Tag Archive for: banking

Blockchain and Central banks: a Tour de Table (Part I)

| 27-1-2017 | Carlo de Meijer | treasuryXL |


Our expert Carlo de Meijer, distinguished blockchain specialist, has published an article that is worth sharing with you. This is Part I and Part II will follow soon. May we invite you to comment or share your experience with this intriguing topic:

In April last year I wrote a blog on blockchain and monetary policy. In this blog I went into a number of still unanswered questions posed by the European Central Bank around blockchain technology. There was a big uncertainty about the impact of this technology on the future role of central bank money and on monetary policy.

 

While at that time many financial institutions and startups already paid a lot of attention to this technology, only a handful of central banks were interested in blockchain with the most vocal being the Bank of England. Since than a lot has changed with a growing number of central banks around the globe starting to recognise the potential for blockchain to help them in obtaining their key objectives: stable financial system and efficient financial markets. In the first part of this blog I will try to answer why there is nowadays so much interest amongst central banks in blockchain technology, what are the main benefits and what are remaining concerns. In the second part a Tour de Table will be given, looking at the various initiatives of the central banks.

Central banks are experimenting with blockchain

Several central banks are or have been experimenting with different versions of blockchain-backed systems. A growing number are questioning the point of creating digital currencies, such as the Danes. But they are not alone. Also the central banks of Sweden, Japan, China and Russia have launched similar efforts. Others such as the central bank of Singapore and Canada have already tested blockchain-based currency systems for internet payments, while also the Reserve Bank of South Africa has expressed their optimism towards the blockchain technology and its potential impact on finance. The European Central Bank recently announced a new research undertaking in partnership with the Bank of Japan. Earlier last month the US Federal Reserve released its first major research paper on blockchain.

Why is there so much interest?

But why are so many central banks now embracing blockchain, seriously exploring their potential.

The turning point was a three-day event in Washington , hosted by the World Bank, the IMF and the US Federal Reserve where representatives from more than 90 central banks worldwide expressed broad interest “in how the technology might impact both the banks they regulate as well as their own regulatory practices”.

Central banks’ interest in deploying a blockchain “comes in step” with moves by the big banks to use the technology to ease cross-border settlement transactions and overhaul antiquated back-office infrastructure. Experiments by banks with distributed ledgers as a way to settle trades and record data and transactions, have clearly shown its potential to reduce costs and increase the efficiency of its operations. The distributed ledger and its potential to simplify the record keeping, tracking and accounting process makes it hard to ignore by central banks.

Central banks and public stances: some quotes

Over the course of the past half year many central banks representatives have taken a public stance on their potential use of distributed ledgers and digital currencies. Here follow some of the most interesting quotes.

 “Innovation using these technologies could be extremely helpful and bring benefits to society. The technology has the potential to transform multiple aspects of the financial system” Janet L. Yellen, Chairwomen Federal reserve

 “We are paying close attention to distributed ledger technology, or blockchain recognizing this may represent the most significant development in many years in payments, clearing and settlement” Lael Brainard, Federal Reserve Board

Other interesting quotes include:

“The conditions are ripe for digital currencies, which can reduce operating costs, increase efficiency and enable a wide range of new applications” People’s bank of China

“A state-sponsored digital currency is still on the agenda, and if adopted, the technology could deliver a range of benefits” Russian central bank

 “The technology could be worth using for central banks because it would make for a financial system that does not go down even if the central bank’s computer systems are temporarily taken offline” Mark Carney Bank of England

What are the potential benefits for central banks?

Central banks are now exploring the potential of blockchain and distributed ledger technology. As banks experiments have shown blockchain networks may lead to safer and better payments and securities systems..

  • Make money more easily traceable

The inherent property of immutability and transparency associated with blockchain makes it easier for the central banks to trace the money that is in circulation. It would allow them to track every euro, pounds, dollar or renminbi on every step through the financial system in real-time.

  • Build single shared record

Central banks are also interested in blockchain technology as a way to build a single, shared record of all transactions among several institutions. The central banks hope they can use the decentralised method of record-keeping to complete and record transactions in the real economy more effectively, quickly and transparently. The creation of a standardised way of recording transactions would allow all the players in the system to communicate more seamlessly. That could leave much less money sitting idle while banks reconcile their different ledgers, as now happens.

  • Simplify the settlement process

It has also the potential to create efficiency. Blockchain or the distributed ledger technology has the potential to simplify the settlement chain around securities transactions. The resulting cost reductions, speed of settlement and enhanced transparency may all contribute to more efficient and safer payments and capital markets.

  • Reduce transmission costs

It may also drastically reduce the transmission costs and time associated with cross border transfers, by enabling instant transfers between branches both within and outside the country.

  • Reduce operating costs

The use of blockchain-based digital fiat currency will reduce the amount of banknotes and coins that are in circulation. This will, in turn, reduce the operating costs associated with printing and distribution of currency notes by the central bank.

  • Fight money laundering

The wide spread implementation of blockchain based fiat currency will also help the central banks (and government’s) fight money laundering while eliminating the issue of counterfeiting.

