When Satoshi Nakamoto first created the cryptocurrency Bitcoin in 2008, it was viewed with immense distrust, still is to a considerable extent, with Central Banks and Regulatory agencies remaining sceptical and refusing to adopt it. However, the underlying technology, blockchain has become one of the most talked about topics for the financial sector today. Nearly every global player in the industry is exploring the use of blockchain technology for faster and more accurate payment processing, reduction in costs, quicker settlement cycles and decline in exceptions. It is also expected to unleash a new wave of financial products and services generating new avenues for banks for earning revenue.
Blockchain, also known as “distributed ledger technology” was originally created as a tracking database for Bitcoin transactions. It was designed to process transactions without the need for a central bank or intermediary, using complex algorithms and consensus among its peer-to-peer network to verify transactions. In the past couple of years, banks and financial institutions have been betting on blockchain to provide a reliable alternative to systems that depend on intermediaries and third-party validation of transactions. Their goal is to leverage blockchain’s distributed ledger approach to create a system that decentralizes trust to significantly reduce all types of transaction fees along with shorter processing timelines. The disruptive potential of blockchain is widely claimed to equal that of the early commercial Internet. A crucial difference, however, is that while the Internet enables the exchange of data, blockchain could enable the exchange of value; that is, it could enable users to carry out trade and commerce across the globe without the need for payment processors, custodians and settlement and reconciliation entities.
Governments, world’s largest financial institutions, global banks and other financial organizations are investing in proof-of-concept projects internally, using trial and error deployments within limited parameters to create efficiencies. In GGK’s view, the key considerations for exploring adoption of blockchain as a viable alternative for the financial sector are:
- Identify opportunities for innovation
- Determining feasibility and impact on legacy systems.
- Testing proofs of concept.
- Understanding the regulatory and data security implications.
- Dissecting the blockchain implementation: open vs. permissioned.
- Planning for transaction scalability.
- Forming partnerships and cross-functional and cross-industry collaboration
The full potential of blockchain can only unravel when banks and financial institutions partner together to set industry standards and protocols that enable interoperability.
At GGK, we strongly believe that the underlying principles of blockchain i.e.: decentralization, consensus based system and use of unique digital signature will reinforce the financial system which was recently found to be increasingly vulnerable to online frauds. For our banking partners, we recommend the use of blockchain in areas such as:
- Payments: Blockchain can transform the world of digital payments to near real-time transactions with real time settlements, without intermediaries. Development of new payments products, based on blockchain technology such as self-executing smart contracts are the next step.
- KYC/AML and Records Management: A decentralized, network-defined registry makes KYC processes streamlined and helps in AML checks and controls during client onboarding.
- Capital Markets: A distributed and consolidated data repository built on blockchain technology gives users a unified and real-time view of all trade-related information, thus reducing the scope for error or disagreement and accelerating the settlement process.
- Trade Finance: The complex network of players with manual processes and paper work is transformed into efficient and innovative trade finance services
- Syndicated Lending: Blockchain in syndicated lending envisages to reduce the settlement process on the sell-side and buy-side, thus saving time and cost worth millions.
- Regulatory reporting: Easy access to transaction reporting data for regulators will reduce cost of regulatory reporting of market participants.
The use of blockchain, when applied to legacy processes of the banking and financial services firms, has potentially transformative effects in the space. However, it is essential to bolster the technology infrastructure even before banks start testing the waters. Based on our inferences from proof-of-concept experiments, GGK is of the view that blockchain has exceptionally high impact and it leads to:
- Lower operational costs
- Seamless global trade
- Reduced risk in clearing
- Increased trust
- Distributed Identity
At GGK, we are committed to delve deep into every process and transform it into the most efficient and secure operational flow with the implementation of blockchain technology. We partner, collaborate and support banking and financial institutions in their endeavour to implement blockchain and our proven track record of high quality successful implementations are a testimony to this fact.