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2 External Document 2016 Infosys Limited
Table of contents
Introduction 4
Key findings 5
Payment transactions. 10
Cost and complexity reduced. 10
Promising examples on their way. 12
Whats next? 12
Trade finance. 13
No trade-offs speed and security combined. 14
Possible use cases in trade finance. 15
Current projects: collaboration is key. 16
Whats next? 17
For several years, the hype surrounding the dis- on the potentials and limitations of the blockchain
tributed ledger approach and blockchain technol- technology. To that end, both promising and non-
ogy has grown steadily, fostering discussions and promising areas of application are highlighted and
research activities on potential areas of application discussed.
throughout the financial services industry. Current
After an introduction of the technology, three main
research and several use cases reflect the first fea-
fields of application have been investigated here:
sible implementations of the technology, bringing
Payment transactions, trade finance and the over-
major changes for segments and processes within
the-counter market. The paper gives an analysis of
the industry. An increasing number of banks are re-
the status quo in each of these fields and shows
alizing the urgency of the topic and are exploring
where and how blockchain technology could be
ways of using blockchain technology. A differenti-
used or is already deployed. The authors show what
ated approach is necessary to elaborate on the po-
is currently done to introduce the blockchain and
tential impacts on industry segments and financial
what the next steps should be.
institutions, as blockchain technology is character-
ized by complexity and several limitations.
Drawing from a broad range of statements from
experts from both Infosys Consulting and institu-
tions from various sectors of the industry, this pa-
per provides a high-level business-case viewpoint
1 2
Other promising areas for blockchain Distributed ledger and blockchain are
applications include lending business, not one-size-fits-all solutions.
insurance, real estate and factoring.
3 4
Blockchain technology is currently not Collaboration between FinTechs and
sufficiently regulated and future suc- banks is key for broad implementation.
cess will depend on clarifying legal
aspects.
5 6
External Document 2016 Infosys Limited 5
Distributed ledger tech- Centralized ledger
nology in the financial
services industry. Trusted third party
1 2 3
Transaction recorded Block validation Add block to
in new block through network existing chain
Figure 3: The process of a distributed ledger transaction; source: Own illustration based on Santander (2015) and Goldman Sachs (2014)
(5) Rules set out a protocol for interac- Two Basic Protocols
tions between participants. Two of the
most influential protocols are seen on the Bitcoin protocol Ripple protocol
bitcoin and Ripple networks (see Figure 5).
Currency with built-in payment system Payment system for arbitrary currencies
Whereas bitcoin is a cryptocurrency with
Proof-of-work consensus process Iterative consensus process
a built-in payment system, Ripple is a pay-
ment system for arbitrary assets. The two Mining of new tokens by network nodes Ripple Labs issues new tokens
protocols differ in their consensus mecha- Only bitcoins can be tracked Any kind of asset can be tracked
nism, transaction fee policy, creation of Transactions are basically free Transactions have an XRP cost
new tokens and other aspects. Hence,
rules strongly influence the character of
distributed ledger systems and determine
Figure 5: Bitcoin protocol vs. Ripple protocol; source: Own illustration based on Accenture (2015),
the way the system can be applied. Bitcoin (2015) and ECB (2015)
POTENTIALS OBSTACLES
The current distributed ledger technology is not always an appropriate solution, since it can
only develop its full potential if a large network and low transaction volumes are given.
Figure 6: Potentials and obstacles for applications; source: Own illustration based on expert interviews (2015) and analysis results
of the participants, and the technological private blockchain solution, allowing each payment systems is not possible to
aspects, which have to be guaranteed at member to send funds and transaction- estimate because of the unknown
any time. relevant information directly to other implementation costs for financial
members. institutions. Also unknown is how
Legal requirements: Legal arrangements certain banks might delay the process
should be defined for the insolvency of Making use of the technology in such
of implementation by resisting changes
a blockchain participant, liability for en- a way could change the course of the
owing to the fear of losses in chargeable
prevailing correspondent banking system.
forcing anti-money-laundering standards transaction fees.
