receiver and transferred to the payer to cover the loss of interest on posted collateral. Imagine an Interest Rate Swap, cleared through a CCP such as LCH, Eurex Clearing or CME Group. At the beginning of the life of the swap the PV is close to zero, so worth little to either party. Over the life of the trade the value of the floating leg will vary leading to an NPV to one of the parties. The change in this NPV from day to day is what Variation Margin is, calculated and moved by a CCP on a daily basis.

[7] LCH Discounting Switch Ester and SOFR

CME Discounting Switch Ester and SOFR

Eurex Clearing Discounting Switch Ester and SOFR

[8] ARRC USD LIBOR Transition Timelines, New York Fed, version September 9 2020

[9] UK RFR Roadmap | 2020-21 intermediate update, Bank of England, September 2020

Partner Interview Series | This is a must read story about Enigma Consulting

27-10-2020 | treasuryXL | Enigma Consulting |

Get inspired by the extensive and catchy story of Robert-Jan Wekking about Enigma Consulting. Robert-Jan takes you into the warm corporate culture, mission, expertise, innovation and their continues investment in knowledge with great examples.

Enigma Consulting is a revolutionary knowledge hub in the field of Payments, Digitisation, Risk & Compliance and Treasury. They are a connecting factor in the financial sector thanks to our consultants’ engagement with their clients, both banks and companies and solution providers.

AN INTRODUCTION TO

Robert-Jan has more than 25 years of experience in payment transactions and he advises corporate clients in the areas of treasury, risk management and bank connectivity.He understands the solutions in the market, both from the B2B and B2C perspective.

Robert-Jan switches easily between executive and operational level within companies and the banking sector, as he easily combines his strategic vision with substantive process and product knowledge. He has a wide network with contacts at all (international) banks, which can speed up the implementation of corporates connectivity with their banks.

We asked him 11 questions. Let’s go!

 

INTERVIEW

1. Tell us more about Enigma Consulting and its mission

Enigma Consulting has in-depth knowledge of all ecosystems that are relevant in payments, transaction value chains and financial markets. Transactional connectivity and digitization increase the prosperity and well-being of consumers, companies and the public sector and thus serve a social interest. Our mission is to contribute to the development of efficient digital transaction traffic and to ensure that this is done in an innovative, sustainable, honest and effective manner with controlled business operations. Combined with a correct attitude and behaviour, this contributes to the translation of legislation and regulations into ethical business operations and a better market position. We follow developments closely, research, analyse and make connections. Our consultants reflect, structure and help organisations to achieve their goals.

2. What is the core topic Enigma Consulting aims to address and how does it differentiate it from the other players in the market?

Digitalization is all about the exchange of data, whether these are payments, information, identities, contracts, signatures or any other regular consumer or business transactions. The complexity of exchanging transactions is constantly increasing; regulations, fraud and data protection are just three of the factors impacting this complexity.  On the other hand, innovative technology is continuously providing easier interaction between data, leading to better and integrated business propositions and making client journeys faster, more friction less and safer.  This is exactly in this domain where Enigma operates.  We leverage our in-depth knowledge of payments and transactions to advise and implement.

We distinguish ourselves from other players by looking at the end-to-end value chain, not only from the viewpoint of efficiency but also with a perspective on regulations and compliance. We understand the guiding laws and regulations and can translate them into practical advice to make sure that our clients remain compliant. We recognize that laws and regulations applying to financial institutions are becoming stricter and that attention is now also shifting towards corporates.

Our legal consultants are specialised in transaction and data related legislation, and we have strong connection with for example DNB and AFM in relation to our guidance of our clients.

Our consultancy practice focuses on the  financial-,  corporate- and retail sectors, hence we understand the complexities affecting those areas. With our knowledge of the ecosystems and  vendor solutions we play the matchmaking role between individual client wishes and the solutions available in the market.

This combination of end-to-end view, legislation and compliancy, working in different sectors, and the matchmaker role gives us a unique position. The fact that we not only advise but also take responsibility for  implementations during the past 20 years, makes us a trusted and recognized partner for our clients.

3. Why choose customers for Enigma Consulting?

Our knowledge of payments and other transaction processes is often the starting point for customers to reach out to us. Our capability to advise and implement solutions from an end-to-end perspective is the basis for our interaction with our customers.  Additionally, customers also appreciate the fact that we are able to advise at a strategic level, but at the same time are pragmatic enough to look for feasible and not theoretical answers.

We have strong relationships with a number of our clients, some even stretching back over more than 20 years. This is something we foster, not only by delivering more than what is expected, but also by working closely together. For instance, our Treasury Barometer is an example where we cooperate with the Rabobank, whilst at the same time we are participating in a number of their projects.

At the end, it all comes together with trust, in the quality of delivery, in our people and in the overall relation. This is how we ensure that we will be shortlisted again the next time.

4. What has been the biggest challenge for Enigma Consulting regarding customer projects so far?

The most challenging projects are when we are asked to take end-to-end responsibility for delivering a complete project. Quite often, this means that we have a team onboard and the client is looking at us as lead consultant to get the job done. A good example is the setup of a complete bank payments infrastructure. Apart from the fact that these assignments are exciting and demanding, it is always challenging to make it happen in an environment with its own complexities.

For our individual consultants, stepping into a new assignment always has its own challenges.

Customers ask for us for different reasons, and our consultants have to quickly adapt to start advising the client. This means not only understanding the clients’ business, but primarily building trust relations with the client and their stakeholders. Hence for every consultant the adaptability towards the new environment is always an important challenge.

For myself personally, I am proud to have led a number of strategic programs, like SEPA, Instant Payments and iDIN.  Besides building completely new products, the key challenge is always to work and build bridges between internal and external parties (Banks, DNB, governmental bodies) with sometimes opposing objectives. Working with all these parties and ultimately developing a new product is what makes me happy and proud of my role as consultant.

5. Can you tell us in what sector you see the most innovative developments regarding payments and how does Enigma Consulting react to these?

One of the most exciting aspects of payments is the continuous innovation in the field. However, it is never a revolution but more an evolution. An example are the digital currencies. I believe that in the long run, these might become as important as, or even replace, the current way of paying. But it will take many years to get there. Where it started with the cryptos and Facebook’s Libra, the central banks are now seriously embracing it.

Additionally, the technical transitions to APIs and SaaS, Open Banking and Instant are ingredients for completely new business innovation. Through API and SaaS, corporates can select best in class software modules and integrate them, rather than select single platforms that will still sub-optimise their process. The introduction of Instant Payments in Europe will ultimately change the way the treasurer needs to forecast and manage their accounts.

In the B2C or C2C world, the client journey will continuously improve, seamlessly and friction less, with data integration as a key element.

Through our assignments, we are constantly in the middle of this innovation. For example, we are the leading consultancy firm in the Netherlands for supporting FinTechs, cryptos and payment software companies with their PSD2 application. Our role in digital identity and Mobility as a Service provides us with insights in yet other areas of innovation.

In order to keep all our consultants informed, we have a weekly meeting with our consultants to discuss the latest trends.

We also leverage this knowledge to assist our clients with their questions around innovation. For this purpose, we have initiated the Enigma Innovation Lab, an accelerator environment to answer client specific questions around innovation, vision building or technical solutions by injecting are our own knowledge combined with our ecosystem of solution providers and subject matter specialists, all facilitated by various methodologies like Design Thinking.

6. Do you experience differences in the world of payments before COVID19 and the time we live in now? What are the differences?

The differences are not that when you look at the regular payment products themselves. But we do see COVID as a steppingstone for digitalization. E-commerce and e-commerce payments have shown significant growth and people are spending increasing amounts of time online. The volumes of payments facilitated by Payment Service Providers are going through the roof.

Also “Cash is King” is the phrase that everybody uses, but this should now be “Digital Cash is King”. Volume of physical cash is dropping significantly, being taken over by contactless payments.

I believe these are just indicators for a bigger change, which is the acceptance of the consumer to step into a full mobile journey.

Customers are now more familiar with working with a cashless wallet and seem also to be willing to adapt faster to other contactless, digital processes. Examples are registration, ordering food and payments in restaurants (for example via QR). But also using mobile apps to order your groceries. Clearly, this has already been taking place for many years, but I believe that COVID has accelerated this transformation through necessity.  People are therefore more willing to change their attitude. What is interesting is whether this transformation will continue, or whether people will step backwards to the old normal or step forward to a new normal.

For the retail sector and corporates, before COVID they already had to understand how to become more relevant in the mobile cashless digital world.  COVID is demanding corporates to speed up this thought process.

7. How does the future of payments look like in your perspective? And how will it change the world?

Digital currencies will be an important element in our future, adopted stepwise, and will be overlooked by market systems and regulators. There will be a continuous drive for integrating payments in the client journey, seamless, frictionless and supporting the Internet of Things. Hence payments will be a key enabler of future growth towards the digital world. Digitization is also very attractive for fraudsters, money laundering etc, as your counterpart is not always visible anymore. The need for trustworthy digital identities will be an important building block for this roadmap.

At the same time, the pressure of fraud, regulations and compliance will shift from banks to other parties (corporates) in the end-to-end value chain. Where banks are currently the gatekeeper, corporates will have to integrate this responsibility in their own business processes.

Hence the roadmap to digital, whether it is digital payments, or any other data transaction, will demand continuous change from all parties in the value chain. This will be a stepwise change, but fast enough to need to keep an eye on it.

8. What has been the biggest success for Enigma Consulting?

The biggest success for Enigma is that we have made a transformation from payments “only” to understanding the full transaction, risk and data value chain. For example, we have made a transition from bank payments to treasury payments and risk processes, but also from payments to compliance, and to integrated transactions and data models.

During this period, we have also changed our internal organisation.  We have been running a number of Young Professional Programs. These next generation talents bring us a more diverse view of the world, which makes our proposition to the market stronger and our internal culture more diverse. As a result, we believe that we have the foundation for supporting our clients, now and in the future, with a passion for payments and transactions.

9. How does Enigma Consulting keep on innovating and stay one step ahead of its competitors?

Our ambition is to be recognised as a though leader in the domain of payment and transactions. Investing in knowledge is the basis for our current and future advisory services.

This means that we continuously invest in gaining and sharing knowledge with our consultants and clients. We have organised this in a number of ways.

