Tag Archive for: blockchain

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

 

Blockchain: What happened during my stay in South Africa? (PART IV)

|13-1-2017 | Carlo de Meijer |

chains-iiAs you may remember I travelled throughout South Africa in december 2016. Being back home I was curious to learn if there were developments in the blockchain area. A first article was about a number of interesting reports that were launched and start ups. The second article dealt with banks and consortia. I focussed on central banks, market infrastructure and card schemes in a third article. In this last article I want to conclude my ‘blockchain journey’ with information about regulators and advisory companies. 

REGULATORS

EU Commission Launches Initiative to Boost FinTech and Blockchain Startups

The European Commission (EC) unveiled a new initiative aiming to support Europe’s FinTech and blockchain innovative entrepreneurs. The Start-up and Scale-up Initiative aims to combine all the possibilities that already exist in the EU, but plans on including a new focus on venture capital investment, insolvency law, and taxation.

With the unveiling of the Initiative, the Commission is hoping to bring together several factors to enable blockchain and FinTech startups to develop and grow their business across Europe. Aside from the proposed factors mentioned above other features that the Initiative is proposing include improved access to finance and simpler tax filings. Through the Initiative startups will also gain access to improved innovation support through reforms to Horizon 2020, which funds high-potential innovation through a dedicated SME instrument. The initiative will also connect startups with potential investors, business partners, universities, and research centers.

ADVISORY COMPANIES

Deloitte invests in blockchain Startup SETL

Professional services firm Deloitte has made an investment in London-based financial services blockchain startup SETL. By harnessing the capabilities of SETL’s blockchain, Deloitte can provide their clients with even more practical and transformational solutions.  News of the investment follows the announcement last month that Deloitte, SETL and Metro Bank had successfully trialed a contactless payment card using the firm’s distributed ledger technology. SETL is one of a number of startups worldwide looking to apply the technology to payment and settlement, and it recently became part of a regulatory sandbox initiative launched by the UK’s Financial Conduct Authority.

Deloitte has bet big on distributed ledger technology. To date, the firm has partnered with a range of startups in the space to develop blockchain prototypes. They have already been investing heavily in real-world applications, such as identity management, cross-border payments, loyalty, trade finance and a number of others. Deloitte is currently setting up an EMEA financial services blockchain centre in Dublin that will house a team of 50 developers and designers and is working with five prominent blockchain companies – BlockCypher, Bloq, ConsenSys, Loyyal and the Stellar Development Foundation – on a wide-range of proof-of-concept applications across the financial sphere.

PwC launched its Vulcan Blockchain Platform

Pricewaterhouse Coopers (PwC) recently launched its Vulcan Digital Asset Services based on blockchain technology. The Vulcan offering marks PwC’s continuing commitment to bringing blockchain technology to financial services and other industries. The Vulcan platform that connects identity, money and assets, allows users to spend, share, trade or track any physical or digital asset cheaply and quickly. It enables fintech start-ups and existing technology companies to gain access to PwC’s global client base and co-develop new product offerings. Vulcan’s digital currency services include digital asset wallets, blockchain-based payments (global payment processing), a digital asset exchange (investment and trading services), and rewards and loyalty programs. In addition, the platform provides governance and assurance services, including anti-money laundering, know your customer and reporting tools to ensure regulatory compliance.

PwC is already conducting several pilots in different industries that capture digitized assets and issue customer reward points as digital money. A global banking group and a central bank are piloting the system while an airline and three multi-national banks are also exploring it.

All parts of this article can also be found as a combined article on my LinkedIN page.

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

 

More articles about blockchain from Carlo de Meijer:

 

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

 

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

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain: what happened during my stay in South Africa? (Part I)

| 28-12-2016 | Carlo de Meijer |

chains-ii In 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 this first article I will focus on two reports and on startups.

 REPORTS

  1. Euroclear Report: Blockchain Settlement – Regulation, Innovation, and Application 

A new report by Euroclear has looked at the regulatory and legal aspects of the use of blockchain technology in post-trade settlement in a European context. The report found that central securities depositories (CSDs) would play an important role in a blockchain-based settlement system. It also stated that regulators should not fear the use of smart contracts and distributed ledger technology any more than any other automated computer-based process prevalent throughout the settlement industry.

As ‘custodians of the code,’ CSDs could exercise oversight of, and take responsibility for, the operation of the relevant blockchain protocol and any associated smart contracts. CSDs may continue to perform an important role as trusted, centralised FMIs (financial market institutions), providing gatekeeping services and oversight of the relevant blockchain.

With the implementation of a DLT-based settlement process there is no need to change the existing regulatory architecture. The authors believe that a blockchain-based settlement system would not present a weaker cybersecurity proposition than any present system, which is not immune to cybersecurity. By allowing regulators to participate as a node in the blockchain system, they could have complete oversight of all the transactions occurring within the settlement system and receive transparent transaction data in real time.

  1. Deloitte Survey: Corporate Executives Having Hard Time Wrapping Heads Around Blockchain

According to a recent Deloitte online survey of more than 300 senior executives at large US companies in order to find out about corporate sentiment towards blockchain technology, understanding of the technology is uneven and many senior executives (39 per cent) still know little or nothing about it, while others place it among their company’s highest priorities.

The survey revealed that blockchain investment and adoption patterns may be more complex than many observers believe. For instance, despite the relative immaturity of the technology, 21 percent of Blockchain-informed senior executives across a wide range of industries indicated that their firms have already brought blockchain into production, and 25 percent plan to do so within the next year. Key findings from the survey showed that 28 per cent of respondents had invested $5 million or more in blockchain technology, while 10 per cent had invested $10 million or more. Looking forward, 25 percent of respondents expect to invest more than $5 million in Blockchain technology during the next calendar year.

Many of these blockchain-informed executives (more than a quarter) see the technology as crucial for their company and their industry. Fifty-five percent of this group said their company would be at a competitive disadvantage if it failed to adopt the technology. Forty-two percent of those surveyed who claimed some knowledge of Blockchain believe it will disrupt their industry.