  • Other advantages

The blockchain technology provides a tool to measure leverage in the system and counterparty exposure, and can monitor compliance in real time. It can also answer questions about collateral ownership.

A blockchain could untangle the spaghetti structure of central swap bank lines, which would improve crisis response capabilities.

  • Reach the unbanked

Digital currencies may eventually benefit the developing world too. Because they are low-cost and easy to use on electronic devices, digital currencies may enable greater access to financial services for the billions of the world’s unbanked.

  • Stable financial system

This all should make the financial system more transparent, fast, efficient and secure. According to a Bank of England research paper produced last year, the economic benefits of issuing a digital currency on a distributed ledger could add as much as 3 percent to a country’s economic output, thanks to the efficiency it could offer.

 Remaining concerns

There are however still a range of questions and all sorts of security and regulatory concerns where central banks will need answers for before blockchain technologies are to become a key part of the future central banking landscape.

Questions such as: How may it impact monetary policy?; What are the implications of issuance of central bank digital money?; What is the impact on physical cash?; How would it impact on central bank seigniorage?; What are the implications for the integration of the European capital market?; and What is the impact on exiting projects such as T2S?

In previous blogs I already tackled some of these issues. See: “Could blockchain bring the EU Capital Market Union forward?” November 6, 2016; “Blockchain: What about T2S?” June 30, 2016; and, “Blockchain and Monetary Policy” April 29, 2016.

There are also a number of concerns that are already highlighted, such as assurance around scalability, data integrity, resilience and resistance to cyber-attack. A big concern is regulation of digital currencies. This is a looming challenge that will require cross-border co-operation. Monetary authorities must come together to start thinking about the necessary regulation of digital money that will be flowing around the world.

See my blog: “Blockchain and Regulation: do not stifle innovation!” April 4, 2016.

When can we expect central bank-operated digital currencies?

When a move to official digital currencies might occur is hard to estimate. Central bank-operated digital currencies could be ‘decades away’ according to the more pessimistic (or realistic?). But what is sure is that it will take a number of years before any central bank issues its own currency onto a live distributed ledger. Research is still at an early stage and many puzzles still have to be worked out.

It has become clear that central banks are set to take a much more active role in the development of blockchain technology. But how active that will be is not yet clear. The Fed’s preference at this stage is still to take a fairly hands-off approach and allow banks take lead the way – “as long as they remain within defined guidelines and best practices”. A switch could happen within the next 5 to 10 years. When large parts of the financial system are using blockchain for financial transactions, so will central banks!

 

Carlo de Meijer

Economist and researcher

 

PSD 2: a lot of opportunities but also big challenges (Part I)

| 26-1-2017 | François de Witte |

The Directive 2015/2366 on payment services in the internal market (hereinafter PSD2) was adopted by the European Parliament on October 8, 2015, and by the European Union (EU) Council of Ministers on November 16, 2015. The PSD2 updates the first EU Payment Services Directive published in 2007 (PSD1), which laid the legal foundation for the creation of an EU-wide single market for payments. PSD2 came into force on January 13, 2016, and is applicable from January 13, 2018 onwards.

By that date the member states must have adopted and published the measures necessary to implement it into their national law.

PSD 2

PSD2 will cause important changes in the market and requires a thorough preparation. In this article, we are summarizing the measures and highlighting the impact on the market participants. In today’s Part I we will focus on abbreviations and main measurers introduced by PSD2.

List of abbreviations used in this article

2FA    : Two-factor authentication

AISP  :  Account Information Service Provider

API : Application Programming Interface

ASPSP : Account Servicing Payment Service Provider

EBA :  European Banking Authority

EBF :  European Banking Federation

EEA :  European Economic Area

PISP :  Payment Initiation Service Provider

PSD1:  Payment Services Directive 2007/64/EC

PSD2  :  Revised Payment Services Directive (EU) 2015/2366

PSP : Payment Service Provider

PSU:   Payment Service User

RTS : Regulatory Technical Standards (to be issued by the EBA)

SCA : Strong Customer Authentication

TPP :  Third Party Provider

Main Measures introduced by PSD2:

The  PSD2 expands the reach of PSD1, to the following payments:

  • Payments in all currencies (beyond EU/EEA), provided that the two PSP (Payment Service Provider) are located in the EU /EEA (two legs)
  • Payments where at least one PSP (and not both anymore)  is located within EU borders for the part of the payment transaction carried out in the EU/EEA (one leg transactions)

A second important measure is the creation of the Third Party Providers (TPP). One of the main aims of the PSD2 is to encourage new players to enter the payment market and to provide their services to the PSU (Payment Service Users). To this end, it creates the obligation for the ASPSP (Account Servicing Payment Service Provider – mainly the banks) to “open up the bank account” to external parties, the so-called, third-party account access. These TPP (Third Party Providers) are divided in two types:

·        AISP (Account Information Service Provider) : In order to be authorized, an AISP is required to hold professional indemnity insurance and be registered by their member state and by the EBA. There is no requirement for any initial capital or own funds. The EBA (European Banking Authority) will publish guidelines on conditions to be included in the indemnity insurance (e.g. the minimum sum to be insured), although it is as yet unknown what further conditions insurers will impose.