We have introduced the so-called Theme Lifecycle within Enigma. When we expect a theme becomes relevant for our business, now or the future, we start a workgroup to progress this theme from idea through different stages. It starts with writing a one pager based on study and analysis, called the exploring stage. We validate the readiness for every next stage (exploring, campaigning, harvesting) so that we invest time in those subjects that also become relevant for the market. All our consultants participate in one or more themes, which helps keep them engaged with innovation and market developments.

Every week we organise meetings to discuss news and articles. On turn, every consultant is responsible to select a number of articles to be discussed during this half hour meeting.

For our clients, we have regular Breakfast and Brains meetings to share our insights and to have open discussions on a specific subject. The success is that clients that even might compete in a certain sector, are always willing to learn and share from our and other clients’ experiences.

Finally, we also participate in and cooperate with FinTechs. We support them by leveraging our network of solutions, whilst their innovative ideas are a good source for future improvements, leading to a broader ecosystem that benefits our clients.

10. We are heading to the end of 2020, can you give us an outlook on the scheduled developments for the upcoming year?

The best outlook would be that we leave COVID-19 behind us, however I think that COVID will strongly influence the developments and investments in 2021. There are a number of scheduled developments which will impact corporate clients. Corporates will have to put their capacity in the IBOR Migration.  Also, the transition to XML messages will impact the operating architecture and bank connectivity of corporates.  In parallel, the transition to instant payments including batches will have to be put on the calendar of the finance function.

And in parallel, it is recommended to continue to look at the potential of open banking and further integration of payments data in the corporate business processes. An example is how payment data can improve the risk profiles of insurance companies.

In summary, enough subjects to keep an eye on. Sitting still and waiting is not an option.

11. A great initiative is that Enigma Consulting supports charity projects, what kind of charity projects does Enigma Consulting support, why and how?

The why should never be a discussion, the real discussion is what you can do. One of our activities is the ZEPA challenge.  Our consultants do like sports, and a lot of them love to cycle. When the transition to SEPA was going on, some of our consultants took the initiative for this challenge: cycling from Zeist to Paris in 24 hours. We have done this now 3 times, and a number of our clients’ employees have also participated.  This year’s event was cancelled, but we are already “ready” for the next challenge. There is not a fixed charity goal, the last charity was support for the education of young refugees.

Apart from the above, we have a warm partnership with “Goede Doelen” charity organisations in Netherlands and facilitate a free payments helpdesk for them.

It is of crucial importance to us to participate in an open and honest society, in which diversity and inclusion are critical. This is important for our own culture, as as an organisation we benefit from our consultants and they, in turn, foster these values in their personal lives.

Smart working with blockchain-based smart contracts

| 12-10-2020 | Carlo de Meijer | treasuryXL

Smart contracts are one of the most popular and talked about subjects being built in the blockchain industry. As processes are increasingly digitalised, it is becoming necessary to find a way to make reliable, digital business agreements. Smart contracts are a great alternative for replacing traditional contracts, that are often complex, slow and expensive.

Smart contracts are gaining widespread use and ease of creation. Today, smart contracts are available to optimize many financial and business processes, thanks to the contribution of blockchain consortia such as Hyperledger.

This blog discusses some of the current opportunities and challenges facing the adoption of smart contracts.

What are smart contracts?

A smart contract is a self-executing, self-enforcing protocol which is governed by its explicit terms and conditions, which stores and carries out contractual clauses via blockchain.

To enter into a blockchain based smart contract, the parties first negotiate and agree to the terms of the agreement before memorialising the terms (either in part or entirely) in smart contract code that are stored inside the blockchain.

Smart contracts allow the performance of dependable transactions without the engagement of third parties. It is a decentralised method, which means that intermediaries at the moment of confirming deals are not required.

Smart contracts automatically execute when predetermined terms and conditions are met, based on the rules it was programmed to do.

Smart Contract Key parts

Smart contracts consist of a number of essential parts: signatories, subject and specific terms. First of all the signatories i.e. two or more parties that use the smart contract and give their final ‘go forward’ regarding the proposed terms via their digital signature. Second the agreement’s subject itself that is limited only within the smart contract’s environment. Third the specific terms of the smart contract. They have to be described in detailed mathematical terms and implemented in a programming language that is compatible with the smart contract’s blockchain. Based on these terms, the contract will execute itself.

Smart Contracts and Blockchain

The key to these contracts is the decentralised network known as blockchain. Smart contracts use blockchain technology to verify, validate, capture and enforce agreed-upon terms between multiple parties.

Smart contracts on the blockchain allow for transactions and agreements to be carried out among anonymous parties without the need for a central entity, external enforcement, or legal system. The transactions are transparent, irreversible, and traceable.

Blockchain is the perfect environment for smart contracts, as all the data stored is immutable and secure. The data of a smart contract is encrypted and exist on a ledger, meaning that the information recorded in the blocks can never be lost, modified, or deleted.

Where could smart contracts be used?

Smart contracts can be used to perform functions in a great variety of industries. Whether regulatory compliance, contractual enforceability, cross-border financial transactions, property ownership, home buying, supply management, material provenance, document management and many other applications.

Today, smart contracts are relevant in areas such as trade in digital financial assets with legal transfer of ownership, banking and credit services, logistics processes, tracking the origin and path of goods, decentralized storage, and use of renewable energy.

Supply chain management
An area where smart contracts could be used is in supply chain management. Making supply chains more transparent via smart contracts is helping to smooth out the movement of goods and restore trust in trade. Smart contracts can record ownership rights as items move through the supply chain, confirming who is responsible for the product at any given time. The finished product can be verified at each stage of the delivery process until it reaches the customer.

Insurance
Smart contracts could also be used in the insurance sector. This sector nowadays lack automated administration. It can take months for an insurance claim to be processed and paid. Smart contracts can simplify and streamline the process by automatically triggering a claim when certain events occur. Specific details could thereby be recorded on the blockchain in order to determine the exact amount of compensation.

Mortgage loans
Smart contracts could also simplify the mortgage process. The terms of a mortgage agreement are based on an assessment of the mortgagee’s income, expenditures, credit score and other circumstances. The need to carry out these checks, often through third parties, can make the process lengthy and complicated for both the lender and the mortgagee. By cutting out the middle men, parties could deal directly with each other.

Financial industry
The most widespread use of smart contracts remains in the financial industry, as money and accompanying documents become electronic. In the financial services sector  the opportunities for smart contracts include, for example, payment processing, clearing/settlement of financial instruments, trade finance, as well as regulatory technology such as streamlined ‘know your customer’ certification.

Smart contract platforms

There are nowadays a number of smart contract platforms. They could be subdivided on the basis of technology, end-user (banking, government, supply chain, real estate, insurance etc.) and region (Europe, North America, Asia or rest of the world oriented).

Their differences are in programming languages, blockchain consensus, the cost of maintaining an application’s smart contracts, differences in blockchain security, transaction confirmation speed, trust in the main network nodes, and much more.

Ethereum was the first blockchain platform to develop codes specially made for dApp development. Their appearance has prompted the arrival of many other platforms including names like Aeternity, Cardano, Qtum, Stellar, and Waves.

Ethereum
Ethereum, the well-known global blockchain platform was the first to introduce smart contracts to a more wide-spread crypto community. Ethereum is still the most advanced platform for coding and processing of smart contracts. This open-source platform has one of the largest networks of developers available, and due to this, it can keep up with the continually changing environment in the blockchain industry.

Aeternity
Using a hybrid of Proof-of-Work and Proof-of-Stake model, Aeternity offers a method for powering so-called Turing-complete smart contracts that are capable of being executed off-chain. Thereby they deliver both privacy and security.

Cardano
Cardano is a decentralised blockchain and cryptocurrency project. Like many crypto projects, Cardano is open source. The Cardano platform is working towards implementing smart contract functionality with the Goguen update this year. This should bring their smart contracts a step further to ‘smarter contracts’.

Qtum
Qtum is an open-sourced blockchain application platform, where security and flexibility are two of the most essential components. The Qtum team has worked intensively to assure that smart contracts can be executed safely, making the platform perfect for businesses and their enterprise clients. Qtum uses Proof-of-Stake and a Decentralized Governance Protocol.

Stellar
Stellar, unlike many crypto coins, was created by developers for developers. That means that it is capable of handling extremely complex smart contracts. For simple smart contracts, Stellar offers a clean, easy-to-use alternative for developers that want to build smart contracts delivering greater efficiency.

Waves
Waves is an open blockchain project, strongly focusing on dApps and using Web 3.0 technology. To keep their smart contract project simple, Waves offers many online courses, and other methods of support for developers that may want to work with Waves. Like many smart contract projects, Waves uses Proof-of-Stake.

Benefits of Smart Contracts

Smart contracts provide many benefits over traditional contracts for a wide range of industries. In theory, they are more efficient and trustworthy than traditional contract law, and are also thought to offer better security as all actions are recorded and verified. As a result they may reduce unnecessary costs and time expenditure while enhancing transparency.

Greater efficiency and speed
Smart contracts are able to improve the efficiency and speed with which commercial arrangements are carried out.  Smart contracts are automated so there is no need to spend a lot of time on the paperwork and also correcting the errors that are manually written in the documents. They can be executed in minutes, for a fraction of the cost, from wherever the involved parties are, and without the need for lawyers.

Accuracy and transparency
As the codified terms are fully visible and accessible to all relevant parties, there is no way to dispute them once the smart contract is established.  This facilities complete transactional transparency and may removes the likelihood of manipulation, bias or error. This, in turn leads to decreased monitoring costs and risks of opportunistic behaviour.

Trust
Smart contracts may provide parties with a degree of trust. They automatically perform transactions following predetermined laws, and the encrypted documents of these transactions are distributed over participants. The information on the contract and the terms of the contract is straight. Specific validation by everyone and the immutability of the work guarantee that the smart contract can never more be broken.

Security
Smart contracts are also thought to offer better security as all actions are recorded and verified. Blockchain transaction documents are encrypted. That makes them extremely difficult to hack. Security features can also be integrated into a smart contract to automatically generate backups and duplicates in the event of damages, data losses to the original one or hacks.

Challenges

Smart contracts could also bring a number of challenges that may prevent more massive adoption.