International payment transactions could
(AML), and managing over-lapping juris-
be executed by omitting the use of third
dictions. Furthermore, legitimation as-
parties like clearinghouses and to a large Ripple Labs,4 a San Francisco-based
pects and procedures must be considered,
extent the branched chain and cross- venture-backed start-up, is currently
such as the identification of beneficiary
transfer of information and funds (see doing research in exactly this field.
parties and politically exposed persons
Figure 9). This principle of implementation The self-developed Ripple transaction
(PEPs). Legal ambiguity constitutes a ma-
could theoretically be beneficial for protocol (RTXP) can serve as a central
jor hurdle for implementing the block-
national payments as well. Blockchain script, which aims at allowing members
chain in international payment systems, as
technology could therefore serve as a of such a network to conduct cross-
many aspects remain to be clarified.
perfect means for account settlements currency transactions within 3 to 10
Technological requirements: Certain within book transfers. seconds.1) Through RTXP, every member
technological properties are vital for broad The key benefits would clearly be cost can take advantage of the lowest prevail-
use. The screening of beneficiary parties reductions owing to the elimination ing exchange rates, as an open-market
needs to be adjusted and extended to IP of transactions, and data processing principle creates a competitive set-up
addresses and block-chain accounts a re- could be shaped much more efficiently. for liquidity providers and guarantees
quirement that should be put into practice International and domestic money the lowest exchange rate fees for
without any major problems. transfers and cross-currency transfers transactions. The cryptocurrency Ripple
would become much faster, and a time XRP constitutes an optional bridging
The most promising fields of application currency between all tradable currencies
and cost reduction due to 24/7/365 real-
within payment systems seem to be in- and can be used by each member of the
time settlement availability, simplified
dividual transactions and cross-border network. Although the Ripple network is
transactions and automated accounting
payments of different volumes, which can constantly growing and developing, the
adjustments would potentially be possible
be large corporate and inter-bank transac- scalability of the Ripple protocol and the
via the blockchain and thereby constitute
tions. Initial concrete approaches within usability of the bridging currency have
a major improvement.
cross-border payment processes state the not yet been tested.
potential advantage of broad peer net- At present, the detailed scope of impact
1)Principle can also be beneficial for national
works consisting of verified partners, such and cost-saving potential in the case of payments and the blockchain can serve as a perfect
as banks. These networks could employ a such well-functioning global blockchain mean for account settlements within book transfers.
BOLERO PLATFORM
B/L
Figure 10: Bolero platform; source: Own illustration based on Bolero (2015) and expert interviews (2015)
Figure 11: BPO framework; source: Own illustration based on SWIFT (2015), ICC (2014), Wolf (2013)
Blockchain
Solutions?
L/C
Insurance on
open account
[ HIGH ]
Figure 12: Trade finance products; source: Illustration slightly adapted from BPO - a corporate prospect on supply chain finance by M. Diaz / SWIFT (2012)
Possible use cases in trade idea of smart contracts pre-dates technology is able to make processes
blockchain technology and is simple in easier and flawless, in trade finance it is
finance.
its core. In combination with blockchain not able to take over the role of financial
Asset tracking is one of the use cases that technology, it becomes valuable as an institutions. In cases of default, banks are
can be implemented in many different agreement between two parties and still needed to cover the buyers or sellers
ways. Having an asset with a unique serial can be secured in a distributed ledger. investments.
number secured in a blockchain can The execution and fulfilment of contract
guarantee authenticity and origin of a conditions can ultimately be automated.
good. The buyer of a good can verify the Manual document scanning becomes
serial number against the immutable data obsolete and legal conflicts can be
in the database and can be sure of having reduced. For a smart contract, a (legal)
a genuine product. Especially industries condition is transferred into a query that
in which counterfeits are common, such automatically checks the conditions
as the medical sector, could strongly fulfilment. In the case of fulfilment, a
benefit from the creation of a secure predefined measure, like the transfer of
product history. For industries with money or sending of a message, is taken.