·        PISP (Payment Initiation Service Providers): PISPs are players that can initiate payment transactions. This is an important change, as currently there are not many payment options that can take money from one’s account and send them elsewhere. The minimum requirements for authorization as a PISP are significantly higher. In addition to being registered, a PISP must also be licensed by the competent authority, and it must have an initial and on-going minimum capital of EUR 50,000.

Banks will have to implement interfaces, so they can interact with the AISPs and PISPs. However, payment initiation service providers will only be able to receive information from the payer’s bank on the availability of the funds on the account which results in a simple yes or no answer before initiating the payment, with the explicit consent of the payer. Account information service providers will only receive the information explicitly consented by the payer and only to the extent the information is necessary for the service provided to the payer. This compliance with PSD2 is mandatory and all banks will have to make changes to their infrastructure deployments.

Source: PA Perspectives on Nordic Financial Services
http://www.paconsulting.com/our-thinking/perspectives-on-nordic-financial-services.

A third important change is the obligation for the Payment Service Providers to place the SCA (Strong Customer Authentication) for electronic payment transactions based in at least 2 different sources (2FA: Two-factor authentication) :

  • Something which only the client knows (e.g. password)
  • A device (e.g. card reader, authentication code generating device, token)
  • Inherence (e.g. fingerprint or voice recognition)

 

The EBA (European Banking Authority will provide further guidance on this notion in a later stage. It remains to be seen whether the current bank card with pin code is sufficient to qualify as “strong customer authentication”. This “strong customer authentication” needs to take place with every payment transaction. EBA will also be able to provide exemptions based on the risk/amount/recurrence/payment channel involved in the payment service (e.g. for paying the toll on the motorway or the parking).

PSD2 also introduces some other measures:

  • Retailers will be authorized to ask to the consumers for permission to use their contact details, so as to receive the payment directly from the bank without intermediaries
  • There will be a ban on surcharges on card payments
  • There will be new limitations on the customer liability for unauthorized payment transactions

In a second article soon to be published on treasuryXL, François de Witte will focus on the impact PSD2 has on market participants. 

François de Witte – Senior Consultant at FDW Consult

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Nieuw op treasuryXL: de Flex Treasurer

| 19-1-2017 | treasuryXL |

 

Wat is een Flex Treasurer?

Stel: je bent de eigenaar van of werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft. Je denkt waarschijnlijk dat er binnen jouw organisatie geen plaats is voor een dergelijke functie. Maar, oordeel niet te snel: ook het MKB heeft behoefte aan professionals als het gaat om treasury en cash management. Toch gaat het aannemen van iemand vaak een stap te ver.

Wij bieden je nu de mogelijkheid om een Flex Treasurer in te huren op urenbasis, als lump sum of in een abonnementsvorm. We willen met deze dienstverlening geen substituut worden voor de grote treasury consultancy organisaties maar we bieden graag ondersteuning bij vraagstukken die nu onbeantwoord blijven. Je kunt je vraag aan ons stellen en wij zullen je vrijblijvend in contact brengen met de juiste deskundige.

Wij kennen Flex Treasurers uit verschillende vakgebieden: risk, bankrelaties & technologie, regulations, non-profit, financiering, trade finance, cash management, SME & overige gebieden.

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De verschillende diensten

Hieronder staat een overzicht van de diensten die we aanbieden in samenwerking met de Flex Treasurers.

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Het aanbod is in ontwikkeling en in de loop van tijd zullen er steeds meer diensten bij komen.

Meer informatie

Wil je gebruik maken van een van de aangeboden diensten of heb je een andere vraag? Of wil je je aansluiten als Flex Treasurer?

Pieter de Kiewit helpt je graag verder.

Pieter de Kiewit[email protected]
06-11119783

 

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Is your payments process limiting your business?

| 18-1-2017 | Treasury Intelligence Solutions GmbH (TIS) | Sponsored content |

TIS iVWith globalisation and an increasingly complex business environment, having an efficient and centralised payment system is vital to any multinational’s success. Recognising this, we at HSBC are proud to have successfully connected to Treasury Intelligence Solutions (TIS) in Asia for automated payment and bank statement processing.

Read more about the collaboration between TIS, HSBC and Netherlands-based Fugro Group, an international geophysics and geotechnics company, which did not have a central treasury department until Group Treasurer Simon Karregat established one in 2014. The Group had numerous ERP systems connected separately to the local banks via several e-banking tools.

“We have reached a unique milestone in Fugro. With great enthusiasm and dedication, we managed to have our payment entered in our ERP routed via TIS directly to the bank. This new setup will result in significant time saving on our operations as well as IT systems maintenance,” praises Karregat.

If you want to read more about this subject please click on in this whitepaper.

TIS (Treasury Intelligence Solutions GMBH)

 

 

 

 

Read also: How can you protect your company against fraud?