 

STARTUPS

Goldman, JPMorgan take a stake in blockchain startup Axoni

Goldman Sachs and JPMorgan Chase have announced finalizing an investment that is said to be in a range of USD 15 million to USD 20 million) in blockchain startup Axoni. The Axoni deal represents the latest Wall Street effort to gain traction with blockchain technology. Axoni is a New York-based technology company that helps banks and other institutions develop blockchain software to run capital markets processes. Furthermore, other financial institutions including inter-dealer broker ICA,  Plc’s venture arm,  are also interested in investing in the startup.

Over the past six months, Axoni has run a number of high-profile experiments with some of the financial industry’s largest players, in areas such as post-trade processing of credit default swaps and foreign exchange.

Digital Asset rolls out blockchain platform allowing confidential trades

Blockchain startup Digital Asset Holdings (DAH) has developed a platform to allow traders use blockchain technology without giving out confidential information on their trades. The new platform provides a solution to confidentiality issues holding back adoption of the blockchain technology in financial markets. They solve the privacy issue by dividing the distributed ledger of transactions into two components: one where participants can confidentially store their transactions data, and another that is shared by all participants without the confidential data.

Moreover, the new platform will form the basis of the technology that DAH is building for financial institutions including Australian stock exchange ASX and US post trade services provider the Depository Trust and Clearing Corporation (DTCC).

Manifold Technology rolls out easy-to-use blockchain platform

Manifold Technology, a US-based fintech, has made its patented blockchain platform available allowing non-technical developers to build enterprise-ready, blockchain-enabled applications. The platform has already been used by the Royal Bank of Canada for a rewards program, and by R3CEV consortium member banks to demonstrate instant trading of fixed income assets. The fintech’s platform can handle more than 10,000 transactions per second in operational environments, surpassing the largest credit card companies that can handle between 2,000 and 8,000 transactions per second.

Stellar’s blockchain powers ICICI Bank’s money transfers in India

Stellar, the open blockchain platform and non-profit payment protocol has partnered with ICICI Bank to bring low-cost, near instantaneous remittance solutions in India, the Philippines, Africa and Europe. Besides the bank, other three new partners in some of the largest remittance markets in the world were revealed by Stellar including: Philippines-based financial inclusion-focused fintech startup Coins.ph, pan-African fintech company Flutterwave which is notably plugged into the popular M-Pesa network, and French remittance provider Tempo Money Transfer, a licensed money transfer operator in Europe. This will allow Stellar customers be able to move money from France to Nigeria to Kenya to India in real-time and securely.

Overstock Issues Shares Using the Bitcoin Blockchain

Overstock.com, the online retailer, has become the first publicly-traded company to issue stock over the Internet, distributing more than 126,000 company shares using the blockchain technology. The company announced in October that it would allow its stockholders to purchase shares of its preferred stock. The company is making the offering to demonstrate its tØ platform, while providing its stockholders the opportunity to participate and trade exclusively using the platform.

Fintech Firm Wyre Raises $5.8 Million for “Fastest Blockchain Cross-Border Payments Platform”

San Francisco-based Fintech startup Wyre has launched its blockchain remittance platform alongside a successful $5.8 million funding round. Wyre intends to add its blockchain solution as a layer on top of existing blockchain-based platforms adopted by payment giants around the world. Fundamentally, the Wyre platform works by taking deposits from large payment companies via an API. These transactions are sent over Wyre’s ledger. Wyre then delivers the funds as per the transaction’s instructions, “typically in less than six hours”. Wyre’s focus lays in the cross-border payments corridor between China and the United States.

Sources: Euroclear Report: Blockchain Settlement – Regulation, Innovation, and Application, Deloitte Survey: Corporate Executives Having Hard Time Wrapping Heads Around Blockchain, Carlo de Meijer/LinkedIN article

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

Blockchain: how to make it operational in your company?

| 29-11-2016 | Carlo de Meijer |

block-chainToday, I was invited to participate in a Challenge meeting at the Euroforum Fintech event in Amsterdam. My challenge was the following. Suppose we are somewhat further in time. Blockchain is far beyond the hype, the initial overdone expectations have been brought to a more realistic level and the technology is generally accepted as having enough opportunities for the financial industry. Your company is convinced this technology will suit their business. A number of blockchain applications have been chosen to use in your day-to-day activities. That is the easy part.

Now the decision has been taken to adopt this technology, there comes a new challenge: how to integrate blockchain and implement this technology into the existing business and incorporate it within your legacy enterprise applications. In other words: how to make it operational!

Making blockchain work: the Challenges

That is where the real work starts. Making blockchain applications work in the real day-to-day world. That may prove as much of a challenge – or even more than that – as building the blockchain application itself. Because blockchain is a complete different and unprecedented, technology, corporates are confronting problems related to integration of the blockchain into the enterprise. Most financial organisations have to take into account their existing complex business lines and the legacy (and mostly old) technology they use. But also the various regulatory obligations have to be taken into consideration.
And there is another – maybe even bigger – challenge. Most banks nowadays heavily depend on massive and (capital-) expensive financial processing systems. These are often 15 years old (or even older!). But these systems do power the many transactions between the world’s major businesses and governments. Trying to overhaul them altogether is a formidable task, and may come with a huge risk. Disrupting them, even for a short time, could be disastrous.

Blockchain integration: points of attention

When deciding to integrate blockchain in your company, you should take a number of important issues into consideration. Every financial company that is serious about blockchain needs also to be serious about issues such as: compliance and regulatory requirements; Enterprise integration with internal systems and data repositories; connectivity to a partner ecosystem; interoperability requirements and access layer; visibility into—and real-time monitoring of—blockchain-based transactions; automated process orchestration; life cycle events; access controls; governance, and more.

Compliance and regulatory requirements

In the near term, KYC/AML models should be developed that could be integrated into enterprise blockchain. Without a thoughtful consideration of KYC/AML and other related regulatory applications, it will be a difficult story to realise that. These models should include concepts such as an inter-ledger, side chains etc. But in such a systematic way to take advantage of blockchain’s way of processing transactions. These models should enhance existing AML/KYC processes thereby overcoming shared data/ledger challenges.

