Blockchain Technology in Financial and Banking industry

October 24, 2020

What is Blockchain Technology?

Blockchain technology allows data to be stored globally on thousands of servers – while letting anyone on the network see everyone else’s entries in near real-time. That makes it difficult for one user to realize control of, or game, the network.

Applications of Blockchain Technology in Finance

Capital Markets

Capital markets pair of issuers with demand for capital, to investors with corresponding risk and return profiles.

Whether the issuers be entrepreneurs, startups or large organizations, the process of raising capital can be challenging. Firms face increasingly stringent regulations, longer times to get to market, volatility from interest rates and liquidity risk. Particularly in emerging markets, they must navigate the lack of rigorous monitoring, thorough regulation and sufficient market infrastructure for issuing, settlement, clearing, and trading.

Blockchain offers multiple benefits for several capital market use cases:

Elimination of a single point of failure through decentralized utilities
Facilitation of capital market activities streamlining processes, reducing costs and decreasing settlement times
Digitization of processes and workflows, reducing operational risks of fraud, human error, and overall counterparty risk
Digitization or tokenization of assets and financial instruments, making them programmable and far easier to manage and trade. In token form, they gain wider market access through increased connectivity and therefore the possibility of fractionalized ownership. This results in increased liquidity and decreased cost of capital.

Asset Management

Venture capital firms, private equity firms, land funds, and specialty markets face demands to enhance liability risk management, adapt more dynamic decision-making structures, and address the increasing complexity of ever-changing regulations.

Blockchain can effectively streamline asset and stakeholder management. It allows:

Automated fund launch implying quicker access to capital markets compared to traditional methods of raising funds
Efficient stakeholder engagement with digitized assets and services
Digitization of portfolio and existing holdings for wider market access, liquidity and fractionalization
Customizable built-in privacy settings for transaction confidentiality
Voting and other shareholder rights and obligations programmed into digital assets, resulting in seamless user experience and reduced risks of human error
Creation and enforcement of incentive mechanisms to market participation and punish nefarious activity
Improved governance and transparency for investors and stakeholders
Efficient cap table management
Automated fund administration
Automated transfer agency in asset management

Payments and remittances

It takes 2 to 7 days and costs a global average of 6.94% to send $200 between countries. This means that remittances are directly reduced by $48B through fees, intermediaries, and financial institutions. Blockchain can streamline payment and remittance processes, reducing settlement times and significantly reducing costs. It allows:

Rapid and secure domestic retail payments
Rapid and secure domestic wholesale and securities settlement
Rapid and secure cross border payments
Real-time gross settlement between central banks, commercial banks, and independent banks
Digitized KYC/AML data and transaction history, reducing risks of fraud and enabling real-time authentication
Automated regulatory oversight and auditing
Multiple sorts of payment enabled on blockchain: Tokenized fiat, stable coin, and cryptocurrency

Banking and Lending

Core banking comprises transaction, loan, mortgage, and payment services. Many of those services depend upon long processes of execution. For example, between information verification, credit scoring, loan processing and distribution of funds— it takes 30 to 60 days for people to secure a mortgage, and 60 to 90 days for small or medium enterprises to secure a business loan. Blockchain can streamline banking and lending services, reducing counterparty risk, and decreasing issuance and settlement times. It allows:

Authenticated documentation and KYC (Know Your Customer)/AML (Anti Money Laundering) data, reducing operational risks and enabling real-time verification of monetary documents
Streamlined credit prediction and credit scoring markets, instantaneously informed by the collation of user activity and sanctioned data across a network
Automated syndicate formation, underwriting, and disbursement of funds i.e. principal and interest payments, reducing cost, delay and friction of syndication
Facilitated collateralization of assets because digitization enables real-time asset management, tracking, and enforcement of regulatory controls

Trade Finance

Trade finance refers to the infrastructure, processes and funding that support international trade supply chains. The industry continues to rely on paper-based processes that are susceptible to security vulnerabilities. Individual transactions can take as long as 90-120 days. Blockchain can digitize the whole trade finance lifecycle with increased security and efficiency.

Blockchain technology allows:

Digitized and authenticated documentation (i.e. letters of credit and bill of lading) and KYC/AML data with real-time verification of monetary documents
Asset digitization to enable faster settlement times
Creation of more efficient financing structures through shared secure networks and digitized processes
Creation of a consistent financing vehicle for the entire trade lifecycle, eliminating the legacy practice of negotiating independent finance vehicles for each stage of the trade

Insurance

Property and casualty insurance claims are prone to fraud and claim assessments can extend long periods of time. Blockchain can securely streamline data verification, claims processing, and disbursement, reducing time interval significantly. It allows:

Authenticated documentation and KYC/AML data, reducing the danger of fraud and facilitating claim assessments
Automated claims processing with the use of smart contracts
Automated parameterized contracts to pay out upon occurrence of certain risk
Automated disbursement of insurance payments
Tokenized reinsurance markets to facilitate policy reinsurance in open marketplaces, stepping away from traditional broker and relationship-based systems