 

Impact of Basel III on Notional Cash Pooling

|17-1-2017 | Arnoud Doornbos |

afbeelding

 

Since the start of the financial crisis a growing need for more bank independency with companies has arisen. Bank counterparty risk became an issue. A large cash management bank announced in 2015 to stop their transactional banking services for continental Europe. What will happen with current cash pools running with banks in the UK? Increased regulations (Basel III) may stop certain banking products.
All types of events where companies feel a growing need for more bank independency.

Basel III

In the coming years, banks have to prepare themselves for compliance with the new Basel III rules on financial institutions.
The financial crisis of 2008 brought the shortcomings of Basel II to light. The capital requirements for banks were found to be insufficient and banks were running risks which were not identified by Basel II.
Therefore the focus of Basel III is to restore previous mistakes and adding requirements to both the quality and composition of the capital held by banks and liquidity position and governance to manage the risks.

Effective liquidity management is a way to look for “Idle” cash. An increasing number of companies therefore choose for notional pooling as it enables them to gain more insight into their (global) financial position and in order to optimize the interest income on their accounts.
Simultaneously Basel III imposes stricter requirements on offsetting balances (credit and debit), and this brings notional pooling possibly into danger. The question is what impact the introduction of Basel III has to notional pooling services offered by banks.

Notional Pooling

Notional pooling is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds between the accounts. It is ideal for companies with decentralized organizations that want to allow some autonomy to their subsidiaries, including their control over bank accounts.

Treasury Services- without notional pooling

Benefits of notional pooling

The use of notional pooling has increased tremendously in recent years. At the moment it is a commonly used structure to concentrate balances and maximize the interest income on bank accounts. In addition it will provide companies with an increased understanding of their financial position and the company is therefore able to manage their money more effectively. Another commonly used technique is physical pooling (zero balancing) where the money from the participating accounts is transferred via a physical transfer to a higher-level account. The difference between them is that with notional pooling the money shall be paid only virtual and with physical pooling a physical transfer of money takes place. By using physical pooling through physical money transfer, internal debt positions will be created. Notional pooling and physical pooling can also be combined in an overlay structure.

Liquidity management

Basel III introduces a number of new financial ratios that aim to strengthen the capital base of banks.
One of the most significant ratios is the liquidity coverage ratio which banks are required to hold in high-quality liquid assets (cash money or assets which can be sold on the market quickly). This liquidity coverage ratio shows how far banks are able to withstand sufficiently a ‘crisis’ on cash flows for a period of thirty days. Moreover, the new law increases the capital requirements for banks and make these requirements more risk-weighted than before. The requirements are also countercyclical, intended to encourage banks to build up more capital in economic good times.
Liquidity management is gaining popularity by two simultaneous developments. On the one hand, credit is a less attractive source of profit for banks, which enforced banks to shift their focus to activities without capital requirements. On the other hand, companies need to make optimal use of internal cash as bank financing is becoming increasingly difficult. Notional pooling offers the option to concentrate the balances at several (international) accounts and optimize the interest.

Uncertain future for notional pooling

Basel III does not always allow that liquidity ratios are calculated by means of netting the outstanding balances of accounts in the notional pool. This means that banks must calculate their ratios based on the gross value of individual accounts. To cover the negative positions in the notional pool banks need to hold more liquidity. The negative position is seen as overdraft, which is associated with unattractive Risk Weighted Asset (RWA) for the bank. The conditions for reducing this RWA vary by bank and are depending also on the central bank of an individual country. To prevent that banks are required to hold a higher amount of risk capital they must be in possession of a legal right of offset. However, the process to obtain this right involves a lot of time and high costs (both for the bank and the company) and requires the necessary legal and tax knowledge. First, the law in the jurisdiction of each participant of the notional pool must allow compensation in the event of bankruptcy. In addition each participant of the notional pool must sign a paper that allow them to guarantee for other participants. Finally, the company must demonstrate that netting has occurred periodically.

Regarding the future of notional pooling, there are a number of scenarios to think of when it comes to the continuation of this service by banks:

  • Banks will only allow entities in the notional pool if there is an enforceable right of compensation;
  • Banks will charge the higher costs related to notional pooling to the companies;
  • Banks offer notional pooling selectively based on the creditworthiness of the company.

If banks decide to increase the price for notional pooling, it is likely that companies will go for alternatives for their cash management activities (e.g. physical pooling). Therefore it is advisable to contact your bank regarding notional pooling, so you are not faced with unnecessary surprises.

Treasury Services monitors the developments in the Basel III framework closely and combines its expertise in the areas of Payments, Treasury and Risk in order to provide its customers the best advice.
The Treasury Services Cash Management Scan analyses the impact of Basel III on your current cash pools and will explain how to manage this in the future.

Bank independent Cash Pooling

Treasury Services has developed a solution to set up cash pooling structures completely independent from banks through software. This creates significant additional savings and advantages compared to a cash pooling solution with banks.

The bank independent cash pooling allows companies to pool different bank accounts with different banks in different countries.

The advantages are:

Treasury Services advantages Cash pooling tool

The solution we have developed is a complete solution. It does not only consist of a software solution, but also proposed changes for policies and processes, and we investigated the legal and fiscal constraints.

For  more information please refer to this link.