Human errors
Like paper contracts, smart contracts could still experience fraud, because of human errors. Smart contracts are codes, and these codes are written by people (coders). As such, there is a (high) chance of a smart contract code having many bugs. They can be delayed, intercepted and corrupted. Some mistakes have proven to be very costly.

Confidentiality, security and privacy
Unlike traditional contracts, all transactions executed via a smart contract, are propagated across all of the nodes in the network.

This may create privacy issues, particularly when the accounts of the parties are associated with known entities. Even when the parties rely on pseudonymous accounts, certain identification techniques can be used to discern the identities of parties who transact with a particular smart contract.

Lack of engineering experience
As smart contracts begin to proliferate, there will be a need for new types of cryptography experts, and forensics experts, to verify software code and to translate the code into human-readable form. A lot of engineering expertise is required to make perfectly operational smart contracts. Experienced coders however are hard to find, and costly.

 Legal and regulatory challenges

There are also a number of legal and regulatory challenges, which are preventing the more widespread utilisation of smart contracts.  Smart contracts lack a clear legal status. There is no official government regulation that applies to them.

Interpretation and enforceability
If there is a dispute about whether a smart contract accurately memorialised the parties’ intentions or whether one party has breached the contract, the parties may still bring legal proceedings or engage in alternative dispute resolution processes.  As contract law varies between different jurisdictions, so too will the enforceability of smart contracts.

Jurisdictional issues
Smart contracts also raise jurisdictional issues. Because blockchain operates as a decentralised ledger, smart contracts can be formed and accessed anywhere across the globe.  They do not reside in any one location, but exist across multiple locations at the one time.

Yet existing laws are jurisdiction-based. The differences in laws across jurisdictions can be highly problematic, and may result in incongruent rights and responsibilities, and confusion regarding the consequences if there is a contract violation.

What steps are needed?

Comprehensive/clear picture of business/operational practices
Vague contracts allow space for argument. This can lead to claims, disputes, high legal expenses, project and operational delays, as well as invoicing and payment delays. To prevent these situations (as much as possible) a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms in order to automate contracts. Participants need to agree on “specific data,” which may include the exact time zone to be used along with the specific time, the location and what that means for contractual terms and fulfilment. Legal departments drafting contracts need to consider details like this in advance.  

Creating Logic Parameters
Parties should also ask themselves a number of questions. What data source will the companies use for their contract? And what are the tolerances? Furthermore, what type of rounding will the smart contract act on? These types of questions must be discussed prior to translation for smart contract codification.

Legal contracts must contain terms on parameters including sources, tolerances, frequency and time frames of data capture methods among others. Specificities such as location, time, and rounding decisions inform logic parameters around data. These impact how contracts translate into code. Incongruent readings can’t be automated.

Clear, non-conflicted contract terms
Problems may arise when an older contract that is used as a starting point has irrelevant or inapplicable clauses that have been forgotten to be removed. This may result in terms and conditions that are either disparate or contradictory. The code of a smart contract cannot be made to execute contradictory terms.

Smart contracts execute exactly what they are programmed to execute and are incapable of judgment. Rules of engagement, particularly those regarding fee calculations and billing practices, must be able to be encoded from clear, non-conflicted contract terms.

Anticipating Data Glitches and Gaps
There will always be technology glitches and failures that may result in data gaps or errors. These occasions can be reasonably anticipated and protocol for them can be incorporated into both natural language and smart contracts.

With agreed-upon terms for these events, a smart contract can be programmed to navigate data tolerances and triggers that automatically recognize when a glitch or failure has occurred. It can then execute the correct predefined action, agreed upon upfront by both parties resulting in zero delays or downtime to the relationship.

Going forward

The potential market for smart contracts is great. Smart contracts can actually change the way agreements are made across various industries.

It however will take some time and require more development before it reaches its mainstream approach. We cannot implement smart contract technology en-masse, as more experimentation is needed at this point. At the moment, smart contracts are still a technology in its early stages. And existing challenges esp. the legal and regulatory ones should be solved first.

That asks for smart thinking|

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain becomes a reality: growing adoption

| 23-09-2020 | Carlo de Meijer | treasuryXL

Early July I wrote my blog Blockchain and Interoperability: key to mass adoption. There I concluded that “we may say that blockchain seems to be at the threshold of widespread acceptance and adoption”.

This conclusion was confirmed by Deloitte’s Third ‘Global Blockchain Survey 2020’ studying the investment and development trends in blockchain technology. This Survey showed that attitudes toward blockchain have obviously, and measurably, shifted in a positive way. It showed progress in the adoption and implementation of real-world blockchain solutions across a variety of businesses and sectors. Organizations have increased their investments, demonstrating their commitment to blockchain technology. But what about COVID-19?

Deloitte 2020 Global Blockchain Survey

Deloitte’s 2020 Global Blockchain Survey shows the results of a poll amongst almost 1500 senior executives and practitioners from 14 countries that was conducted between February 6 and March 3 this year. Those interviewed had at least a “broad understanding of blockchain, digital assets, and distributed ledger technology (DLT)”.

Main findings

The Survey observed a change in attitudes towards blockchain, with more positive feedback. One of the main conclusions was that blockchain is “solidly entrenched in the strategic thinking of organisations”.

According to the Survey “organizations appear to be more committed than ever” to blockchain. Compared to Deloitte’s 2019 Global Blockchain Survey, there was a significant increase in the interest and implementation of blockchain across businesses. This is further confirming blockchain’s maturity as a valid solution for many institutions and enterprises.

Blockchain already is an integral and vital tool upon which—and with which—new, innovative solutions are being created, and the Survey shows confidence amongst respondents that blockchain solutions will gain even greater traction within the global business community over the next 12 to 24 months.

General consensus, as a key takeaway from the report, was around acceptance of blockchain’s scalability, which continues to increase. 88% believe blockchain is highly scalable and will eventually become mainstream.

Strategic priority for organisations

But let’s look somewhat deeper into the various results. One of the main conclusions is that blockchain technology is increasingly becoming a true strategic priority for organisations. This was affirmed by 55% (2019: 53%) of respondents saying blockchain is critical and in their top-five strategic priorities, with 66% of executives forecasting investments of $1million or more in the next 12 months.

More than four in five respondents (83%) in the Deloitte Survey believe they will lose competitive advantage if they don’t adopt blockchain (2019: 77%). 63% said it was vital to move forward in the blockchain space.

Blockchain initiatives: real-world use cases

In terms of applications, increased advances of large-scale blockchain initiatives are occurring, such as blockchain-based financial infrastructure to simplify global money movement and commerce, as well as distributed ledger technology (DLT) for trade finance and blockchain track-and-trace platforms, among others.

The Survey also revealed increased blockchain initiatives in daily processes. These smaller-scale examples of blockchain adoption, such as title transfer and protection, patient data storage and retrieval, and more efficient voting or food sourcing tracking are “proving to be just as transformational in the way people live and the way work gets done”, according to the Survey.

Adoption of blockchain-based solutions

Adoption of blockchain-based solutions is increasing across organisations, with technology, media and telecommunications (TMT), financial services and non-food manufacturing industries leading the trend.

The number of companies around the globe now driving to intensify their blockchain (and digital asset) integration is speeding up according to the recent Survey. As to what drove them to innovation, 86% of respondents cited their executive teams saying that there are compelling business cases for the use of this technology.

This year, almost twice as many firms surveyed have integrated blockchain solutions compared to 2019. The Survey discovered that 39% of respondents had already implemented blockchain into their operations (2019: 23%), clearly showing this technology is gaining traction. The production figure was even higher at 46% for organizations with more than $1 billion in revenues.

When it comes to preparations for a blockchain-based future, 82% of respondents said they are already hiring new staff with blockchain expertise or plan to do so within the next 12 months (2019: 73%).

Where are corporations using blockchain?

According to the Survey, the top five use-cases for blockchain mentioned by the respondents include digital currencies (33%), data access and sharing (32%), data reconciliation (31%), identity protection (31%), and payments (30%), while track- and trace and asset protection, were adopted by between 27% and 33% of respondents.

Proliferation of digital assets

An interesting part of the Survey is the growing acceptance of digital assets. The Survey unveils the growing role and evolution of digital assets in the near future. 70% of respondents consider the pace of regulatory changes for blockchain and digital asset solutions as very or somewhat fast.

“Digital assets are now enabling enhanced commercialisation models across industries and geographies.” Deloitte Survey

Nearly 89 per cent of those surveyed believe that digital assets will be very or somewhat important to their industries in the next three years.

“Our survey confirms what we see in the marketplace — a proliferation of digital assets used as a means of exchange, a store of value, digital representations of specific assets, or equity in a company,” Rob Massey, partner, global and US tax leader for blockchain and digital assets, Deloitte Tax LLP

Digital assets can be used for a variety of purposes. Respondents who considered digital assets in their business models were most focused on enterprise controlled (64%) followed by general asset-backed (63%), while cryptocurrency comes at number three, with 59%.

A majority of respondents from each country, 83% of the respondents (and even 94% in China) said they strongly (or somewhat) believe digital assets will serve as an alternative to, or even replacement for, fiat currencies in the next five to ten years.

“While our survey revealed great faith in digital assets’ future importance, it shows no clear or specific consensus about exactly how those assets will be used or the specific role they will play—a kind of incoherence that we have seen in blockchain use cases in the past and today,” Survey

A vast majority of respondents expressed confidence that they will meet their regulatory burdens. Some 80% claimed to be very or somewhat prepared to deal with the regulatory aspects of digital assets (KYC, Tax, GAAP/FAS, etc.).

Other areas

The Survey also deep-dived into the issues of global digital identity and consortia and governances.

The Survey explored the use of global digital identity. 90 % of respondents believe global identity will be very or somewhat important in their future blockchain and digital assets strategies. Among the applications of digital identity, global financial transactions (29%) and data privacy (27%) stand to benefit the most.

The 2020 Survey studied the issues faced by enterprises when joining a consortium. It revealed leadership perspectives around joining consortia and an increased understanding of the benefits of consortia to help address regulatory and other complexities of implementing blockchain.