Enterprise integration with incumbent internal systems and data repositories

Another consideration is: how to integrate blockchain with incumbent record systems. Corporates have been creating their own business systems to better measure and manage the business. These include issues such as reporting, analytics, business application management, dashboard, counter-fraud management, etc. Many of these systems “feed off” of the enterprise’s System(s) of Record (SoR) with all kind of information. Integration blockchain in an enterprise suggests a system design around integrated transaction systems (trust systems) and record systems (shared ledger); any application that is either transitioning or originating using blockchain technology would need to consider the enterprise systems for tangent business activity.

Interoperability and access layer

And there is the interoperability issue; may be the most important one. Interoperability of blockchain within an enterprise will be key. Every enterprise has legacy technology that must be interoperable with blockchain, from KYC to risk management and settlements. These applications have to engage seamlessly with the new blockchain applications. In order to make that possible, organizations need to use a so-called access layer to ensure complete interoperability. Such an access layer makes it possible to abstract the complexities of blockchain and smart contracts; expose the functionalities of the blockchain application; and, communicate them to legacy applications.

Automated process orchestration

Although private blockchain transactions occur in a closed environment, they however may impact events both inside and outside the chain. Technology is thereby critical to make these on-and off-chain applications interoperable in an automated fashion. Automated process orchestration is thereby needed, as it enables blockchain events to trigger processes across multiple off-chain and on-chain applications.

Life cycle event

Lifecycle events need to be managed too. Through a total surveillance module, the access layer has complete visibility of every event in the blockchain network; with that visibility the analytics engine can detect anomalies and gather intelligence. For example, when a counterparty exercises an option on a smart derivatives contract in the blockchain, that event needs to be captured and propagated to the same downstream systems. Similarly, external events, such as those relating to market data, will also need to be monitored and applied to the smart contracts. You will need to plan for integrating those systems. But before doing that you will have first identified what systems are affected and how.

Governance

And there is the governance issue. What happens in a blockchain application can have an impact across the whole enterprise. So careful monitoring off- and on-chain is necessary in order to enable proper governance, risk management and security of the entire network. Integration that is technology-neutral and the ability to establish and execute the policies required for good governance are key to the blockchain access layer. API-based integration could thereby be of help.

Other requirements

But here it does not end. New higher-level processes may also need to be established to exploit the benefits from the blockchain ecosystem. The interoperability between systems will have to be agile, secure and have robust governance. It should be prevented that enterprise applications would be exposed to any complexities of the blockchain. Operationalizing blockchain also addresses the need for access controls over the participants, from both an application and business context, be it internal or external to the enterprise.

Integration: steps to be taken

To gain the real advantages of blockchain technology, a company must be able to rapidly, but seamlessly utilize blockchain. Without having to run complex, costly and lengthy re-architecturing programs. But what is the best approach to operationalize blockchain?

Here are six steps you should keep in mind:

First, you need to connect to a (private or public) blockchain ecosystem and/or with external parties using the blockchain.
Second, you have to integrate blockchain applications with existing technology.
Third, you will have to decide how to interact with the blockchain ecosystem, with regards to security and access controls.
Fourth, you have to figure out how to monitor transactions and events on the blockchain and react to them in real time.
Fifth, you have to decide how to reconcile data that exists in blockchains as well as legacy applications.
Sixth, you have to automate, coordinate and manage the processes that span both existing technologies and blockchains.

Conclusion

While blockchain technologies are viewed as a disruptive force for the existing financial systems and market infrastructures and may fundamentally change the way the financial services industry operates day-to-day business, the challenges of enterprise adoption and integration need to be addressed as well.

The introduction of blockchain in your company will require the well needed time. You will have to address the enterprise issues around transaction audibility, visibility and integration into existing business functions. Without this, a profitable integration of the blockchain in the company will prove to be a difficult storey.

Of course this story is not yet complete. I will definitely have forgotten things that must also be considered. But this is a start!

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Could blockchain bring the EU Capital Market Union forward?

| 10-11-2016 | Carlo de Meijer |

blockchainThe European Commission recently launched an update report on the state of the Capital Markets Union (CMU) project. A comprehensive program of actions set out a year ago to put in place the building blocks for this CMU by 2019. Aim is to create deeper, and more integrated capital markets across the EU to lower costs and make the market more resilient. One year later this project is still “lacking an organic and coherent set of actions to bring down cross-border barriers and create a single market for capital, which could support the effectiveness of monetary policies”, according to the Commission.

It however is important that the CMU project moves forward with greater speed. A financial market infrastructure that would permit more funding via the capital market is however not yet in place. Besides under CMU categorisation, post trade issues are considered long(er) term actions.

An intriguing question is: Could blockchain play a role in bringing the EU Capital Market Union forward?

Existing inefficiencies

But first, why a European Capital Market Union? The free movement of capital across the EU is one of the three key freedoms enshrined in the Treaty of Rome. This however is still far from its realization.

Over-reliance on bank financing

Europe’s businesses cannot fully exploit the opportunities of an efficient EU capital market. They are over-reliant on bank financing such as bank loans. Many small and medium enterprises (SME) have limited access to the financial markets, especially to venture capital and capital markets. Access to capital markets in Europe is unequal and varies significantly across member states. Investments in shares and corporate bonds occur mainly domestically, where different rules and standards apply.

 “The proportion of European company finance that comes from banks is high, around 80 per cent. Less than 20 per cent comes from investors. Figures from the US are the opposite. While the European economy is as big as America’s, bank loans in the US account for less than 30% of total funding for businesses, Europe’s equity markets are less than half the size, its debt markets less than a third”, according to Deutsche Bank Research.

Fragmented market infrastructure

In Europe, we have a very fragmented capital market infrastructure (unlike in countries such as US and Japan). Though there has been some moves towards consolidation, mainly at the exchange level, there is even more fragmentation now despite the efforts taken by the industry since 2000.