 

arnoud-doornbos

 

Arnoud Doornbos

Partner at Treasury Services

 

 

 

Interesting transfer Joop Wijn from ABN to Adyen

| 16-1-2017 | Pieter de Kiewit |

Joop WijnLast Thursday I attended a very interesting breakfast meeting about PSD2, organized by Alexander Huiskes of EY with support from DNB. I will write about this in a separate blog. Not being up-to-date on my Financieele Dagblad reading, I was surprised by the question what my opinion is about the transfer of Joop Wijn from ABN Amro to Adyen. I replied to my best knowledge, digested the question and decided upon this blog.

Not being involved at all, I think there are two aspects in this transfer: industry developments and his strategic career management. Fact is that Joop Wijn surprised us before with career changes from banking into politics and back.

We all know banks have to rethink their place in the value chain and their proposition. New services appear and replace traditional banking services. Also traditional services are executed better or cheaper by new suppliers. Adyen , as a payment services provider, offers a perfect example of these developments. Risk management within Fintech gets, just so, increasing attention. Topics like anti money laundering, authentication, fraud and hacking should be addressed. Not only because regulators want this but of course clients see this as essential. My first thought was that Joop Wijn is too senior, as board member of ABN, to be responsible just for risk. As risk management is essential, I can understand Adyen aims this high and Joop accepted.

From a strategic career perspective I have two assumptions. The first is that one of the motivators of Joop might be the impact he can have. Not being considered as chairman of a Dutch bank stops his career advancement, thus the possibility to increase his impact. Being responsible for a strategic topic within a global market leader in a growing market, might be more appealing. The second assumption is that he made a reshuffle of what is important. I often see this with candidates with a longer track record. This move might enable him to change his priorities.

Perhaps he will inform us about the above, perhaps he will keep this to himself. Fact is, it is an interesting career move.

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Blockchain: What happened during my stay in South Africa? (Part III)

| 4-1-2017 | Carlo de Meijer |

chains-iiIn december 2016 I travelled throughout South Africa. My main focus was on the country, the people, the safaris, the Big Five and not on blockchain! Being back home I was curious to learn if there were developments in the blockchain area. A number of interesting reports were launched and there had been growing blockchain and distributed ledger activity in the financial industry from start-ups, to banks, central banks, the market infrastructure and consortia. 

In earlier articles on treasuryXL I focussed on new reports and startups (Part I)  and on banks and consortia  (Part II) while in today’s article I want to write about central banks, market infrastructure and card schemes.

CENTRAL BANKS

Central banks in Japan, Sweden and Singapore, among others , have launched blockchain efforts, with the European Central Bank (ECB) announcing a new research undertaking in partnership with the Bank of Japan on 6th December. The US Federal Reserve recently launched its first major research paper on blockchain.

Japan’s Central Bank Staff are Running Blockchain Trials

Japan’s central bank is researching and testing blockchain to study the possible use of distributed ledger technology for market infrastructure. They are “test-driving” blockchain technology to understand the innovation, according to its governor Haruhiko Kuroda. Speaking at a financial forum centered around digital innovation and Fintech, the Bank of Japan’s governor underlined blockchain as having the potential to “significantly affect” the basic pillars of financial activities – money and ledgers.

ECB and Bank of Japan research DLT for market infrastructure

The European Central Bank and Bank of Japan agreed to launch a joint research project to study potential use cases of blockchain technology for market infrastructure. This initiative comes after the ECB revealed that it is open to taking a closer look at exploring the potential for blockchain technology as a means to further innovation among central banks around Europe. The bank is toying with the idea of tapping DLT, among other options, for its revamp of the Target2 real-time gross settlement system and Target2-Securities platform. If this is to happen, more research into the technology is needed, prompting a collaboration with the Bank of Japan which will see findings released next year.

Bundesbank and Deutsche Börse test blockchain for securities settlement

Germany’s central bank has teamed up with Deutsche Börse to develop a functional prototype for blockchain technology-based settlement of securities. The prototype thereby enables the settlement of securities in delivery-versus-payment mode for centrally-issued digital coins, as well as the pure transfer of either digital coins or digital securities alone. In addition, this technology is capable of settling basic corporate actions such as coupon payments on securities and the redemption of maturing securities, using code from the Hyperledger Project as a basis. Both parties now plan to work on it over the next few months to test its technical performance and scalability. According to the Bundesbank, the project is aimed at providing a basis for further exploring the use of the tech in the securities trading space.

French Central Bank Pilots Blockchain

According to a report issued by the Banque de France it was announced that they tested blockchain technology for potential uses in managing SEPA Credit Identifiers, or identification markers used to establish the identity of creditors within the Single Euro Payments Area. This marks its first publicly acknowledged blockchain trial by the central bank. The trial was conducted with blockchain startup Labo Blockchain in collaboration with the Caisse des Depots et Consignations.

MARKET INFRASTRUCTURE

SWIFT unveils blockchain proof-of-concept (PoC) for bond trading

SWIFT recently unveiled its first proof-of-concept (POC) for managing the entire lifecycle of a bond trade based on blockchain technology. The internal POC demo tackles the issue of asset servicing across the full lifecycle of a bond trade, from issuance to payment of coupons and maturity. For the tests, Swift set up five separate nodes on a simulated network, stretching from Swift offices in California as the ID provider to an account servicer in Virginia and three investing banks in Sao Paolo, Frankfurt, and Sydney. SWIFT expects to see a number of other POCs come to fruition in Q1 2017.