These same leaders thereby shared concerns about how consortia are run, how decisions are made, and how profits are shared across memberships. The most prominent challenges for 41% of the respondents of joining a consortium were the inability or incompetence  to create fair and balanced governance rules and poorly defined roles and responsibilities of members.

These concerns can be exacerbated further based on geographic, namely cross border, and industry-specific governance.  I described that in detail in one of my earlier blogs “Blockchain consortia need good governance: but how?”.

Blockchain and the regions

While global adoption has increased, blockchain adoption proved to be uneven in different countries. Countries’ averages are varying wildly whereby China turned out to be one of the biggest supporters of blockchain and digital assets.

While in China 59% of the respondents stated that their companies have already incorporated blockchain into production, this figure is almost twice as small (31%) in the US. The APAC region stood at 53%. Other countries are also outpacing America in terms of blockchain integration. Throughout the European Union including the United Kingdom, blockchain is witnessed as a matter of priority with multiple approaches.

Countries worldwide also follow multiple approaches. Asia Pacific responses revealed a widespread recognition of blockchain’s strategic value, while China expressed concerns over cross-border implications. Germany exhibited substantial activity around crypto regulation.

The UK market is seeing ongoing and increasingly mature activity across key sectors with several substantial projects now live, typically among industries reliant on complex, multiparty, and international supply chains. UAE is evolving as a digital assets hub with a consistently growing ecosystem. While Israel is emerging as a leader in blockchain innovation.

Sceptics

However, sceptics about blockchain remain. It is important to note that 54% of respondents said that blockchain is overhyped, compared to last year’s 43%. This has all to do with remaining barriers. The respondents claim there are still a number of organisation or project barriers that prevent them from adopting and implementing blockchain.

According to the Survey the top barriers of blockchain adoption include: implementation: replacing or adapting an existing legacy system (35%), concerns over sensitivity of proprietary information (34%), potential security threats (34%) an lack of regulatory clarity.

As companies develop use cases and adopt digital assets, the most significant problem areas are new tax and regulatory compliance structures. A patchwork approach, different regulatory treatments, or improperly defined parameters could threaten the underlying advantages of these blockchain solutions. But companies are not impressed by this, and some 80% claimed they were prepared to deal with regulatory aspects of digital assets.

Along with regulatory uncertainty, 58% of respondents said cybersecurity was also impacting their blockchain and digital asset strategy. Meanwhile, 21% said cybersecurity was the only hindrance to advancing their strategy.

But what about the impact of COVID-19?

According to the KPMG COVID-19 Survey that was published in August, blockchain investments fell by 63% because of COVID-19. The report compiled by KMPG International and HFS Research, is drawing on a survey of 900 technology executives from different organizations on the Forbes Global 2000 list of the largest companies in the public that have more than $1 billion in annual revenue.

According to the report roughly 40% of the executives indicated that they had moved to entirely cease investment into the emerging technology initiatives. Distributed ledger technologies (DLT) slid from the largest emerging technology sector with an average investment of $18 million in March/April,  to the second smallest with $6.5 million in May/June.

7% of the executives said COVID-19 had significantly changed strategic priorities for emerging technologies. In the earlier survey, the priorities were cost reduction and improved brand value. Since May/June, emerging technologies are now assessed based on survival.

The report also found that 59% of the executives believe that the pandemic created an impetus to accelerate digitization initiatives. After the heavy funding cuts for blockchain that occurred in 2020, global companies are looking forward to the technology as a way to regain a competitive advantage in the business landscape after the Corona crisis. They predicted that blockchain will be one of the five emerging technology sectors that will see increased investments from enterprises over the next 12 months.

Blockchain won’t be cut across the board. Projects that are close to production or already live are less likely to be put on hold if they can show reasonably quick returns. Blockchain tools that can help improve a company’s visibility into its own supply chain are the sorts of candidates that could attract budget. Applications that combine blockchain with other more “survival oriented” emerging technologies could also do better.

Blockchain is a reality already!

The Corona-crisis will undoubtedly have negative impact on blockchain for some time. Companies will turn their interest towards less ambitious, more targeted projects.

But the substantial portion of respondents of the Deloitte Survey who already have blockchain in production in their organization highlights the growing maturity. There is however still substantial work to be done. The report does note that “it remains an iterative process, with bumps remaining in the road”.

“As companies adopt and implement blockchain solutions, and as leaders increasingly accept blockchain as a fact rather than a future breakthrough, there remains an underlying level of uncertainty about current and future applications of blockchain technologies.” “We don’t expect that organisations will sort this all out right away – this process will continue to take time, depending on industry, maturity, risk tolerance, and budgets.” Deloitte Survey

But the sentiment at companies towards blockchain has definitely changed. This technology is increasingly becoming a reality for many of them, not just in the future but already!

 

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

Blockchain and Interoperability: key to mass adoption

| 13-07-2020 | Carlo de Meijer | treasuryXL

Blockchain‘s  potential for improving business processes, providing transactional transparency and security in the value chain, and reducing operational costs is obvious for many. Notwithstanding this the expected mass adoption failed to happen up till now. What has been holding blockchain back?

In fact, there have been several concerns in recent years preventing this mass adoption. But by far the most widely recognized problematic issue is that of interoperability. Or, more accurately, the lack of it. In this blog, I will not go into the details of the various tools that can be used to enable interoperability. There are many reports that give in-depth description. I will look at recent developments in the interoperability area, the various offerings and real word interoperability use cases that should give an idea of what we may expect.

Siloed blockchain ecosystems

While blockchain was conceived as a decentralized technology, individual blockchain networks are not inherently open and are not able to communicate properly to each other. There are a large number of blockchain projects, all of which have different characteristics – such as the type of transactions, hashing algorithms, or consensus models – and which focused on a particular area. The problem is further deepened by different networks and financial institutions running completely different governance rules, blockchain technology versions and regulatory controls. This has resulted in a series of unconnected blockchain ecosystems operating alongside, but siloed from each other, preventing the industry from reaching its full potential.

“We would be left with a scattered collection of siloed blockchains, each supported by a weak network of nodes and susceptible to attack, manipulation, and centralisation.” ConsenSys research paper

What is interoperability?

The term blockchain interoperability is increasingly being talked for some time now. It not only means the possibility that disparate blockchain systems can communicate with each other. Above all it is the ability to share, see, and access information across different blockchain networks without the need for an intermediary – like a centralised exchange. So, blockchain projects that want to implement interoperability into their platform aim to create an ecosystem that will enable different blockchains to easily communicate with each other. The vision of interoperable enterprise blockchains thereby rests on a number of functionalities and abilities including: integration with existing systems, initiate transactions on other networks, conduct transactions with other chains, transact between deployments on the same chain by integrating apps and making it easy to switch one underlying platform for another.

Why is interoperability critical?

It is easy to see why interoperability for blockchain is not only desirable, but above all critical, in a world where enterprises depend on ever-greater levels of collaboration and interaction. In fact, interoperability is crucial in any software system – it simply won’t work to its full potential if it can’t work with other software. It is the only way to realise the full promise of enterprise blockchain and get the most out of their blockchain investments. Interoperability would enable smooth information sharing, easier execution of smart contracts, a more user-friendly experience, the opportunity to develop partnerships, and the sharing of solutions.

Where is interoperability needed?

Especially in areas where the value chain is important, such as supply chain, trade finance, healthcare, aviation, etc., one blockchain network will simply be unable to provide all the needs for any given transaction. This asks for multiple networks, each providing specific value, and proper communication so that data from private networks can be routed to other relevant networks for transactions “without having to establish a one-to-one integration”. “Everyone is dependent on physical goods’ ability to move across all participants in the global supply chain with minimal friction. We need the same ability to move a digital asset from one blockchain to another without creating redundant data or a new market for intermediaries. This is why blockchain interoperability is critical.” Rasmus Winther Mølbjerg, Director, Deloitte, Denmark.
Blockchain’s characteristics allow disconnected supply chain management systems to interoperate securely without too high investment costs. Because of the pressing need for supply chain transformation, leveraging these characteristics ensures that blockchain can be useful and effective in the real world.

Interoperability Studies: WEF Report

In the meantime a number of interesting papers covering the interoperability issue have been. The most ground-breaking one is that of the World Economic Forum (WEF). The WEF described blockchain technology as being “balkanised in silos.” In collaboration with Deloitte, the WEF this year released a report on “Inclusive Deployment of Blockchain for Supply Chains – A Framework for Blockchain Interoperability”. The report covers several models, concepts, approaches and best practices for blockchain interoperability. It should help organizations understand the importance of interoperable blockchains and outlines a decision framework to support their development and execution. “Interoperability and compatibility issues are key to address in a world after the coronavirus pandemic.” “The challenge of interoperability is not only a technology problem, but even more so a problem in terms of governance, data ownerships and commercial business models.” Nadia Hewett, Blockchain and Digital Currency Project Lead at the World Economic Forum

Blockchain interoperability approaches

Broadly one could distinct two main blockchain interoperability approaches: APIs and network-of networks model.

‘Mashup’ APIs
Blockchain networks and solutions could be brought together for an organization via a so called “mashup” application. They only have to interact with one consistent application programming interface (API) and not an API for every network. This mashup application can include a variety of capabilities defined in data models and smart contracts, but fundamentally, it will serve as “the glue that joins various networks together”. However, APIs do not presuppose a governance structure, which makes them flexible and expedient but also a poor choice for organizing interoperability in the long run.

Network of networks model
The most efficient and scalable way to build interoperability is through the joint effort of establishing industry standards as well as identifying a network of networks structure that industry networks can converge around. An organizations blockchain network actually represents a ”web” of interconnected networks. This architecture would allow an organization to connect and transact with multiple solutions, not restrained to a single network, and open up a market of interoperability across solutions. By unlocking the power of the peer, organizations can use their peer to connect into multiple blockchain networks via channels. This significantly reduces the complexity and optimizes an organizations interaction with different blockchain networks. This network of networks model for interoperability continues to gain momentum, especially as we see natural blockchain hubs emerge.