At present there are 102 regulated markets, 151 multilateral trading facilities, 20 central counterparties (CCPs), 42 central securities depositories (CSDs) or securities settlement systems (SSSs) and 6 trade depositories.

Insufficient regulation

In the post-crisis environment European financial authorities have recognized the importance of efficient market infrastructures at the trading and post-trading levels. They have introduced  regulations providing guidelines targeting CSDs and CCPs, and aiming to organise their activities in a harmonised way such as CSDR and EMIR. These regulations should bring further harmonisation in the fragmented post-trade area. And there was the launch of T2S,  which aims to eliminate cross-border settlement among participant CSDs.

However: this is a very long process that is still ongoing. These pieces of legislation are either still in planning phase or have only partially been rolled out. Others – namely on settlement discipline – have not yet been proposed. The experience with T2S demonstrates how difficult and lengthy the creation of single market infrastructures is. T2S has gone live, but three more migration waves are needed before implementation is complete. Although T2S only concerns settlement, it should create harmonisation in the custody industry.

Capital Markets Union: the goals

On 30 September 2015 the European Commission launched an action plan setting out key measures to achieve a true single market for capital in Europe. With many obstacles to domestic and cross-border capital movements as well as underdeveloped and fragmented capital markets – especially compared to the US – leading to lower levels of diversified funding for the economy, there is a need for action. In the current political and economic context developing stronger capital markets in the EU is seen as even more important.

An EU Capital Market Union is seen as the logical next step in the integration of European financial markets. The idea thereby is to transform European finance from a primarily bank-based financial system into a system wherein most of the funding is channelled directly to firms and households through non-bank financial institutions and securities markets.

The CMU has three pillars …..

  1. Unlocking investment for companies, including SMEs and infrastructure projects
  2. Attracting investments from outside the EU from
  3. Opening up the EU’s real economy to new investment sources

…… and six goals

  1. Financing for innovation, start-ups and non-listed companies
  2. Making it easier for companies to enter and raise capital on public markets
  3. Investing in long-term infrastructure and sustainable investment
  4. Fostering retail and institutional investment
  5. Leveraging banking capacity to rapport the wider economy
  6. And, facilitating cross border investment

The vision

Through a Capital Markets Union (CMU), the Commission is striving to increase the benefits that capital markets and non-bank financial intermediaries can provide to the economy. By improving the effectiveness of these markets, where barriers and fragmentation will be replaced by deeper and more integrated capital markets. This should contribute to improved stability, capital allocation, business growth and innovation. A single capital market would facilitate improved cross-border risk sharing, more liquid markets and a wider variety of sources of funding.

“This is done by unlocking the capital around Europe, by removing obstacles to the free flow of capital across borders and providing savers cross-border investment opportunities and offering business a greater choice of funding options at lower price” (European Commission, 2016).

The effectiveness of the market could thereby be enhanced with a single rulebook approach, enforcement and competition; supervisory convergence; data and reporting; market infrastructure and securities law; company law, corporate governance, insolvency and taxation; as well as technology.

Challenges

One year after the launch of the CMU Action Plan, the EU faces a number of important challenges that could impact the Capital Markets Union.

Political

The EU is confronted with a number of political issues. According to the head of ESMA, one of these that could really hurt the plans for this Capital Markets Union is Brexit, the upcoming British exit from the European Union. Being the European biggest financial center, London was supposed to play a central role in the CMU and be one of its biggest beneficiaries.

Regulatory

But there are also serious regulatory challenges. Work towards a CMU seems even more complex and politically difficult than the building of the European Banking Union. This given the extremely diverse legislative and regulatory setting of non-bank finance in EU countries, and the resistance of national authorities to release powers to Europe. It is therefore important to progress quickly towards the adoption of forthcoming legislative/regulatory proposals.

Technology

And last – but maybe the most important – there are the technological challenges. The capital markets are currently witnessing a remarkable wave of disruption and innovation, driven by new technologies. Technology has the power to increase the role of capital markets, and bring them closer to companies and investors. It is a driver of competition and helps to create a more diverse financial landscape.

 

Nasdaq: the wrong focus?

In a report by Nasdaq “Capital Markets Union: The Road to Sustainable Growth in Europe” , the US exchange stated that the concrete measures in the CMU Action Plan mainly focus on making it easier for large institutions to invest more and extend their product and service offerings, rather than improving the capital markets themselves.

For Nasdaq that is the wrong focus. Instead, the Action Plan should focus on increasing transparency, making the capital markets more accessible to smaller businesses, incentivizing long-term private investment in listed equities, and above all encouraging the development and use of disruptive technology to improve the post-trade environment.

An independent report by Systemic Risk Centre, co-hosted at the London School of Economics and University College London, also states that a successful CMU must embrace disruptive technologies.

“The EU and national authorities must alter existing regulatory structures if the CMU is to be achieved, encouraging disruptive technologies and allowing market forces to match savings to investment opportunities more efficiently”, according to the report.

 

Fintech and blockchain

One area that lies in the center of the technology revolution is the Fintech sector. Next to upcoming regulation, the booming FinTech industry is set to be a strong influencing factor on the planned Capital Market Union. They have the power to seriously disrupt EU capital markets. The technological advances they bring are accelerating, creating new business propositions and revolutionizing the way the financial industry operates. New technologies including blockchain may bring new asset classes to capital markets, but also create inroads for new and currently underserved investors as well as SMEs to access and use traditional financial services.

Blockchain: “el Salvador”?

Of all Fintech trends the most discussed and promising is blockchain– which enables transactions to take place on a distributed ledger that is maintained by a network of computers. This technology is attracting industry-wide interest. The financial industry is now actively looking into opportunities this blockchain technology could bring. They thereby are increasingly engaging with industry bodies as well as clients and blockchain providers to bring more efficiency to the financial industry. Nasdaq is a “big believer” in the ability of blockchain technology to effect fundamental change in the infrastructure of the financial services industry.

