Tuesday, January 3, 2017

Blockchain- Unexpected twists in technological innovation

Of late , if there is one technological innovation, which shakes the financial world to its core, it is most likely the arrival of digital currency (bitcoin in particular). Rather than relying on a government, bank, or intermediaries, bitcoin system is made of individual users and its objective is to have a decentralized financial system and to break the systems dependency on a few elite global decision-makers.

Trade based on decentralized system using digital currency is indeed a remarkable transformation when one considers the origin; from Barter system - where goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money or financial institutions controlled system.

Bitcoin transaction is a transfer of digital ownership of a certain amount of digital currency on the bitcoin network. During bitcoin transaction, the merchants present their bitcoin wallet address in a convenient manner such as a Quick Response (QR) code to the customer. The customer uses their phone camera to scan the QR code into their installed bitcoin wallet app and to acquire the needed details to initiate bitcoin transaction.  And finally when the bitcoin transactions are confirmed on the network, it is said to be complete and valid. This process of not relying on traditional financial intermediaries to complete a valid transaction frees the system from the existing establishment and leaders.

Although bankers raised doubts about the bitcoin concept, the under pinning technology (Blockchain) is somehow seen by many banks as having a number of useful features. Blockchain works like a huge decentralized ledger for the digital currency bitcoin which records every transactions and stores the information on a global network so it cannot be tampered with. It is this technology that banks feel can be utilized in many areas even without the adoption of digital currency.

The biggest advantage presented by blockchain technology comes in the form of creating a completely transparent trading system as it is shared among a large number of users allowing trades to be viewed and verified by anyone using the system. Second advantage blockchain brings is the reduction of risks which the traditional payment methods presents. The no chargebacks feature, transparent system with less fraud possibilities and zero possibility of erasing the traces of a digital transactions presents a technology with reduced risk.

There are already many silopilot initiatives and group collaborations for adopting blockchain for banking products in mortgages, trade finance and in insurance sector such as automobile insurance and home insurance as well as in virtually in all areas, which represents a major step in the use of new technology in traditional banking/insurance businesses.

In mortgages area this is being piloted by banks as the same survey work is often conducted multiple times on the same property as different customers shop around for mortgages. Now blockchain to be used to create a decentralized network of banks and surveyors through which the latest valuation can be listed, verify and shared in real time.

To detect and prevent multiple fraduantant claims which is currently costing the insurance sector, many are piloting blockchain for maintenance of insurance contract and claims and ensuring validation by a network of insurance provider and regulators and other appropriate parties to ensure only the valid claims are settled.

In trade finance, blockchain technology is being validated to hold legal contracts/smart contracts, facilitate the movement of goods to be monitored and facilitate payments in close to real time.

Even many central banks like Bank of England and the People’s Bank of China are contemplating about issuing their national currencies onto some sort of distributed ledger that helps them to track every penny on every step of its journey through the financial system in real time. If that happens an invention aimed at dethroning central banks may instead ends up empowering those central banks and making money much more easily traceable.

Potentially banks could act as a platform supplier, providing the ecosystem based on blockchain technology for external counter-parties to connect to (Does this open the door for OpenAPI?)  and thereby they could even improve their market share. With many traditional players in the midst of a radical transformation programs with the adoption of deploying robo-advisors equipped with big data solutions as replacement of their financial advisors, payments simplifications, migrating core business operations to cloud and driving digital initiatives into mainstream with the objective of simplifying their landscape, reducing their operation cost and trying to become more agile. It will be genuine opportunity for the financial institutions to check if their investment to become agile when it comes to embracing innovative and evolutionary technologies are indeed paying off.