Blockchain interoperability solutions

The majority of interoperability solutions up till recently were mainly focused on chain interoperability across public blockchains, thereby using crypto-directed tools like sidechains (or relay chain), notary schemes and timed hash-locks. The focus however has increasingly shifted towards solutions for interoperability between private networks and/or between private networks and public blockchains. One way to solve interoperability is to use a separate blockchain as a bridge to facilitate cross-communication. Essentially, this is a third blockchain that sits in the middle of the two blockchains and maintains a cryptographically secured timestamped ledger of the transactional and messaging activity between the two. Interoperability tools that are used range from hub and spoke, decentralised finance (DeFi) and general purpose bridges. Another way to facilitate interoperability between systems is with off-chain or middleware systems. This so-called non-blockchain interoperability approach uses tools including atomic swaps, oracles and state channels.

Blockchain Interoperability projects

A growing number of interoperability projects have entered the scene to try to bridge the gap between the various blockchains. Their aim is to facilitate interaction between networks and ensure the concept of decentralisation is fully realised. Depended on the interoperability solutions these can be used for activities like decentralised asset exchange and decentralised message exchange. Interesting projects are Chainlink, Cosmos, Hybrix, Polkadot and Wanchain. Other examples include Aion, Ark, ICON, Transledger, and Overledger.

Chainlink
Chainlink is a decentralised oracle network, an interoperability solution to facilitate secure and trustless communication between all disparate blockchain systems. The resources mostly revolve around off-chain data to trigger smart contracts and settlement outputs like established payment systems and cloud backend. This standalone function is important for many blockchains that don’t have to interact with other blockchain protocols but do need access to externals inputs and outputs. Chainlink nodes are able to format messaging and data from public APIs into a readable format for smart contracts. These nodes can connect to any API, whether it is a blockchain, enterprise system, Web API, or IoT device. Chainlink is sometimes working in combination with other interoperability protocols. Chainlink has already announced partnerships with Polkadot and Ethereum to provide off-chain data to their networks. Wanchain is integrating with Chainlink to provide off-chain  data to their on-chain smart contracts.

Cosmos
One of the most prominent interoperability solutions is Cosmos, very much focused on its Cosmos SDK platform. Cosmos aims to act as an ecosystem of blockchains that can scale and interoperate with each other. Cosmos is a smart contract platform that has prioritized interoperability as a critical component of their blockchain design. Their architecture is based on the so-called ‘hub-and-spoke’ system whereby a series of ‘spoke’ chains connect to a ‘central’ hub by means of inter-blockchain communication. Cosmos is heavily reliant on validators to provide interoperability. It makes use of the so—called Byzantine fault tolerant (BFT) consensus algorithm and uses both member chains and Peg-Zones for existing chains to improve the overall ecosystem. Their end goal is to create an ‘internet of blockchains’ – a network of blockchains that can communicate with one another in a decentralised way. The implementation of the IBC (Inter Blockchain Communication) protocol is scheduled for this year 2020. Cosmos will use the IBC protocol to allow communication between a central hub and the chains linked to the network, also called Zones. It will first only concern the interoperability of chains built on top of Cosmos SDK platform.

Hybrix
Hybrix is an open-source cross-chain solution aimed to make it easier to make cross-chain transactions, and also increase the level of ease for developers who want to offer multi-chain platforms. For that purpose Hybrix is developing an “HY” token. Each token represents an identical block of a chain and can be used to reconcile data across the entire crypto complex. Tokens form as bridges that allow transactions to be conducted on either a single chain or multi-ledger systems. Since Hybrix utilizes existing languages to build its protocol and interface, there’s no need to acquire new coding languages to use its system. Hybrix has amplified its capacity to adapt 27 major blockchains and more than 400 tokens.

Polkadot
Another project is Polkadot, which facilitates transactions and data exchange, aiming to promote interoperability between blockchains. It uses the DPoS algorithm and employs required validators which can lead to a certain degree of centralization. The concept at Polkadot is quite similar to that of Cosmos. It allows communication between the relay chain and the parachains of Polkadot’s network. By using Parachains and Bridgechains, this approach enables to transfer both value and data. Additionally, scalability will be taken to a whole new level by running multiple parallel chains. This is a bit different from other projects which are looking to bridge the gap between blockchains as well. The launch of their mainnet is planned for this year (2020). As for interoperability, there are no precise timelines regarding their protocols for chains  implementation.

Wanchain
The Wanchain network allows interoperability between very heterogeneous blockchains like Bitcoin, Ethereum and EOS. Wanchain aims to link and facilitate communication between the different blockchains as much as possible. Wanchain is already functional and allows communication and exchange of value and data between public and private blockchains through storeman nodes and the T-Bridge framework. The storeman node system combines two cryptographic concepts that ensure security and confidentiality of network transactions: secure multi-party computation and “Shamir’s secret sharing”. The Wanchain project recently announced the integration of EOS blockchain and the implementation of the T-bridge framework. Wanchain’ s next challenge is to fully decentralise its network. This is planned to be finalised in 2022.

Other interoperability offerings

And there are many more interoperability projects including Aion, which is working towards integrating artificial intelligence in its consensus model. Or Ark which uses Smartbridge to link existing chains, and will also allow for the transfer of both data and value. And the Loom Network, which uses its DPoS blockchain Basechain to connect and transfer value among several blockchains, including Bitcoin, Ethereum, and Binance. A rather unknown but interesting player is Block Collider. Its proof-of-distance (PoD) consensus algorithm ensures that ledgers can operate with one another. It is also the only project that, in its current form, requires any validators.

Real world interoperability use cases

During 2020 we have seen a number of interesting real world interoperability use cases.

AVA Network (Defi Apps)

The AVA network is an open-source platform for building and deploying decentralized finance (DeFi) apps and enterprise-grade blockchain solutions that can be run in one interoperable, highly scalable ecosystem. AVA has officially released the codebase of its AVA blockchain platform to the global community. Interoperability between different DLT networks has thereby been built into the AVA protocol, using the Avalanch consensus protocol. The AVA platform has coupled this protocol with a network model that enables the system to span permissioned and permissionless networks, making AVA a self-serve platform for new blockchains and digital assets. Instead of one network with thousands of tokens, the AVA ecosystem is one platform with thousands of subnetworks and tokens on each subnetwork . AVA’s infrastructure allows anyone to build their own private, public, permissioned or permissionless blockchain networks or subnetwork, so-called “subnets.”

Kava Labs and IRISnet (decentralised finance)

Another  real world  example is Kava Labs that has teamed up with IRISnet in order to provide a technology foundation for facilitating the development of distributed business applications. Kava is a Cosmos SDK (software development kit) blockchain. The collaboration will involve the whole interchain ecosystem that has been developed by  blockchain interoperability solution provider Cosmos. Aim is to further support and promote decentralized finance (DeFi) application development on each other’s respective blockchain or distributed ledger technology (DLT) networks. Kava’s Interblockchain Communication Protocol (ICP) will be used by both development teams to expand the nascent DeFi ecosystem. IRISnet aims to offer iService and Coinswap applications to Kava in order to improve liquidity. “Cosmos’ value proposition is that “if you make a blockchain and it has a similar consensus mechanism to another blockchain …[then by using] … the inter-blockchain communication protocol (IBC), you should be able to connect those two blockchains and transfer data [or assets] between them.” Brian Kerr, CEO at Kava Labs

Quant Overledger and Oracle Cloud (banking lifecycle)

Quant Network, a technology provider, delivering blockchain enterprise-grade interoperability for the secure exchange of information and digital assets across any network, platform or protocol, at scale, has partnered with Oracle. Quant will use Oracle Cloud to run mission critical business applications on interoperable DLTs that will be powered by Overledger, which connects global networks to blockchain-based platforms. Banking institutions may deploy an extensive set of APIs that aim to cover all areas across the banking lifecycle. “Quant helps Oracle’s customer banks by providing a single API to all supported blockchains to power interoperability across platforms. Giving clients choice and flexibility to freely use any blockchain technology and go cross-platform with only three lines of code.”  “Clients gain benefits of market access, new products and revenue streams without the challenges of managing complex underlying blockchain technology stacks.” Gilbert Verdian, CEO at Quant Network

SIA and Quant Overledger (financial services)

Banking users of SIA’s private blockchain infrastructure, SIAchain, will be able to link up with other distributed ledgers following successful testing of interoperability via Quant Network’s Overledger technology. Quant’s Overledger complements and connects existing systems and DLTs, to drive innovative and efficient growth for companies, public entities, and regulatory bodies alike. This integration provides the ability to bridge permissioned blockchain instances between SIAchain’s 580 European network nodes and other external networks in order to have crossplatform applications and services covering the likes of notarisation, payments and KYC. SIA, that provides its services in  50 countries, is European leader in the design, creation and management of technology infrastructures and services for Financial Institutions, Central Banks, Corporates and the Public Sector, in the areas of Card & Merchant Solutions, Digital Payment Solutions and Capital Market & Network Solutions. “The achievement of a fully interoperable blockchain network, through our collaboration with Quant Network, is another key-element in our path of bringing innovation and state-of-the-art technologies for supporting banks, financial institutions, corporates and public administration bodies to extend their capabilities in integrating different DLT business applications.” Daniele Savarè, innovation & business solutions director SIA.

Telos and Transledger (crypto currency transfers)

Transledger, a blockchain interoperability platform that aims to facilitate cryptocurrency transfer between separate or independent DLT networks, has chosen the Telos blockchain network to perform cross-chain digital asset transactions with its utility token in a fast and secure manner. Transledger Inter-blockchain Communication (IBC), allows different blockchains to interact with each other and perform tasks together. Use cases for blockchain interoperability solutions include peer-to-peer (P2P) networks such as decentralized or non-custodial cryptocurrency exchanges (DEXes). These types of trading platforms allow digital asset users to trade their tokens without requiring centralized, third-party exchange platforms. DEXes may use Transledger IBC to run P2P networks across several different blockchain platforms. This allows trading on DEXes to take place at speeds that are comparable to centralized exchanges, however, these non-custodial platforms allow users retain control of their funds. They also allow investors to manage their cryptocurrency portfolios with “faster and more powerful” smart contract functionality and features.