 “Changes are afoot that hold the potential to revolutionize the way we think about and interact with the world of finance as businesses, investors and consumers,” states the report, while cautioning that “more needs to be done within the scope of the CMU to explore the opportunities offered by this (blockchain) technology.”

CMU and blockchain applications

The role that blockchain could play in a CMU environment is intriguing. According to a growing group blockchain technology could be a catalyst for greater integration of Europe’s financial markets by helping break down some of the long-standing barriers to cross-border investment. This technology brings both opportunities and challenges. Blockchain technology promises to bring financial markets into the XXI century with real-time settlement, corporate actions and risk management.

There is little doubt about the potential gains this technology could deliver in terms of lower transaction costs, shorter delays and greater convenience. The existing market infrastructure is being challenged by blockchain applications that have the potential to render contracting and settlement between market participants cheaper and faster. It may allow full-fledged real-time settlement, corporate actions and risk management services.

In line with the CMU, the potential of a blockchain/DLT venture capital platform could facilitate the supply and demand for SMEs with regards to funding. Either by debt issuing, turning savers into investors and providing more capital access options to companies.

Or by shares issuing – against a light prospectus regime – turning savers into owners. This could be a type of regulated crowd funding by issuing existing financial market products like shares and bonds, but without the burden of legacy systems and infrastructures.

Transforming market infrastructures

Blockchain could prove to be a perfect use case for a complete reform of the securities post-trade value chain, transforming the market infrastructures. This technology has the potential to wipe out traditional post-trading players. As blockchain removes the need for a number of intermediaries in the securities lifecycle, this may lead to substantial shifts in the role of the different market participants and in the organisation of the post-trade landscape. Large central bodies such as clearing houses (CCPs) and central securities depositories (CSDs) would not be needed in a world where the settlement of transactions is completely reorganized and executed real-time and those activities are greatly taken over bij the distributed ledger.

No complete disintermediation

It however is not expected that there will be a complete disintermediation of service providers. While the role of custodians would greatly disappear and those of clearinghouses and CSDs will drastically change in a blockchain environment, the rest of the value chain in the securities industry may remain largely intact. The functions associated with tracking, reconciling, and auditing enormous amounts of data are not going to be disintermediated away. They have to continue to exist, but just need to be done more efficiently, at lower cost and with fewer errors. And also the bulk of financial infrastructures dominated by financial institutions will largely remain. As most of their activities in this area are related with the provision of intermediated capital funding.

 

European Commission and Fintech

But how is the attitude of the European Commission towards Fintech in general and blockchain particularly?

“Fintech has the power to increase the role of capital markets, bringing them closer to companies and investors” says the European Commission.

As it bids to push the CMU, the Commission is increasingly backing fintech in capital markets. The Commission is thereby highlighting the role that technology including blockchain could play as a driver of competition that helps to create a more diverse financial landscape bringing more choices to consumers, companies and investors.

However, “at the same time, the rapid development of fintech poses new challenges in managing risks and ensuring consumers have adequate information and safeguards,” warns the Commission

They agree that this innovative potential should be harnessed. In a number of EU Member States, regulatory authorities are already developing new approaches to support the development of FinTech firms, including hubs providing regulatory guidance or teams focusing on policy implications of FinTech. The European Commission supports this development and will continue to promote the development of the FinTech sector and work “to ensure the regulatory environment strikes an appropriate balance between building confidence in companies and investors, protecting consumers and providing the FinTech industry the space to develop”.

The Commission will work with the European Supervisory Authorities (ESAs), the European Central Bank, other standard setting bodies, and the Member States to develop a co-ordinated policy approach that supports the development of FinTech in an appropriate regulatory environment.

Buts!!

There are however still a number of buts!!! The directions that these blockchain related developments will take in the end are not (yet) entirely clear. For example, it will most likely take some years before blockchain will have a real, potentially disruptive, impact on parts of the financial services industry. And what those really will be?

And it is also far from certain whether there is a reason to assume that this blockchain technology would, on the whole, eliminate the prevailing risks of the capital markets. While it is certainly true that the opportunities blockchain are promising, digital finance is not immune to errors, manipulations, hackings and other dishonest practices.

The self-regulation of blockchain technology is no panacea either: legal issues have already arisen and any application involving risks to the financial sector will still require supervision. The Commission has the vision that one therefore should not attempt to create an artificial separation in financial regulation, but should instead treat technology neutrally.

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

 

 

Blockchain, near real-world projects and collaboration: viable approaches

| 25-10-2016 | Carlo de Meijer |

blockchainIn one of my earlier blogs I wrote that we are beyond the hype of blockchain and distributed ledger technology. Support in the financial industry and beyond for this technology is accelerating in a rapid way. A lot of time and money is now invested into blockchain and its applications.

“Distributed ledger technology is set to move out of the test environment and into the wild next year, with nearly two thirds of banks expecting to be in production with full-scale, commercial blockchain projects by 2019”, according to recent research from IBM.

If so, that would mean much earlier than the 2020 to 2025 period that was earlier predicted for mass adoption of blockchain technology.

Collaborative near real-world examples

Financial institutions, technology companies as well as start-ups are increasingly collaborating on projects and pilots (or are planning to do so) to use distributed ledger/blockchain technology in trade finance, payments and securities. Next to existing platforms such as Ripple (payments), there is a growing number of collaborative initiatives including the Distributed Ledger Group (R3CEV) and the Hyper Ledger Project (Linux Foundation) (see earlier blogs). This could really accelerate the whole process towards mass adoption.

The first collaborative near real-world tangible use cases and practical applications of distributed ledgers  in the financial industry are now being brought to the open. And more are expected soon. Here follows a number of interesting examples of actual projects, initiatives and trials. Main question is: will they be viable in the long run?

