Blockchain in Banking (Part 2)
How are banks/financial institutions reacting to this new form of technology? What is the general perception among the world’s public towards this?
Bitcoin and Alike: Banks Hate Them
Perhaps the most memorable impression we’ve had when it comes to the relationship between Bitcoin (which is an advent of blockchain) and banks or financial institutions is that the latter always say the application of the former will never work, and to a certain extent it would cause world-wide economic disasters. In fact, governments and central banks around the world have been criticizing cryptocurrencies to be “an environmental disaster that could crash the global market” or could face “a complete loss of value”. The conclusion to such a statement stems from the viewpoint of banking experts that cryptocurrencies are too flawed, too short-sighted, and too unstable to become workable fixtures in world monetary matters. The hype or sense of pride towards this revolutionary invention is often debunked by studies showcasing the underlying economic limitations inherent in the so called “decentralized creation of trust” that cryptocurrencies often boast about, as well as giving “false trust” under the facade and assumption that trust could be maintained within a group of anonymous network participants.
A portion of the general public often raise their eyebrows over such statements made, under the context that banks are deliberately mis-guiding the people in fear of the disruptive capabilities of cryptocurrencies towards the established role of banks ever since centuries ago.
That being said, it is worth noting that while banks “hate” cryptocurrencies, their perception towards blockchain in its applications towards banking is generally optimistic and embrace, a spark contrast compared to Bitcoin and the like. This is perhaps due to the fact that blockchain technology is mendable, and as such is able to integrate into the process of banking while keeping the very essence of traditional banking, whereas Bitcoin or other cryptocurrencies is already the end-product of blockchain which challenges the very perception on how we view and operate with money.
The outlook of blockchain in the banking industry: The Recent, Now and the Future.
International institutions including the United Nations and the International Monetary Fund, together with nations such as the US, UK, Japan, China, India, and South Africa, have paid close attention to the development of blockchains and explored their application in various fields. A number of major international financial institutions have already formulated plans for the application of blockchain in some of their processes. Goldman Sachs, J.P. Morgan, UBS, and other banking giants have all established their own blockchain laboratories, working in close collaboration with blockchain platforms and published a series of studies on this topic. Joining the research trend were also various national stock exchanges, such as the Nasdaq Stock Market and the New York Stock Exchange. Nasdaq subsequently completed its first securities transaction using blockchain transaction platform Linq during the end of December 2015.
Many blockchain industrial consortiums have emerged to promote the development of blockchain technology and its applications, among which the most influential is the R3 blockchain consortium, which brought over 40 of the world’s leading financial institutions such as Bank of America, Citigroup, Morgan Stanley, Deutsche Bank, Barclays Bank, and China Merchants Bank (CMB), thus strengthening the exchange and cooperation of top financial institutions in the blockchain technology.
The People’s Bank of China (PBOC) has spent considerable resources into researching the application of blockchain technology within issues related to digital currencies. Subsequently, on 18th October 2016, the Ministry of Industry and Information Technology (of China) published the “Chinese Blockchain Technology and Application Development White Paper”, highlighting the analysis of blockchain technology and its current status as well as the proposal for its future development. China is very keen to embrace blockchain technology in its banking systems and is deemed to having the optimum market environment to initiate such a feat. The reason mostly lies on the fact that China has strict monetary and currency controls, which creates the necessity for virtual cash and thus the demand would be big enough to create a market within its large populous. This is also considering the fact that the recent narrowing interest-rate spread in China had caused interest rate liberalization and profit decline, necessitating the need for urgent transformation and new growth avenues in the banking industry.
In a panel discussion among renowned banking experts moderated by the Financier Worldwide, the general consensus is that blockchain technology definitely has tremendous potential in its application and benefits to the banking industry. Thus, its future outlook within said industry is justifiably optimistic. The opinion is such that blockchain will eventually grow faster in relation to payment services, securities trading, and foreign commerce than in other fields. In the near future, it would not be surprising to see blockchain permeating into global financial systems, as its robustness provides security and makes more efficient cross border payments, real estate transactions, share trading, smart contracts, and online identity management, to name a few.
On the other side, the European countries and even the United Arab Emirates have been slowly experimenting with the application of blockchain within its financial institutions. In Spain, banks are starting to offer clients with the opportunity to carry out international transfers using blockchain technology. BBVA (Banco Bilbao Vizcaya Argentaria) became the first global bank to use blockchain technology to execute a €75m bilateral financing transaction, from the beginning of the negotiations to the execution of the documentation. In respect to securities and the issuance of warrants, Spain seems to be very interested in the application of tokens (an advent of Blockchain), which represents units of value created by an organization and is tradable among shareholders. In February 2018, the Spanish Stock Exchange Authority has officially stated that tokens could be regarded as a tradable security under the circumstance that the buyer could expect the revalorization and profitability of the securities acquired based on the evolution of the business.
In Germany, banks are looking at blockchain very intensely but are approaching it rather carefully and slowly. What comes first is the improvement of internal processes, before the year 2019 where banks in Germany has finally embraced blockchain in its few couple of customer-facing transactions. Commerzbank has used blockchain in a foreign exchange transaction with Thyssen Krupp, and even in a commercial paper issue that was done in parallel using blockchain and conventional means. Rudolf Haas, a partner at King & Wood Mallesons, felt that Germany is not particularly fast in addressing the need to amend its legal regimes and regulations within the financial industry before the Blockchain technology could be fully implemented.
Additionally, The Bank of England has explored opportunities with partners and Fintech Accelerators to collaborate with innovative firms and new technologies. Together with PricewaterhouseCoopers, they have completed a study on the current capability of DLTs (distributed ledger technology) and concluded that while the technology is still relatively immature, it could provide benefits in the future and also be complementary to existing systems by, for example, considerably increasing resilience. Furthermore, the Bank of England partnered with US-based blockchain start-up Ripple to test an interledger system designed to synchronize different payments in different simulated RTGSs (Real-time gross settlement) using interledger protocol. The test proved successful at processing cross-border payments between two RTGS systems simultaneously. Pretty much like Germany, the UK is also concerned on how its regulation can meaningfully address the risks posed by exchanging potential securities based on Blockchain.
Perhaps the most interesting and adventurous experimentation of blockchain in financial systems is conducted in Dubai, where Abu Dhabi’s Al Hilal Bank has successfully completed the world’s first sukuk (Islamic bond) issuance using blockchain technology, which involves using it to sell and settle within secondary markets. Moreover, the Emirate NBD has successfully went live with “Cheque Chain”, which is underpinned by blockchain technology and focuses on reducing cheque-related fraud. This is ultimately achieved through a quick response code printed on each page of new cheque books, which the code records every cheque on the bank’s blockchain to help bank employees validate cheque authenticity and have source access at any time.
Disruption doesn’t happen overnight. Blockchain technology is still in its infancy, and a lot of the actual technology has yet to be perfected. Die-hard believers in cryptocurrency believe that it will replace banks altogether while others think that blockchain technology will supplement traditional financial infrastructure, making it more efficient. One thing is clear, however: blockchain technology will indeed transform the banking industry.
Writers: Ethan, Cherrish, Yash, Wei Jet
Editor: Saras Rehathi Thurai Lingam