SWIFT intends to sketching out a roadmap of key initiatives planned for 2017. These include working with vendors and member banks to deliver a blueprint for a SWIFT-run distributed ledger and the development of a DLT sandbox. For the latter, SWIFT intends to collaborate with member banks on a select number of use cases for the future application of distributed ledger technology as part of their Global Payments Innovation initiative.

ICAP to process foreign exchange trades on blockchain in 2017

ICAP, a UK-based operator and provider of post trade risk mitigation and information services, has announced plans to start processing foreign exchange trades on blockchain. For that, ICAP brings along its subsidiary Traiana and has teamed up with Axoni, a US-based technology company to supply the code to customers in March 2017. Traiana will thereby act as a messaging hub for forex, fixed income and swaps deals. They thereby provide services to monitor pre-trade risk and automate post-trade processing of financial transactions in listed and over-the-counter trading markets. Also, it will reconciles transaction, reference, market and portfolio data before it is transmitted to regulators, clearing houses or back to financial institutions.

Everex trials blockchain remittance in Thailand

Everex, a financial inclusion blockchain development company seeking to improve access to financial services and markets for un- and under-banked population across the world, has tested blockchain remittance. Over 100 migrant workers transferred money instantly over blockchain to their homes in Myanmar in the last months. Therefore, over 850,000 Thai baht (around USD 24,000) were transferred using the Everex wallet, a mobile and web based app that sends digitized national currencies using Ethereum blockchain.   Overall, average transaction took less than a minute and recorded savings of over 7% in remittance cost and currency exchange rates.

CARD SCHEMES

MasterCard files blockchain patents focused on payments and transacting

MasterCard has filed to the US Patent and Trademark Office (USPTO) four applications related to its work (focused specifically on payments and transacting) with blockchain and distributed ledger technology. The applications focus on methods and systems for authorizing, processing and securing blockchain-based transactions. MasterCard is arguing that a combination of blockchain and its existing payment technology could bring great benefits for those making digital payments. Publication of the applications comes weeks after the credit card company released a set of experimental blockchain APIs.

Lotte Card rolls out biometric authentication based on blockchain in Korea

Lotte Card, a large card issuer company in Korea, has adopted a biometric-based authentication system service in its payment app jointly with Blocko, a blockchain startup. Blocko is the provider of Coinstack, a blockchain-based development platform, and has a large number of references in providing blockchain technology in Korea.   Financial organizations in Korea, including banks, card companies and Korea Exchange, are actively adopting blockchain technology, but this is the first case in Korea of commercialized blockchain technology combined with biometric-based authentication system.

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Safety of payments

| 3-1-2017 | Lionel Pavey | GT News

Fraud and cybercrime protection is of major importance for corporate treasurers. In the past year a new risk had to be added to the list: connectivity. Reports of banks being hacked and losing millions through unauthorised payments appeared more and more frequently and since protecting payment connectivity workflows was not a high priority item on the list of treasurers, it created damage in the industry.
GT News deals with the topic of how to protect payments in their article’ ‘Five tips for keeping your payments safe‘ on december 21st, 2016. We asked our expert Lionel Pavey to comment on the article and give us his own view on how to protect payments.

Safety of payments

As even medium size companies can easily have over 100,000 bank transactions per year, it is imperative for a company to ascertain the validity of all payments so that no fraudulent payments take place.

Authorisation Matrix

It is necessary to embed a clearly defined matrix within the company. This should follow a six-eye principle and be traceable within the payment system – invariably a bank payment system. The matrix should include the names of all those authorized; the amount they may authorize; the distinct legal entities they may represent etc. This data also needs to maintained and secured away from the payment centre (IT or legal department). If a new person needs to be added to the list who implements the procedure – Treasury or IT?

Types of payments

There are various workflows that will generate payments and these should be mapped and a complete process should be designed for each one – procurement system and creditors in the book keeping; financial obligations from the existing financing operations (loans, bonds etc.); tax on wages; social premiums; Value Added Tax (BTW); manual payments normally arising from expense claims and incidental purchases outside the normal procurement channel.

Validity of payments

Normal payments relating to creditors are relatively easy to follow – authorization has taken place in 2 different areas (procurement and book keeping). VAT requires data from book keeping for both debtors and creditors. Tax on wages and social premiums are normally presented just once a month either through the administration/controller channel or directly from HR. The biggest area of concern relates to manual payments.

Manual payments

These generally relate to purchases (normally one-off). The obvious question that arises is why is there a need for suppliers that are not in the existing procurement system? It is not impossible to ensure that there are preferred suppliers for all normal desires. Another source is repayments to debtors that are not balanced off against outstanding balances. If a company does not have dedicated software relating to the financing operations who, beyond the Treasury Department, can verify the amounts and dates? The area that requires the greatest vigilance relates to expense claims. Just because a line manager authorizes an expense claim does not mean that it is always compliant with company policy – this is an area where the onus should be on the controller to validate the integrity of the expense claim. Is the expense a genuine expense made in direct relationship to working for the company? An employee away on business and staying in a hotel is entitled to a meal at the expense of the company, but what is the policy towards alcohol and entertainment? Is the amount being claimed excessive and work related?