R3CEV

Credit Suisse (syndicated loans)

Led by Credit Suisse and the bank-backed blockchain consortium R3CEV, a group of seven member banks (BBVA, Danske Bank, Royal Bank of Scotland, Scotiabank, Société Générale, State Street, US Bank and Wells Fargo) and a number of buy-side firms have started a new initiative to apply distributed ledger technology to overhaul “antiquated” and costly manual intervention in the global syndicated loans market. Goal is that in the future, syndicated loan data processing can be done exclusively on the distributed ledger, eliminating the cost for each market participant to maintain its own separate lending system. The Swiss bank is working with Synaps Loans (a joint venture created earlier this year through a partnership between smart contract vendor Symbiont and loan settlement platform provider Ipreo), on a proof-of-concept (PoC) which will run through the end of this year. Through Synaps, loan investors have direct access to an authoritative system of records for syndicated loan data. By connecting a network of agent banks through blockchain, faster and more certain settlements in the syndicated loans market can be achieved. This allows immediate savings by reducing manual reviews, data re-entry and systems reconciliation.

R3CEV and eight member banks (treasury bond trading)

Working under the R3CEV flag, a group of eight member banks have successfully tested a distributed ledger prototype for bond transactions. Thereby they used an implementation of Intel’s proprietary distributed ledger platform, Sawtooth Lake, for the trial. The platform featured advanced smart contract functionality, enabling trading, matching and settlement of US treasury bonds on-chain, as well as automated coupon payments and redemption based on network time and third party data sources. The partners used physical, non-cloud-based nodes hosted across the US, Canada, Asia, Australia and Europe to interact and simulate US treasury trading on the ledger. In addition, the technology enabled an on-chain identity registry to facilitate the permissioning of validators and transactors, and the association of those roles to different organisations. Intel is now donating the bond-related transaction families developed for the trial to the Hyperledger Project.

R3CEV and 15 member banks (Letter of Credit)

R3CEV and 15 of its consortium member banks successfully completed a number of prototypes using distributed ledger technology for trade finance purposes. The involved member banks in the trials (including Barclays, BNP Paribas, Commonwealth Bank of Australia, Danske Bank, ING Bank, Intesa Sanpaolo, Natxis, Nordea, Scotiabank, UBS, UniCredit, US Bank and Wells Fargo), designed and used so-called smart contracts on R3CEV’s Corda distributed ledger platform to process accounts receivable (AR) purchase transactions, invoice financing or factoring, and letter of credit (LC) transactions. Estimates suggest that “such technology has the scope to reduce operational and compliance costs of paper-based trade financing by 10 to 15% and provide a platform for banks to grow revenues by as much as 15%”.

R3CEV and 40 member banks (Commercial Paper trading)

R3CEV and 40 member banks have successfully completed a number of cloud-based ledger experiments. The (then!) 40 member banks were connected to five different R3CEV managed private distributed ledger technologies. Objective was to test, compare and evaluate the strengths and weakness of different blockchain offerings on the market today. The banks thereby modelled a series of smart contracts that were programmed to manage Commercial Paper transactions including facilitate issuance, secondary trading and redemption of Commercial Paper. Each of the distributed ledgers thereby ran a smart contract based on identical business logic to enable the banks to accurately compare the difference in performance between them. These experiments followed a test in January to unite eleven global financial institutions on a private distributed ledger provided by Ethereum.

Barclays and R3CEV (smart contracts repository)

The R3CEV blockchain consortium is working with Barclays Bank, ISDA and legal and academic bodies to explore the development of a repository of master templates for smart contracts when trading and managing securities on distributed and shared ledgers. The new group, has been set up to address the challenges of developing master templates for smart contracts, with an initial focus on how they could be implemented within existing legal and regulatory frameworks. Earlier this year, Barclays Bank demonstrated a Smart Contract Templates prototype creating an ISDA agreement and an interest rate swap trade that then executed as a smart contract on R3CEV’s Corda platform.

Credit Suisse and others (reference data management)

Coordinated by Credit Suisse and working with R3CEV and capital markets tech startup Axoni, seven buy-side and sell-side firms (including Citi and HSBC) have completed a multi-months proof-of-concept (PoC) exercise, which aimed to simplify reference data processes through a distributed ledger prototype. The prototype was created using proprietary distributed ledger software of Axoni (a distributed fintech solutions company) to simulate the collaborative management of reference data, as well as the use of that data for corporate bond issuance. Participants could interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, immutable record of all data related to the bond. The results show how blockchain technology could be used to allow regulators and network participants to view in real time which parties on the ledger have created, issued and proposed amendments to the data record. “This may remove the need to reconcile multiple copies of data and help reduce duplicate reference data costs and improve data latency which will ultimately lower costs and reduce operational risks”, according to Credit Suisse.

Hyperledger Project

UBS and IBM (trade finance)

Swiss bank UBS and IBM  have designed a project that replicates the entire lifecycle of an international trade transaction on Hyperledger`s Fabric blockchain. The trade finance project that is still in its earliest stages and focuses on just a single aspect of the process, combines payment transactions, foreign exchange payments and more, into one single, elaborate smart contract. By programming that process into a smart contract on Hyperledger, UBS “expects to be able to cut the processing time down from seven days to one hour”. Besides the letter of credit process, the project also aims to incorporate the account opening process, to build a user-friendly interface “capable to operate on the go, from a transportation vehicle for example”. It remains unclear how long it will take to complete the international trade project, according to UBS.

CLS (payments netting service)

CLS, the multi-bank foreign exchange counterparty, is to build a payments netting service for trades settled outside the core membership thereby using distributed ledger technology based on the Hyperledger Fabric. CLS wants to use its position to standardise and expand bilateral payment netting capabilities for the entire FX market, eliminating intra-day liquidity demands caused by inefficient “bespoke” approaches to netting throughout the market. The company has signed up 14 banks as early adopters of the proposed service, which will accept FX instructions for six products, including non-deliverable forwards (NDFs), and 24 currencies over existing SWIFT-based channels. Participants will also have the option of connecting directly to the platform via a permissioned distributed ledger, administered by CLS using Hyperledger Fabric. CLS will be working with IBM to build new infrastructure. The new service will be delivered in a phased approach – subject to regulatory approval – beginning with a payment netting service for FX spot, forwards, NDFs, swaps, tomorrow/next day and same-day trades across the 18 currencies CLS currently settles, as well as the Chinese renminbi (offshore), Russian rouble, Polish zloty, Turkish lira, Thai baht and Czech koruna.