opaque production and transportation, Such a signal could be the entry of a
like coffee, cocoa or textiles, blockchain goods serial number by a third party. For
technology could assist end consumers example, the freight carrier taking over
in making correct purchase decisions and the goods from the seller could enter this
in distinguishing, for instance, between information into the system and thereby
fair and unfair labor practices. Combining initiate the payment. An approach like
asset tracking with other technologies this could replace the process of sending
and use cases like GPS, RFID or smart a paper B/L from one institution to
contracts may lead to an advanced, another.
automated and secure flow of goods.
Many blockchain use cases imply
Smart contracts are a use case that that banks or other third parties
is likely to become an inherent part become obsolete in their function as
of future trade finance products. The an intermediary or trustee. While the
Figure 13: Everledgers diamond tracking process; source: Own illustration based on expert interviews (2015) and Everledger (2014)
Exporter
Digitization
(Bracket)
Sales
contract
Importer
Provision of trust Securitization of the Asset tracking and automated, signal induced triggering of payments and
for many use cases contract conditions information-flow. A price advantage of 90% is possible (company statement)
besides bitcoin (Smart contracts)
Figure 14: Skuchains Bracket2) ; source: Own illustration based on skuchain (2015) and expert interviews (2015)
most secure distributed ledger. Therefore, At the moment, many banks are exploring and future market developments. Each
many FinTechs use it to secure their data ways to make use of the technology and institution must analyze whether and
with bitcoin transactions. The sidechains its possibilities. Only a few presently how the technology can help or how it
of the bitcoin blockchain or the colored emphasize trade finance. Some financial could interfere with existing products and
coin principle are favoured for consigning institutions have taken an observer processes. A successful implementation
contract conditions or tracking assets. position, waiting for the right time will require combining technological
to invest. However, the wait and see expertise with industry understanding
Whats next? strategy appears risky as the know-how, and critically analyzing potential
At the current stage, it is hard to predict which is currently building, becomes application areas.
who of the different players will be more valuable. The entire FinTech and
successful and whether it is possible to blockchain environment is fast-moving,
establish an international blockchain and according to several experts, block-
platform for the exchange of documents chain technology will reach mass
and trade finance products. Success of suitability within the next 5 to 10 years.
individual companies will strongly depend
During the maturing of the technology,
on effective networking and openness
a market entry could become costlier.
to collaboration. Most of the currently
promising projects are based in some way Current projects will stabilize and start to
on collaboration models, and banks will generate revenues, leading to an increase
have to accept that expertise and deep in investments in start-ups, infrastructure
technological understanding cannot and know-how. In addition, major trade
be found solely in-house. In contrast, institutions like the ICC and the WTO
FinTechs are in need of the customer base will approach blockchain technology
and the industry knowledge of financial on a broader level. As a result, banks
institutions. should now closely monitor current
2) Bracket = Blockchain based Release of funds that Are Conditionally Key signed and Triggered by signals
Cost savings
Contracts without downtime, censorship, Elimination of the credit and market risk
fraud or third party interference by requiring prefunding prior to trading
Smart contract
Smart controls
Execution is open to the internet and Computer protocols monitor the perfor-
automatic settlement mance of a contract and assess the need
for contractual clauses
Figure 16: Blockchain potential for OTC market participants; source: Own illustration based on Accenture (2015), H. Shadab (2014) and analysis results
IMPLEMENTATION
Figure 17: Conception of NASDAQs Linq; source: Own illustration based on Rizzo, P. / Coindesk (2015), Kaminska, I. (2015), Nasdaq (2015), Rosenfeld
(2012), expert interviews (2015) and analysis results
technology enables the implementation nological requirements. The examples be observed in the form of first-use
of smart contracts in the OTC markets as presented in the following discussion cases. One example is Nasdaq12, which
well as already seen in trade finance. The are illustrative of the biggest current implemented the blockchain technology
requirements for a mass implementation challenges. First, the implementation Linq on its stock exchange for private
and use can be distilled into three of non-digital native assets must be stocks in the field of pre-IPOs, making
broadly defined categories: legal aspects, based on standardized terms. Since the Linq the first blockchain-based platform
technological aspects, and institution- introduction of a CCP allows a position for trading and managing private shares.