Skuchain and Corda (trade finance)

Skuchain network, a blockchain platform for supply chain, recently launched the DLPC CorDapp, a Skuchain application that promotes interoperability in trade finance blockchain applications. This application is the first example of The Bankers Association for Trade and Finance’s Distributed Ledger Payment Commitment (DLPC) operating in a real network. A DLPC is a fundamental piece of trade transaction. Everyone needs to commit to a payment. Skuchain’s DLPC CorDapp allows transactions to take place between its enterprises on Hyperledger Fabric and their bank partners on the Corda Network. The ultimate goal of brokering interoperability between Skuchain EC3 and Corda is to allow Skuchain’s enterprise customers to receive trade finance from banks on a Corda implementation without any party having to onboard onto another platform. Enterprises can now easily access trade finance as native part of their own supply chain platform.

Moving forward

The arrival of interoperability solutions may fundamentally change  present attitudes towards blockchain and will be an important step in persuading networks that the seamless exchange of data is crucial to the success of the entire market. As more progress towards interoperability between blockchain protocols is expected in the coming years, and we already may see successful cross-blockchain projects this year, interoperability is likely to become an important game changer for the blockchain industry. We may say that Blockchain seems to be at the threshold of widespread acceptance and adoption.

 

Carlo de Meijer

Economist and researcher

 

 

 

Source

How SMEs should select a BAAS platform?

| 08-06-2020 | Carlo de Meijer | treasuryXL

In my last blog BAAS and SMEs: New Opportunities I explained what Blockchain-as-a-Service is, where it could be used for and what the benefits are for SMEs. But another question is: how should SMEs select BAAS providers and their offerings. What are the various issues they should look at to get the most out of it. In other words: how should SMEs deal with this?

Why many SMEs move to BAAS?

But first, why this growing interest by SMEs for Blockchain-as-a-Service (BAAS)? There are various reasons for that. Such a the promised benefits in terms of efficiency, simplicity, transparency, speed, costs etc.

BAAS has some interesting use cases ranging from smart contracts, document origin tracking, resource sharing, single window, contract execution and spend rationalisation.

And BAAS could be used in various business activities like food safety tracking, international transactions, retailer industry, supply chain management, and trading.

What issues for SMEs to consider?

But before a company decides to start integrating BAAS services in their existing infrastructure it is important for them to consider a number of key issues. They should ask themselves a number of key questions.

Such as, does the company really need BAAS (or blockchain)? If so, for what purposes? And what are the specific (basic) requirements to look for at the “ideal” BAAS provider? What other factors to be considered? And finally, which BAAS provider offers the right and best type of solutions for the company?

Do you need BAAS or Not?

One of the first questions a company should ask themselves is do they really need BAAS. Whether or not BAAS matters to a company will depend on a number of issues.

Does the company already works efficiently from a cost and processing point of view? There may be hurdles in the company in the form of managing varied database, browsers, firewalls, application servers, and hardware, that could make it very difficult to integrate BAAS offerings into the legacy network of the company.

And does the company have the team skills that are comfortable and confident (or not) in using BAAS? Do they already use (one or more) cloud providers? And if so, do they have enough experience with these. This question is especially relevant because BAAS offerings are evolving quickly.

Other questions that may determine all or not choosing BAAS will be the tools available, choice of operating systems, ease of use, and pricing, thus costs.

So many things to think about, investigate and discuss.

Some broad guidelines for Selecting a BAAS Partner

Given the lack of readily available guidelines and best practices a lot of discussions and evaluations are needed into the process of selecting a BAAS provider or solution. Here are some broad guidelines a company should consider.

BAAS provider experience
First of all the company should ask themselves has the BAAS provider prior experience in setting up blockchain infrastructure? A company should ensure that the BAAS provider has proven experience in developing and deploying Blockchain technology. Companies should be ensured that the implementer department of the BAAS provider has professional staff that could easily attain the complex solutions for the enterprises. Companies should also ensure that the BAAS provider disposes of a good developer community, thereby guaranteeing “excellent output”.

BAAS provider’s commitment
There is also the question of BAAS provider’s commitment? Delivering quality is of great importance when choosing the right BAAS provider. A company should therefore probe their commitment to quality, process and standards of BAAS offerings.

Security assurance
Another critical issue that a company should investigate is can the BAAS provider deliver security assurance? In the first place they hey should ensure that –  for privacy and security reasons – BAAS offerings are built on permissioned blockchains. Given the variety of security issues ranging from application level to server level, it is important to look for potential gaps in security assurance in the proposed BAAS implementation plan.

Seamless deploying
A company should also look if the BAAS provider has enough experience in deploying. A company should evaluate the BAAS provider’s experience in deploying cloud-based solutions for operating systems similar to that of their organization. SMEs should  thereby look for BAAS providers that offer quick and economic deployment, testing, staging, and good production line. Companies also need to ensure that the new Blockchain infrastructure integrates seamlessly with their legacy systems.

User-friendly
A company should make sure that the proposed BAAS systems and processes are user-friendly and easily to adopt. After all, they look for  a system that their employees do not find difficult to use or navigate.

BAAS innovation
SMEs should also ask how innovative BAAS providers are. As BAAS solutions may vary from provider to provider, innovations might be a real trigger in case of any blockchain deployment. Innovations in the BAAS marketplace can create a more different type of BAAS architecture for a company’s organization.

Cost control
But also in terms of costing control the company should be aware of the real costs. Can a company be assured that they just pay for the value proposition delivered by the BAAS provider? Companies should therefore carefully analyse the pricing options and post-deployment support options and modalities. They should investigate if there are hidden costs linked to the BAAS contract.

Other features of BAAS offerings to look at

But next to these issues there are other basic features of BAAS offerings a company should look for. These include, amongst others, things such as offering good backend or backup solutions, quickly add up new additions to the platform, offer technical support in case of self-deployment etc.

Need for backend services
One key issue that should be investigated thoroughly by SMEs is how BAAS could deliver a company’s unique need for backend services such as integration of popular features and mainstream technologies. A BAAS provider should at least provide some key deliveries including data security, process control, costing control and integration. These backend services should support a wide range of applications without changing the legacy network, often characterised by multiple layers of the data sources, processes and workflows.

Companies should also know  the ins and outs of the blockchain platform in order to avoid risks. This asks for adopting proper monitoring and managing tools to manage the BAAS solution network effectively. For security reasons it should be made sure that the application data and user data “should stay within the boundaries of the platform” .

There are also a number of process control requirements for the application. SMEs should be guaranteed that the new BAAS environment needs to keep maintaining the original performance all the time. Some performance checking tools could let companies know how much capable their blockchain solution really is. It also needs to have protection mechanism from hackers, controlling data flow, computer resources, active monitoring tools etc.

Smart contract offering
When considering BAAS a company should make sure that the BAAS provider offers the smart contract integration with the deployment. As you have read in my former blog smart contracts are an important part of any BAAS solution. These allow the companies to electronically measure and encode all terms of the contract so there can be no dispute. Though they are not (yet) legal contracts, they allow the enforcement of an agreement between parties under pre-agreed rules, but also enforces the penalties in case of any rule breaking situation.

Access management
And there is the issue of who and who may not have access to certain information within the organisation. Companies should look for identity based consensus solutions as all the enterprise will operate with known identities. Not everyone in the company should have access to internal securitised information.

It is therefore also important to look for secure Identity and Access framework integration with the BAAS solution. It will enable companies to control the user access from critical information in the organisation, helping the administrator to regulate and control access all over the network.

Flexible deployment
And there is the issue of flexibility in deploying BAAS solutions. BAAS providers should offer versatility when it comes to BAAS frameworks. This asks for the availability of a variety of toolsets for companies. Companies need to have a choice in case of choosing the perfect framework. They should choose a BAAS operator that offers optimal support.

What else to consider?

A final, and may be the best way to select a BAAS architecture is the existing customer ecosystem. In many cases BAAS companies that can offer the most advanced and trouble-free BAAS have a large customer base. So, a BAAS provider with good and positive customer base could be a sign of good quality services.

After having answered all these many questions a company may (or may not) be able to select their favourite BAAS provider. On Google you may find various oversight lists of BAAS providers with many ins and outs.

Enjoy your BAAS journey!

 

Carlo de Meijer

Economist and researcher

 

 

 

Source

Blockchain-as-a-service and SMEs: great opportunities

| 19-05-2020 | Carlo de Meijer | treasuryXL

One of the recent promising blockchain trends is the growth of Blockchain-as-a Service (BAAS) platforms and software. This is highlighted by the recent release of the Second Annual Blockchain 50 list by Forbes. Several of the entrants on this year’s list offer blockchain-as-a-Service, including global players such as Microsoft, Amazon and IBM.

These third-party services are a relatively new development in the growing field of blockchain technology, mirroring the growing demand for hosting decentralised software services to boost market growth.

Fortune Business Insights recently revealed that the BAAS sector is set to reach a valuation of almost USD 25 billion (EUR 23,2 billion) by 2027, from USD 1.9 billion recorded in 2019, demonstrating an impressive so-called compound annual growth rate (CAGR) of 39.5% during the forecast period (2020-2027). According to the same report especially the retail and e-commerce segment is expected to adopt BAAS solutions and are expected to register the highest growth rate during the forecast period.

What is BAAS?

In my first blog on BAAS I wrote last year I already explained what it is. Here follows a short resume.

BAAS is a cloud-based service that enables users to develop their own digital products by working with blockchain. It is in fact the distributed ledger equivalent of Software-as-a-Service or SAAS, the means by which businesses subscribe to and access cloud-based software.

These digital products may be smart contracts, decentralized applications (Dapps), or even other services that can work without any setup requirements of the complete blockchain-based infrastructure.

How does BAAS work?

BAAS describes the process by which a third party installs, hosts and maintains blockchain networks on behalf of other organizations. The external service provider thereby offers to set up all the necessary blockchain technology and infrastructure for a fee. They thereby take care of the infrastructure and maintenance issues.

In fact, a BAAS’ provider’s role is similar to that of a web hosting provider. It allows customers to leverage cloud-based solutions. BAAS helps businesses develop and host blockchain apps and smart contracts in a blockchain ecosystem that is managed and administered by cloud-based service providers.

The BAAS operator typically offers support activities like bandwidth management, suitable allocation of resources, hosting requirements, and data security features. As a result enterprises can focus on their core business without worrying about the day-to-day complexities of operating a blockchain.

Why is BAAS needed?

Consumers and businesses are increasingly willing to adapt to blockchain technology. However, the technical complexities and operational overhead involved in creating, configuring, and operating a blockchain and maintaining its infrastructure often act as a barrier.