Integrity of bank systems

How secure is the bank system? When a batch is prepared for payment and an authorisation code produced, how is the code produced – what are the underlying factors that generate the code? Is it possible to alter the beneficiary’s account number after the batch has been produced? Would an alteration be seen by the system, resulting in an incorrect authorisation code? Banks generally do not provide a lot of information as to how their system generates codes.

Reconciliation

Who can extract data from the bank systems? Does this occur daily? Are all entries processed the following day in the book keeping system? What happens to items that are not immediately reconciled?

Conclusion

With regard to standard procurement, it should be easy to construct a solid working system that can be followed at all times. Manual payments are a weak link and a serious amount of time and effort has to be used in constructing a strong framework that has to be enforced and maintained at all times.

Lionel Pavey

 

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Blockchain: What happened during my stay in South Africa? (Part II)

| 30-12-2016 | Carlo de Meijer |

chains-iiIn the past three weeks I travelled throughout South Africa. My main focus was on the country, the people, the safaris, the Big Five and not on blockchain! Now being back home I was curious to learn if there were developments in the blockchain area. 

A number of interesting reports were launched, amongst others by Euroclear and Deloitte. And there has been growing blockchain and distributed ledger activity in the financial industry from start-ups, to banks, central banks, the market infrastructure and consortia. But also from advisory companies, central government bodies and others.

In my first article on treasuryXL, earlier this week, I  wrote about two reports and startups. I want to focus on banks and consortia in this second article about blockchain developments.

BANKS

BNP Paribas completed its first blockchain-based live cross border B2B payments

BNP Paribas has completed its first live cross-border B2B payments between corporate clients using blockchain technology. The transactions, conducted on behalf of packaging outfit Amcor and trading cards group Panini, were cleared in various currencies between BNP Paribas bank accounts located in Germany, the Netherlands and the United Kingdom. For the ‘cash-without borders’ project, the payments were fully processed and cleared in a few minutes. This highlights the potential of the technology to eliminate delays, unexpected fees and processing errors, and pave the way for real time cash management. The bank has strong commitment to follow closely and further accelerate their participation in a number of market initiatives aiming at improving the corporate payments experience using blockchain technology.

Citi backs blockchain startup

Citi has invested in blockchain venture Cobalt DLT, ahead of what the company expects will be a second round of funding in 2017. Cobalt DLT is a blockchain startup aiming to bring distributed ledger technology to the processing of foreign exchange trades. Transactions in the FX market are notoriously inefficient and costly. Currently, foreign exchange trades need multiple records for buyer, seller, broker, clearer and third parties and then reconciliation across multiple systems.   Cobalt is now building a post-trade processing network based on distributed ledger technology. The Cobalt DL solution has the potential to significantly improve post-trade services by cutting costs and reducing risk for our industry. Cobalt DL’s FX solution is set to launch in 2017, with 15 institutional participants committed to using the service.

 CONSORTIA

While the number of consortia in the blockchain arena are further growing, the bank-backed R3CEV sees some cracks in the consortium. Some of its biggest founding members parted ways. Big names like Goldman Sachs and Banco Santander are leaving the R3CEV consortium. And new reports are surfacing suggesting that others such as JP Morgan, Morgan Stanley, Macquiries, US Bancorp and National Australia Bank may follow soon.

The R3 consortium has its first Spanish-speaking Latam member

But there is also some good news. Creditcorp, a Spanish-speaking Latin American financial institution, has joined the R3 consortium to design and apply distributed and shared ledger-inspired technologies to global financial markets. The bank provides corporate and personal banking, brokerage services, and other financial services across its six principal subsidiaries in Peru, as well as other South American countries including Bolivia, Columbia and Chile, and is listed on the Lima and New York stock exchanges.

R3 and Calypso to develop blockchain trade confirmation system

Blockchain consortium R3 continues to press ahead with new initiatives, partnering with Calypso Technology to develop a multi-party trade confirmation system running on its Corda distributed ledger-based smart contract platform. Calypso will be the first application partner to adopt the R3 platform, utilising the technology to enable counterparties to see all trade tickets on the distributed ledger so they can be sure they are matching against the correct trade.

JPX to form Japanese blockchain consortium

Japan Exchange Group (JPX) is to form a consortium of financial institutions to run trials of the use of blockchain technology in capital markets infrastructures. The exchange will seek participation from a wide range of Japanese financial institutions in order to gather broad industrial expertise ahead of testing in spring 2017. They will consider a structure for efficient information sharing between the DLT engineer community and financial institutions through efforts such as training on DLT technology. The Tokyo Stock Exchange together with the Osaka Exchange and Japan Securities Clearing Corporation (JSCC) will lead the coalition which intends to create a test environment for Proof of Concept (PoC) using Hyperledger fabric, the open source DLT platform, in cooperation with IBM.