Bank of America Merrill Lynch/HSBC (Letter of Credit)

A bank consortium consisting of Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority (IDA) of Singapore successfully applied distributed ledger technology to replace paper-based letters of credit (LCs) in trade finance transactions and streamline global trade. They thereby used the open source Hyperledger Project software for the prototype app, supported by IBM Research and IBM Global Business Services. By sharing information between exporters, importers and their respective banks on a private distributed ledger, this enabled them to execute a trade deal automatically through a series of digital smart contracts. The partners now plan to conduct further testing on the concept’s commercial application with selected partners such as corporates and shippers. Their challenge is to take this from concept to commercial use “making it quicker and easier for businesses to connect with new suppliers and customers at home and abroad.”

BTMU and IBM (contract management and trade finance)

The Bank of Tokyo-Mitsubishi UFJ (BTMU) and IBM are collaborating to use blockchain technologies for the design, management and execution of contracts among business partners. They thereby make use of the Hyperledger Project’s open-source platform to automate business transactions with each other on the IBM Cloud. Both partners have built a prototype of smart contracts on a blockchain that should improve the efficiency and accountability of service level agreements in multi-party business interactions. To help improve efficiency, the two will monitor delivery and usage of equipment with a sensor that embeds information into the blockchain. This will then automate invoicing and payment processes between the two companies. BTMU plans to begin using it to manage contracts within their business in fiscal year 2017.

JPX and IBM (post-trade settlement and proxy voting)

Officials of the Japan Exchange Group (JPX) and IBM Japan recently announced advanced plans to test the use of blockchain technology for post-trade settlement and proxy voting. The exchange will investigate how blockchain technology could be used to create new systems for the trading of low-liquidity assets. They thereby will use the framework provided by the Hyper Ledger Project. JPX is also working with Nomura Research Institute (NRI) and several major financial institutions (including SBI Securities, Mitsubishi UFJ Financial Group and blockchain specialist Currency Port) to test the use of blockchain technology for future applications across the securities industry. Until the end of June, the partners have examined various business scenarios and validation items involving distributed ledger technology and prepare prototype systems based on those scenarios.

Credit Mutuel Arkea (verify customer IDs)

Credit Mutuel Arkea has completed a pilot of an operational permissioned blockchain network to verify customer “bona fides” in compliance with Know Your Customer (KYC) requirements. Using the open-source Hyperledger Project fabric, the software “tapped into all valid existing evidence” already stored in the bank’s multiple systems of record such as from mortgage applications or life insurance enrolment and bank accounts opening. Following the success of the initial pilot, Credit Mutual Arkea plans to work with IBM to integrate the different silos of customer data across the bank to create a single ID data chain that can be used across all business processes.

Ripple

The Ripple network recently announced that seven banks including Santander, CIBC, UniCredit, UBS, ReiseBank, National Bank of Abu Dhabi and ATB Financial of Edmonton “had made a breakthrough by being among the first financial institutions in the world to move real money across borders using blockchain-based distributed ledger technology provided  by Ripple”. Focus is thereby on international, low-value, high-volume and velocity payments (as these can often be expensive and not profitable for banks). The seven banks are all planning to deploy Ripple commercially, while most having already moved real money via the network.

In the meantime Ripple has signed up several major banks to a steering group on the use of distributed financial technology for global payments (including names like: Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac, and Royal Bank of Canada). The creation of the  Global Payments Steering Group (GPSG), is significant because this represents the first time that major banks have formulated policies to govern the transfer of money across borders using blockchain. The group will oversee the creation and maintenance of Ripple payment transaction rules, formalised standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities. This Group might become a great competitor for SWIFT.

Standard Chartered (trade finance)

The first bank-developed blockchain platform for trade finance was the product of a partnership between Standard Chartered, the Development Bank of Singapore (DBS) and the Infocomm Development Authority of Singapore (IDA), the government’s IT and communications arm. They developed a blockchain-based invoice trading platform (code-named TradeSafe) that uses the distributed ledger technology developed by Ripple. Invoices and bills of ladings are allocated unique identifiers and stored on this distributed ledger. The use of unique identifiers enables users to view the status of a particular invoice/bill, but also reduces the risk of duplicate financing of the same invoice/bill. Further, to maintain confidentiality, users are allocated encrypted identities.

ATB Financial and Reisebank (international interbank payment)

SAP (the world’s third largest independent software manufacturer), partnered with Ripple and two banks, ATB Financial (Canada) and Reisebank (Germany), to demonstrate how banks can improve the efficiency of cross-border payments by using blockchain technology. For that SAP and Ripple designed and built a proof-of-concept (PoC) prototype based on this technology (thereby connecting SAP HANA Cloud, the open platform as a service (SaaS), and the SAP Payment Engine application, which centralizes payment processing in one solution with Ripple’s network of enterprise blockchain solutions).

This prototype was used to send the first international interbank blockchain payment of CAD $ 1,000 from ATB Financial to Reisebank. With parties representing different continents, this cross border payment transfer using blockchain technology was completed successfully. The payment which would normally have taken between two to six business days to process “was now completed in around 20 seconds, so nearly instantaneous”. In addition for being far quicker, this blockchain payment transaction cost a fraction of current transaction rates.

Japanese bank consortium (real-time settlement and domestic fund transfers)

A consortium of 15 Japanese banks are to work with blockchain joint venture SBI Ripple Asia, to build a new payments platform for 24 hours real-time settlement and domestic fund transfers, thereby using Ripple’s blockchain technology. This should firmly reduce the fees currently paid by banks for performing cross-border transactions and pave the way for the arrival of real-time domestic and cross-border payments. Initial participants include Bank of Yokohama and SBI Sumishin Net Bank (SBI Holdings owns part of it). It is expected that the size of the consortium will increase to 30 banks, and that the new service will go live in Spring 2017.

