I am no expert in banking systems, but as a technologist or even as a simple observer of technology, we could see that every other space is fast paced in terms of technology adoption but banks. When I recently opened a bank account in one of the biggest banks in India, I had to do tons of paper work, from attesting proofs, taking photo copies, gazillion signatures and what not. This frankly annoyed me a bit.
I thought, this is not a complex problem after all — identity management,in other words, I have these same papers which proves my existence with multiple other bodies(ex: Government), why should I repeatedly replicate copies? — Why can’t they be digitized? Why can’t KYC process be improved? Every process in a bank — opening an account, applying for a loan, mortgaging etc. all includes tons of paper work.
Considering the fact that top banks spend an enormous amount of money into their branch networks, and an even more stunning fact that the top 25 banks spend more on branch networks than the top 25 tech firm on R+D with a 2:1 ratio (here). It is evident that the technology adoption in bank space is arguably slow compared to the other domains. Banks are indeed feeling the heat, with the plethora of fintech start-ups disrupting the financial market.
This posts talks about how banks can leverage blockchain — A distributed ledger technology and some usecases.
Blockchain adoption in banks and financial organizations:
Many banks and financial institutions like Barclays, Visa— are working on Proof of Concepts. With IBM backed projects like HyperLedger which focuses on leveraging blockchain for financial services.
Take a look at this interesting video by visa and docuSign.
We are heading towards a digital asset economy where all the assets are digitized and are present in the blockchain. Digital assets live on the blockchain network which can be controller by keys the owners hold. Any type of asset can live on the blockchain with owners having the cryptographic control over it — Complex multi-asset trading is possible with smart contracts in place which has predefined set of rules.
Blockchain helps in real-time asset transfers with no centralized partiescontrolling it and also helps in audits with a single shared ledger in place. Money-over-IP with blockchain makes asset management secure, robust and seamless.
‘How exactly do you get these assets on the blockchain?’ — you may ask!
Firstly, it is important how we digitize an asset and make it live on the blockchain.
Forget computers for a bit, lets get into a world of analogs.
Let us consider blockchain to be a shared distributed locker, actual physical locker which is somehow magically replicated and distributed real-time. The prominent proponents of the blockchain world — Alice and Bob, both got the lockers with valuable assets that belong to them. Both the lockers has got aunique label(public address) that is visible for all, but the key(private key) that would unlock the lockers are with Alice and Bob for their respective lockers.
Kevin becomes a part of blockchain, he gets a locker for himself and put his own valuable asset into it. Alice, Bob and Kevin will now have three same lockers with flashing public address and private keys to open their own respective lockers.
In a digital world, the lockers are your digital ledger and all the assets are in bits. Replicating and distributing the ledger are feasible in this case, transferring these assets happen on a peer to peer manner and this eliminates a centralized controller of these assets.
Central bank issues currency, and they are in different mediums today, they can very well be issued on the digital blockchain network with the same value that is present on a different medium — a currency note for instance. China, Netherlands, United Kingdom central banks are already considering fiat currencies on a blockchain. The central bank would mint digital dollar onto the network for circulation much like the physical notes they print today.
Know Your Customer and Anti Money Laundering:
All legal processes require papers — Example would be opening a bank account would involve customers to give legal proofs. Many of these legal papers that proves a customer’s identity is already with another body. Not only does it cost the bank to collect, verify, validate and maintain these papers, it also makes the customer go through the same process which is time consuming and at times irritating. A good KYC/identity system that works on top of blockchain can solve this issue.
Distributed data storage systems like “Inter Planetary File System” (IPFS) which is a peer-to-peer distributed file system capable of sharing the same files among nodes can be used to replicate documents. All legal documents can be hashed and stored on the blockchain.
A KYC blockchain can hold these data that are hashed, replicated, then when the user who want to go through any process which requires KYC papers, can give access to the bank with their private key and the bank can verify it.
Money transfers becomes a whole lot easier with a token based smart contract that are deployed onto the blockchain. Banks could deploy a money transfer smart contract onto a blockchain and Users could then make a wire transfer to the bank’s digital network and in return you would get the trade tokens/coins the bank system mints onto the contract.
Let us look into an example:
- Alice does a wire transfer of $10,000 to CoinBank’s DigiNet(Made up bank and Digital exchange system that works with blockchain).
- Bank would acknowledge the wire transfer, then would mint the user a $10,000 equivalent tokens onto the smart contract.
- The contract now holds a map of Alice and 10,000 transfer tokens.
- Alice could then get Bob’s public address and perform the simple transaction of 10,000 tokens.
- Bob would receive the tokens, he could then claim his $10,000 with the trade tokens
- The blockchain would hold the transaction for audit purposes and the cross border money transfers happen real-time.
The reason why banks issue transfer tokens here is because, transferring money with bitcoins are not feasible since bitcoin’s value fluctuate.
A typical import/export process involves multiple stake holders here, thebuyer, the seller, and the issuing bank. A typical import or export process involves the buyer’s issuing bank which will release a Letter of Credit(LC) to the beneficiary’s bank. The seller would then release the goods upon receiving the LC, once the delivery conditions are met, the bank releases the LC and the seller gets his payment.
Bill of Lading is used by the transporter/agent, it assures the conditions when loading and unloading of the goods.
Using blockchain for import and export:
The letter of credit that is issued for the buyer can be on a trade DAO contract which gives the surety to the seller who is initiating the process of sending his goods.
Autonomous IoT devices can be present at each checkpoint during the shipping stage, which will be holding smart contracts will check the state of the goods and automatically update the trade DAO. Once the necessary promised delivery has been done by the seller, the DAO would then release and transfer the funds to the seller.
Similar to how the KYC documents are stored and hashed on the blockchain, the bill of lading and other legal papers can also be stored onto the blockchain.
Inter-bank blockchains :
Bank does thousands of inter bank payments on behalf of their clients each day. Cheque payments, wire transfers, loan verifications etc. Banks could categorize such payments and transactions, use blockchains to make the transfers quicker and in a more secured fashion.
Banks could also exchange hashed legal documents between other financial institutions securely by granting access to the documents. In other words, banks could build their own digital certificate registry(DCR) and that can be used for inter-departmental or inter-organizational information sharing securely.
Interesting video on how UBS is building smart bonds at DEVCON1. Great introduction by Stephan Karpischek of B9lab.
Few other notable usecases:
- Carbon credits
- Bilateral trade
- Collateralized loan
R3 Corda, a tailor-made blockchain distributed ledger solution for financial institutions by R3, which is a consortium of top banks like Barclays, UBS, Commonwealth Bank of Australia, tested blockchain platforms like Eris and most recently released a detailed report submitted by Vitalik, one of the founders of ethereum platform, on how private and consortium blockchains can be used by banks, the prevailing scalability issues after testing it on Microsoft Azure which provides Ethereum Blockchain as a Service offering.
In few years, we will see drastic change in banking. It has started already with non-banking firms, FinTech start-ups already driving the customer focused components. With scalable, secure and truly decentralized blockchain in place, it is only evident that there is going to be a major upheaval in banking technology space.
[Originally published here: http://bit.ly/29i0Hi4]