Blockchain requires huge investment when it comes to setting up infrastructure and maintaining it. It is much more resource intensive, as compared to traditional databases. It also consumes a huge amount of energy and requires huge bandwidth.

What may BAAS bring?

BAAS is gaining significant traction recently, and that for various reasons. For many companies, pairing cloud services with BAAS could be very valuable. The personalized flexibility of BAAS technology allows businesses to combat pain points by tailoring integrations. BAAS can resolve complex issues around transparency, efficiency and cost in a simplistic and straightforward manner, thereby firmly reducing the barriers to entry for enterprise blockchain applications.

By favouring this BAAS model, companies can take advantage of the many often-mentioned benefits of blockchain technology – improved transparency and accountability, data security and trust minimization – without having to develop their own blockchain ecosystem or invest in expensive in-house computing resources.

They may give diverse businesses the opportunity to experiment with blockchain apps and smart contracts while letting service providers manage the network itself.

Is BAAS valuable for SMEs?

By organization-size, BAAS market is still dominated by large enterprises especially in the financial sector. The SMEs segment however is expected to grow at a higher rate, given the above mentioned opportunities of BAAS for these enterprises.

BAAS is ideal for such organizations that outsource their technological aspects, and are not involved in understanding the working mechanism of the blockchain. It allows these firms and other organizations to quickly get to grips with the technology without having to develop their own proprietary blockchain. It lets these enterprises focus on their core jobs and not waste time in setting up of infrastructure facilities.

BAAS is firmly growing across a variety of industries for issues such as supply chain management, identity management, payments. Blockchain technology is emerging as an optimal solution to many of the challenges faced by SMEs such as access to various financing sources. SMEs looking to expand their businesses in foreign countries can gain wider access to trade financing sources using BAAS as this technology is decentralized and cuts out the middlemen from the process.

BAAS service providers 

BAAS has become so popular, that some of the largest tech companies in the world all have divisions dedicated to the integration and promotion of BAAS. But also some of the most successful cloud service providers have started offering Blockchain-as-a-Service.

Main companies or platforms that are operating in the BAAS market include the names like Amazon, Microsoft, Oracle, Corda, IBM, SAP, Accenture, NTT Data, Stratis, Huawei, Baidu, Alibaba, Infosys, consequently shaping the future of blockchain applications.

But there are also the many smaller innovative BAAS companies – mostly based in the US – that integrate these game-changing ledgers into everyday technology such as Altoros, Blockstream, Bloq, Dragonchain, Factom, Innominds, PayStand, Skuchain, Symbiont,  tZERO, VironIt etc.  

Some major players in the BAAS market

Let’s take a look at some of the key BAAS service providers helping enterprises realize their blockchain ambitions.

Alibaba Cloud Blockchain as a Service

Alibaba’s BAAS offering, is under the umbrella of its cloud computing arm. Utilizing Quorum, Hyperledger Fabric and the Ant Blockchain, the platform integrates Alibaba Cloud’s Internet of Things (IoT) and anti-counterfeiting technologies to create blockchain solutions for product traceability, among other things. At present, Alibaba’s BAAS offering encompasses enterprise-level BAAS services, an agile BAAS platform that supports private deployment, and specific blockchain solutions for container services.

Amazon Web Services
Amazon provides various blockchain tools to both large and small companies via its cloud computing arm, Amazon Web Services (AWS).  AWS is a BAAS leader in many industries. The company integrates blockchain-based networks and business processes for some of the largest companies in the world (including T-Mobile and PwC) to improve IT infrastructure, business processes, human resources, financial transactions and supply chains.

Amazon, which has introduced Amazon Managed Blockchain, a BAAS service that “makes it easy to create and manage scalable blockchain networks” using open source frameworks including Ethereum and Hyperledger Fabric. Amazon has attracted a steady stream of high-profile clients including  Nestlé, BMW, Accenture, Sony Music Japan, and the Singapore Exchange.

Huawei Blockchain Service
Huawei unveiled its novel BAAS solution, called Blockchain Service, based on Linux Foundation’s Hyperledger Fabric 1.0. The solution is devised to help companies design smart contracts focusing on supply chain, securitized assets, and public services, on top of a distributed ledger network.

IBM Blockchain Platform
Another key BAAS provider is IBM. Its Blockchain Platform allows organizations to “easily build and join a blockchain network on-premises, or on any private, public, or hybrid multicloud. Partnerships have been vital to IBM’s continuous BAAS expansion. IBM’s Blockchain-as-a-Service business deploys Hyperledger Fabric and has been used extensively in industries such as food supply, media, advertising and trade finance.

Microsoft Azure
And there is Microsoft’s Azure platform based on Ethereum. That BAAS offering enables clients to deploy blockchain networks, build apps with confidence and store data off-chain. Clients can choose to build on several networks, while three products are available: Azure Blockchain Service, Azure Blockchain Workbench, and Azure Blockchain Development Kit.

As Azure can be integrated with other Microsoft products such as Logic Apps and Flow, this makes it ‘a dependable choice’ for enterprises seeking to harness blockchain, such as General Electric and T-Mobile .

R3 – Corda
Corda, the open-source blockchain platform developed by global enterprise solutions provider R3, enables companies to transact directly and privately using smart contracts. The BAAS provider was recently used by KLM Royal Dutch Airlines to simplify financial processes and enhance settlements. Interoperability, security and privacy are the foundations of the finance-focused Corda. The firm R3 developed solutions for over 300 clients.

Regional development

According to a recent BAAS Market Report North America – especially the US, Mexico and Canada – owns the largest share in the worldwide market for BAAS. One of the major reasons for the widespread development and adoption of BAAS tools in North America is the strong presence of small, medium, and large tech companies operating in the US. This, along with rising integration of BAAS solutions with public utilities services, will enable the region to dominate the BAAS market share in the foreseeable future.

Europe has been deemed as the second-leading market for BAAS. Apart from this, the region can note significant surge in adoption of blockchain technology in the forthcoming years, because of the strong support from the government across various countries. Increasing focus of well-established players on blockchain technology will propel the market in the near future.

The Asia Pacific (APAC) region is believed to be the third-most lucrative market for BAAS. The BAAS Market Report states that Asia-Pacific will register the highest growth rate during the forecast period. The BAAS sector will be boosted by enormous blockchain investment by China, Japan, and South Korea governments.

Final remarks

BAAS may become the catalyst that leads to a widespread adoption of blockchain technology and to a deeper penetration across various sectors and businesses, especially by SMEs.

According to the World Economic Forum (WEF) blockchain technology could be instrumental in bridging the gap in trade financing around the world. Similar benefits can be reaped by SMEs in the context of supply chain processes as transparency, immutability, and traceability become inevitable. These potential advantages of blockchain for SMEs may provide a significant boost to the BAAS market growth in the coming years.

So, BAAS may be seen as a great opportunity for SMEs to take advantage of blockchain.

 

Carlo de Meijer

Economist and researcher

 

 

 

Source

Stable Coins and Monetary Policy: towards more instability?

| 08-05-2020 | Carlo de Meijer | treasuryXL

In response to a call last year October by the G20 to examine regulatory issues raised by so-called global stable coin arrangements and to advise on multilateral responses ‘as appropriate’, the Financial Stability Board (FSB) recently published ten high-level recommendations for consultation for effective regulatory and supervisory treatment of stable coins. The FSB however did not extend their response to financial stability and monetary policy risk issues. And these are of utmost importance.

What are stable coins?

But first, what are stable coins? These are digital currencies or contracts that are linked to certain underlying assets. That could be a currency, a real estate, or stocks. Stable coins can be used in many forms, namely as a store of value, a means of payment or fully backed or collateralised by fiat currency. Stable coins can be issued as tokens or accounts, settled in a centralized or decentralized fashion. So there is not one uniform sort of stable coin but many variations, making it very difficult to control and regulate.

Why are stable coins taking off?

Why is adoption of stable coins growing? Stable coins could bring a number of benefits especially to cross-border payments, which currently tend to be slow, non-transparent, and expensive. Stable coins might bring improved efficiency, broader financial inclusion, and more innovation (better integrated in our daily digital lives). But also low transaction costs (near-costless and immediate), convenience, global reach (via strong network effects), and speed are all key advantages.

While stable coins could greatly facilitate transactions in foreign currency, it could drastically lower costs of remittances, which would increase foreign currency inflows. Though they are increasingly being used for payments, an area where speed and efficiency have become the deciding factor, stable coins could also make storage of foreign currency easier, safer, and cheaper.

Most banks however do not yet address consumer and companies demands for these kind of digital currencies, so other organisations are filling the gap.

Why are stable coins risky?

Facebook’s plans to launch a stable coin named Libra has created a large amount of scepticism from central bankers and financial regulators around the globe (See my earlier blog). And that for justified reasons.

While stable coins have the potential to enhance the efficiency of the provision of financial services, at the same time they may also generate a number of important risks. Though stable coin arrangements might be expected to have contingency arrangements in case of problems, there are a number of risks brought in by them that could be detrimental for both financial stability and monetary policy effectiveness.

These risks are related to issues such as the value of stable coins, the security of the trust account, the interoperability of stable coins and thus to competition.

  • Reduced consumer protection

There is the risk of reduced consumer/investor protection. Providing appropriate protection levels may become more challenging, as the cross-border nature of a stable coin means it is subject to a variety of regulatory frameworks in different jurisdictions. It is therefore not clear whether strong safeguards on consumer bank accounts and the associated payments will be in place with stable coins, or what recourse consumers will have. There is a big chance that redemption of stable coin into fiat currency is not (always) possible as government-backing is absent. Without requisite safeguards, stable coin networks at global scale may put consumers at risk.

  • Limiting market competition

But also from a competition point-of-view it might be very challenging to create a future level playing field. Stable coins may pose challenges for competition and anti-trust policies. Competition in financial markets may be endangered especially when stable coins are not interoperable. Tech giants could thereby use their networks to create monopolies to “shut out” competitors and monetize information, using proprietary access to data on customer transactions. And there is the risk of a potential and partial disintermediation of commercial banks if some depositors prefer holding stable coins.