Santander (cross border payments)

Santander has become the first major UK bank (and the first bank in the world) to use Ripple for cross border payments. Starting in May Santander has begun piloting a Ripple-powered payments app built on the blockchain technology, that facilitates international payments. The app, currently being tested by bank staffers, connects to Apple Pay, and allows cross-border payments to be made between GBP 10 and GBP 10.000, around the clock and at any time of the day, using Touch ID. Funds appear in the recipient’s account the next working day. These transfers can be made from sterling to euros and US dollars (currently payments made in euros can be sent to 21 countries and US dollar payments to America only). The results of this trial will be used to assess whether to bring this technology to its customer base at a later date.

Foundational challenges

When it comes to blockchain, we may say that we are beyond the hype. The many experiments, proof of concepts and other real-world trials with blockchain technology are all evidence of that. And we will see many more of them this year and beyond. But quoting Terry Roche of Tabb Group in a recent blog the technology now needs to deliver real-world benefits.

“While blockchain’s promises remain bright, however, there are (still) numerous foundational challenges (process, technical, community, etc.) that the financial services industry needs to overcome to get a beneficial blockchain world.”

While all these projects ask a lot of investments, not all of them may prove to be viable in the end. The financial industry however has no endless funds available to explore endless options.  In today’s constrained technology marketplace, there needs to be a defined and realizable gain associated with any project for firms to fund it. That is why the industry should prevent dead-end options and only focus on viable applications that have a long-term future and suits best in their business model!

 

carlodemeijer

 

Carlo de Meijer

Economist and researcher

 

Blockchain and Hyperledger Hackfest: from another planet

| 17-10-2016 | Carlo de Meijer |

blockchainLast week I was invited to attend a Hyperledger Hackfest at ABN AMRO in Amsterdam. This event organized by the Hyperledger Fab led by IBM took place in the rooms of the bank’s new Innovation Lab, an ultra-modern environment. Certainly the right place for such a happening. Technical specialists and architects from companies and organisations all over the world from China to Japan and the US as well as Europe were participating.  

From another planet

For me as a ‘normal’ economist who thought to know a lot about blockchain and distributed  ledger technology, trying to bridge the gap between this technology and the financial world, this was sometimes different (and difficult) stuff. Just as if I was on another planet. But for many of them the other way around may also be true. The present financial world is often a complex one for these technical people. To realise that this technology should fit in this financial world they also need to understand what is happening there in other to bridge their gap. That means we should learn from each other in order to get the best of both worlds.

Blockchain platform Iroha

I have learned a lot at this event. But for this blog I like to restrict myself to an interesting offering that is a real example of such a cross-disciplinary research approach: the Japanese blockchain platform Iroha. One of the speakers from the Japanese fintech Soramitsu, was just returning from the Geneva SIBOS event where he had announced the open sourcing  and proposal of a blockchain network called Iroha to the Hyperledger Project (see my earlier blog about Hyperledger Project). Once the proposal is accepted by the Hyperledger Project and its members, Soramitsu will be able to collaborate with a wider range of partners and corporations in testing the network and finding easier methods in deploying blockchain networks to private companies.

What is Iroha?

Iroha, jointly sponsored by leading Japanese technology firms, including NTT DATA Corporation, is a distributed ledger technology and smart contract platform using Java-based smart contracts and a Byzantine Fault Tolerant consensus algorithm, called Sumeragi. This network is adapted from the Hyperledger Fabric architecture, with plans for greater interoperability in the future

Soramitsu intends to increase the availability of smart contract enabled networks to open opportunities for companies in using the blockchain technology. Iroha is expected to provide private businesses, financial institutions and organization with a simple blockchain architecture that is easy to understand, develop, and integrate. That will enable businesses of any size to implement its network with substantially lower costs, as well as run smart contract-based applications with improved security measures.

All of Soremitsu’s partnering institutions and research firms will support the development of Iroha, by running experiments on Iroha’s local currencies and the network’s overall efficiency.

Expected use cases for the Iroha blockchain network include: Payment and Settlement, Contract management, Securities clearing, Development of financial products such as Insurance, Supply Chain Management, Smart Grid, Trade finance, and Internet of Things (IoT), and efficient compliance with Know Your Customers (KYC) regulations.

Soramitsu collaborative approach

Soramitsu, started in February 2016, and a member of the Hyperledger Project, currently oversees various research projects and developments with Japan’s leading research institutions, technology and financial firms.

Weather derivatives

The company’s Iroha project can be implemented outside the realm of finance. Recently, Soramitsu began the development of derivative insurance contracts using blockchain technology, such as weather derivatives, together with the Japanese insurance company Sompo Japan Nipponkoa Holdings.

KYC

In addition, the company is working with Rakuten Securities to develop a Know Your Customer (KYC) using blockchain technology. They are now looking for global KYC partners.

Smart currencies

Soramitsu has also created a new joint research project with The University of Tokyo, The University of Aizu, and the Center for Global Communications (GLOCOM) of the International University of Japan to study the creation of local currencies running on blockchain and distributed ledger technology (Iroha network), so-called ‘smart currency”, and their  effects on regional development. This project will focus on the area around Aizu, in Fukushima Prefecture, Japan.

Thereby the University of Tokyo and its Interfaculty Initiative in Information Studies, Professor Hideyuki Tanaka researched the effects of network economics and information technology (IT). The University of Aizu OpenAppLab and regional technology center looked into the relationships of local smart currencies to solve regional problems. Lastly, GLOCOM, who founded the Blockchain Economics Research Lab back in March 2016, focused its efforts on socio-economic systems and the impact of distributed ledger technology.

Blockchain and cross-disciplinary approach

What may we learn from this? Intensive collaboration between the financial and the technology world is a must. This in order to meet the needs of both worlds. The Hyperledger Project is already a platform where all these disciplines come together. Given its open-source approach this gives the best guarantee to make further progress. It is no up to the regulators to make that a reality!

carlodemeijer

Carlo de Meijer

Economist and researcher

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