Blockchain applications, consortium for Malta Stock Exchange

Malta Stock Exchange (MSE) has announced plans to research and develop into the blockchain technology, and to establish its own consortium. MSE’s committee will be run by MSE board members, blockchain experts and its chairman. The consortium will be sharing knowledge and establishing connections or joint-ventures with each other to assist fintech companies based on the blockchain technology, to grow by supporting them in designing and implementing blockchain applications. Furthermore, with this consortium, the Malta Stock Exchange could be planning its first blockchain application. It is very likely their first application on blockchain will replace standard stock exchange platforms.

South Korea rolls out blockchain consortium

The Korea Financial Investment Association (FIA), along with 21 financial investments and five blockchain companies, have teamed up to form a blockchain consortium. The group has signed a memorandum of understanding (MoU) to collaborate on projects and share their expertise on blockchain technology. Moreover, the group aims to create business opportunities for the consortium as well as establishing a platform with the member companies. Its future research projects include the establishment of a common platform for personal authentication due in 2017, researching into clearing and settlement automation in 2018 and 2019, and a platform for over-the-counter trading for 2020.

Microsoft creates Asia’s first blockchain consortium on Azure

Microsoft has teamed up with AMIS and the Industrial Technology Research Institute of Taiwan (ITRI) to form Asia’s first and the most advanced consortium blockchain network on Azure. The consortium includes members such us: Ubon Financial, Cathay Financial Holdings, MegaBank, KGI, Taishin, and CTBC Bank. Aim is to further develop blockchain opportunities in the Taiwan financial market.

The pilot blockchain project is developed using ITRI’s technology (to create an internal application program interface (API)) and Microsoft Azure. AMIS chose Ethereum, to develop a permissioned blockchain, an infrastructure specific to the needs of Taiwan’s financial market. As part of the project, ITRI provided its advanced technology to create an internal application program interface (API), while Azure provided high-speed cloud computing to ensure high security and efficiency for the blockchain infrastructure.

XBRL and ConsenSys work on deploying blockchain tokenization standards

XBRL US, a US non-profit consortium for business reporting standard, has teamed up with Consensys, a blockchain technology company, to work on deploying blockchain tokenization standards. The working group aims to establish a standardized method to represent a token across all blockchain networks in order to eliminate transactional friction and reduce processing costs; enable automation and provenance tracking; and allow interoperability of transactions on a global scale.

The working group will establish goals and action steps by early 2017, and is requesting participation from individuals representing technology, finance, and accounting to provide their expertise in developing tokenization standards that can be used worldwide, for all asset classes.

Source: LinkedIN/Carlo de Meijer

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Carlo de Meijer

Economist and researcher

 

 

Will the European banks strike back?

| 27-12-2016 | Hans de Vries |

europe Last November The European Payments Council (EPC) launched the single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme. The scheme will be live in November 2017 and allows the European banks to propose innovative, digital, and fast payment solutions to their customers. The EPC describes the SCT Inst scheme as “a world first, enabling individuals, businesses, corporates and administrations to make instant euro credit transfers between accounts across an international area that will progressively span over 34 European countries. This new scheme is a revolution for the traditional 9 to 5/ weekdays only operating banks. Will it also block the way to relative newcomers like Paypal? Will the banks seize this opportunity and strike back?

As a result of the internet experience, banks had to deal with the fact that their systems were not able to cope with the subsequent demands of the 24/7 demands of the retail market. Paypal attacked the weakspot of the banks by introducing their worldwide internet banking solution. Downside of this approach is of course the fact that the consumer had to first open and credit their Paypal accounts, before they were able to use  this payment method. And of course the merchants had to support this payment method as well and find ways to collect their funds. As an alternative creditcard payments were implemented and local solutions like I-Deal in the Netherlands, Mister Cash in Belgium etc. All these alternatives had their ups and downsides looking at costs and reachability. Most important value of these solutions were that the Merchant was to some extent sure that he received the funds before delivering the goods. And it worked both ways, the consumers were also sure that the goods would be delivered as soon as the transaction was finished.

With the upcoming introduction of the SEPA instant credit transfer scheme, as announced by the EPC last month, this whole picture is about to change. The EPC describes the SCT Inst scheme as “a world first, enabling individuals, businesses, corporates and administrations to make instant euro credit transfers between accounts across an international area that will progressively span over 34 European countries. This implicates that the consumers can directly debit their accounts and instantly transfer their funds to their beneficiaries all over Europe with the same effect as the current local schemes like I-Deal. This means that Internet Merchants all over Europe are by now reachable for the total European consumer market. Of course it will take some time before all banks are able to support this service and are also able to provide the consumers as well as the Merchants with the tools to obtain the information real time. However, the PSD2 regulations will certainly support this development and the FINtech industry will make sure that the information flows are connected to allow for flawless operations. By implementing the SEPA instant credit transfer scheme the European banks are able to recover lots of grounds they lost uptill now to external parties like Paypal: the banks will strike back! And they will have to in order to survive in today’s world.

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Hans de Vries

Treasury/ Cash Management Consultant