  • Increased cyber risk

And there is the risk – caused by lack of transparency (anonymity) and clear regulation – of stable coins promoting illicit activities such as money laundering, terrorist financing, and other financing crimes. But it could also heighten data privacy and protection concerns, as the organisation behind a stable coin could rapidly become the ‘custodian’ of millions of users’ personal information.

Stable coins may negatively impact financial stability and monetary policy

Stable coins already pose a number of additional risks including credit and liquidity risk to the existing financial system. These may threaten  financial stability and hamper monetary policy and ultimately may harm real economic activity if not designed and regulated properly. This by increasing existing fragilities in the financial sector and facilitating the cross-border transmission of shocks. These impacts could be seriously magnified if stable coins are widely accepted and used as a means of payment on a global scale for general use.

Threat to financial stability

There are still many questions related to the implications of a widely used stablecoin for financial stability. This impact will greatly depend on the sort (design) of the stable coin and complexity of these arrangements as well as the scale of adoption. If stable coins achieve wide-scale usage, more serious financial stability issues may result.

  • Stable coin arrangements

The effect of a stable coin on financial stability, for example, would thereby be driven in part by how the stable coin is tied to an asset (if at all) and by the features of the asset itself. A stable coin tied one-to-one to an individual currency would have different (but less negative) implications than one tied to a basket of currencies.

A stable coin that is built on a permissioned network would have different (less) risk implications than a permissionless network, which may be more vulnerable to money laundering and terrorist financing risks. A stable coin used solely by commercial banks would have a different risk profile than one for consumer use.

  • Likelihood of bank runs

Giving the general public access to stable coins could pose a greater threat to financial stability (of the international payments system), by increasing the likelihood of a bank run in times of shocks. The impact on financial stability will be heavily determined by how stable coins are managed.

If risks are not addressed and managed adequately, the resulting liquidity, credit, market, or operational risks, could undermine confidence and trigger a run on bank deposits where users would all attempt to redeem their GSCs at the reference value. Such a scenario would be more likely if the stable coin issuer is not transparent about its reserve holdings or if the stable coin’s reporting lacks credibility. But also poor governance may result in the stable coin being vulnerable to runs or loss of confidence.

Hampering monetary policy

Global stable coins have also the potential to challenge monetary sovereignty and change the way monetary policy works. Stable coins could hamper monetary policy in a number of circumstances. Especially if they reach global scale they could have a very negative impact on the effectiveness of the  monetary policy. This will be most pronounced during periods of strains when there is a massive substitution of fiat currencies into stable coins.

  • Privatisation of money

Large scale use of stable coins could lead to further privatisation of money, out of the control of monetary authorities, and to frustrating trust in the existing monetary system. This could further negatively impact monetary policy effectiveness and ultimately have massive disruptive effects on the entire global financial ecosystem.

  • Real impact on monetary policy

The real impact on monetary policy will very much depend on how stable coins will be used: as a store of value, a means of payment or a unit of account. But also on how the stable coin is linked to the various underlying asset(s).

  • Store of value

If a stable coin is used as a store of value on a large scale, the effect of monetary policy on domestic interest rates and credit conditions could be weakened. This is especially the case in countries whose currencies are not part of the reserve assets.

If users were to hold stable coins permanently in deposit-like accounts, bank retail deposits might decline. This will increase bank dependence on wholesale funding and might exaggerate monetary policy transmission. This because wholesale deposits are generally more interest rate-sensitive than “sticky” retail deposits.

  • Currency substitution

By facilitating cross-border payments, a stable coin might increase cross-border capital mobility and the substitutability of domestic and foreign assets, affecting monetary policy transmission thereby amplifying the responsiveness of domestic interest rates to foreign rates and as a result underme domestic monetary control.

  • Dollarisation

The existence of stable coins as a safe haven during times of financial crisis could also encourage dollarisation. Via network effects, this could have a significant impact on monetary sovereignty through currency substitution leading to a loss of monetary autonomy. Central banks may lose monetary policy control, as financial systems become more exposed to exchange rate shocks, while the central bank is constrained in providing liquidity. This may have adverse effects on monetary policy effectiveness. As the monetary supply of stable coins cannot be controlled by any one party, it will negatively affect the menu of options available to central bankers in certain economic situations.

Some worry that, if stable coins are adopted on a wide enough scale, it could have a negative externality, or spill-over effect, on the economy as a whole. This may be amplified by potential uncertainty surrounding the ability of official authorities to provide oversight, backstop liquidity, and collaborate across borders

How to react: tackling the risks?

Stable coin networks at global scale are leading us to revisit questions over what form money can take, who or what can issue it, and how payments can be recorded and settled. While central bank money and commercial bank money are the foundations of the modern financial system, nonbank private “money” or assets also facilitate transactions among a network of users.

Regulators, central banks and monetary policy authorities would be confronted with a number of challenges. If stable coins may reach global scale, they are likely to become systemically important and concentrate risks. That however may hurt the safety, efficiency and integrity of the global financial system. For that reason strict regulations and monetary surveillance is of utmost importance.

“The more you move towards the core of the global payment system, the more likely you are to see central bank money because that is what provides stability.” “We care about financial stability and we have built a system which works very well … it has never failed.” Benoît Coeuré, director of BIS’ new innovation hub

Because stable coins and other cryptocurrencies are unlikely to be bound by physical borders, regulatory actions in one jurisdiction are unlikely to be fully effective without coordinated action elsewhere. The emergence of stable coins has raised important questions for regulators, central banks and other authorities worldwide how to react. They are now looking for ways how the various risks linked to stable coins could be tackled in a most effective way.

The challenges however will not only be creating an appropriate regulatory framework including consumer protection, but also measures to counter financial stability and monetary policy risks. Given the large differences how stable coins are organised and the role they might play, there is no one-solve-all-problems solution. Things to decide are: whether or not to restrict foreign-currency stablecoins; whether or not forbid stable coins unless there is a sufficient framework in place to ensure governance and risk management; ask for more interoperability between stable coins; risk management procedures in place by enforcing international standards etc.

  • Regulate stable coins like money market funds

Customer funds must be safe and protected from bank runs. This calls for legal clarity on what kind of financial instruments stablecoins represent. One approach would be to regulate stable coins like money market funds that guarantee fixed nominal returns, requiring providers to maintain sufficient liquidity and capital.

  • Access to Central Bank reserve accounts

Another way is getting central banks involved. They could offer stable coin providers access to their reserve accounts ( the safest and most liquid assets available), under strict conditions. This offers a blueprint for how central banks could partner with the private sector to offer the ‘digital cash of tomorrow’—called synthetic central bank digital currency (sCBDC). In the sCBDC model, which is a public-private partnership, central banks would focus on their core function: providing trust and efficiency. The private sector, as providers of stablecoins, would be left to satisfy the remaining steps under appropriate supervision and oversight, and to do what they do best: innovate and interact with customers.

  • Create own Central Bank Digital currency

The most extreme reaction of Central Banks would be to create their own central bank digital currency (CBDC), whose monetary issue is centralized in the hands of the bank. Proponents argue that central bank digital currencies would be a safer alternative to privately issued stable coins because they would be a direct liability of the central bank.

A more relevant question may be whether some intermediate solutions may be able to offer the safety and benefits of real-time digital payments based on sovereign currencies without necessitating radical transformation of the financial system.

 

 

Carlo de Meijer

Economist and researcher

 

 

 

 

Source

How to simplify Procurement and Finance in the Supply Chain

| 21-04-2020 | Wim Kok | treasuryXL

Accelerated by the Corona pandemic, an unforeseen global crisis affecting us all, digitalisation, transparency, efficiency and real time settlement has moved dramatically up north on the priority scale of all global industries. At least it makes an important move to rethink sustainable business models in the post Corona era.

Secured (cyber proof) Platform connectivity bolstering strategic supply chains will become a very important aspect in the future survival of trading companies globally.

More and more initiatives are seen to phase out the “old school” handling of paper-based settlement. Rain forest of papers are being used to settle payment out of export and import contracts. Its cumbersome processes to settle payments through bank using old payment methodologies like Bills of Exchange, Cash Against Documents and Documentary Letters of Credit. Do not misunderstand my objective, nowadays contract settlements are strongly embedded in society supported by different legislation countries by country. This is also the reason why things are moving so slowly. Institutions like ICC, Swift, Customs & Harbour authorities (to name few) are constantly trying to move the needle in digitising processes. The reality is that the transformation goes to slowly. Maybe when COVID19 is behind us there will be an acceleration after reconsidering existing business models of supply chains dependent from documentary evidence.

In this 15 trillion USD ($) global trade market there is enough space next to the big banks and big corporates, who started to explore already after the 2008 crisis using agile inhouse innovation labs.

Initiatives like Komgo and R3 syndicates already looking at blockchain technology, however still geared toward the larger (commodity) trading community. It is interesting to see that the big Agri trading companies recently started a new initiative Covantis.

After PSD2 introducing Open banking a lot of financial FinTech’s are entering the market not having the burden of an absolute (outdated) big banking system. Big tech giants like google, Facebook and Amazon are looking into their enormous data bases trying to grasp their market share.

TransDocLink is developing a platform based upon the above ideas, capturing as much as possible stakeholders & features. Transdoclink already can make use of the TDeal concept on its platform. Creating in a supplier/buyer relationship full transparency, efficiency and trust in their contracted supply chain. A dashboard gives visibility around the whereabouts of the goods and money (triggered movements are settled through a dedicated wallet). TransDocLink aims to serve the SME market in an open (independent) platform environment.

In 2016 TransDocLink already recognised that the Letter of Credit (and its very paper heavy documentary settlement) is a “dinosaur” in the expensive settlement of payments in the banking industry. The aim was to digitise these processes and offer an alternative on a platform-based initiative. Buyer and Seller create on the platform a trusted lane (supply chain) by matching contracts. The settlement of agreed terms is being executed through an independent trust account instead of the alternative using an expensive settlement via Letter of Credit. The original concept was built around a straight through processing payment engine (exempted by the Dutch Central bank) and further enhancements are being made (escrow-TDeal , working capital, asset based & trade finance modules) to keep up with the quick changing landscape in the FinTech industry.

Curious what TransDocLink can do for your business? Visit transdoclink.com and/or contact me directly for some advice.

 

Wim Kok

International Business Consultant
Trade Finance Specialist