specific aspects. The legal aspects present netting of a customer, the new technology The implementation of the technology
the major hurdle for most participants. should also include the ability to operate simplifies the issuance, cataloguing and
nettings among different customers. recording of shares of privately held
Legal requirements: So far, regulators Moreover, market participants want to companies.
and other judicial institutions have make use of margin finance and trade
Nasdaq also uses a more advanced bitcoin
reacted in a reserved manner concerning assets without possession. Additionally,
protocol that enables the coloring of
the blockchain technology. Fundamental the speed of confirmation has to be
bitcoins (Figure 17). Coloring bitcoins
measures in this field include the aligned with the speed of the settlement.
turns them into tokens that represent
adjustment of the current legal framework Both processes should take place
private shares.
to the distributed ledger framework and simultaneously without one lagging
the establishment of a legal environment behind the other. The platform is based on the principle
that regulates either the transition from of plain bitcoin transactions that satisfy
Institution-specific requirements: Each
traditional contracts to smart contracts additional requirements of contract
institution faces individual challenges,
details. This case constitutes an ideal
or their coexistence. Besides the basic which require in particular a redesign of
example of how investigators currently
framework, another major hurdle is the the technological architecture. Internal
operate. Linq can only be accessed by
implementation of financial contract risk, price and capital models currently
a narrowly selected circle of investors
specifications as pre-trade agreements do not align with the conditions imposed
and therefore is classified as a private
and further individual contract conditions. by the implementation of the blockchain
blockchain. With this use case, Nasdaq
technology.
Technological requirements: Complex addresses especially customers that are
market conditions impose high tech- The technologys advantages can already open to innovation.
Management
summary
Distributed ledger and blockchain Besides technical challenges that
are about to cause major business have yet to be overcome, the lack
transformations in the financial of a legal framework for the use of
industry. blockchain technology is currently a
major obstacle.
Three very promising fields of appli-
cation are payment transactions, Many market participants are ex-
trade finance and the over-the- ploring ways of using blockchain,
counter market. among them established institutions
and start-ups alike.
In all of these areas, first projects
and deployments can be seen. Banks should now closely moni-
However, all of them are in a very tor current and future market
early stage and have to prove their developments.
benefits in practical use. Should
According to several experts, block-
blockchain prevail in practice, it has
chain technology will reach mass
the potential to disrupt traditional
suitability within the next 5 to 10
business models and make existing
years.
players obsolete. This is especially
true for trusted third parties.
Illustrations
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Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-Banking-Distributed-consensus-ledgers-payment.pdf
A.T. Kearney (2013); Winning the Growth Challenge in Payments
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de/content/dam/oliver-wyman/global/en/files/archive/2013/Outlook_for_Wholesale_and_Investment_Banking_2013.pdf
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Bolero International. (2015). About Us / Solutions / Services / Customers. Retrieved December 5, 2015, from http://www.bolero.net/
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European Payments Council. (2015). Ripple: an Internet Protocol for Inter-bank Payments.
Everledger. (2014). Insurance fraud is a global problem. Retrieved November 23, 2015, from http://www.everledger.io/
Goldman Sachs. (2014). All about Bitcoin. Retrieved January 10, 2016, from http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdf
ICC International Chamber of Commerce. (2014). Bank Payment Obligation (BPO) Frequently Asked Questions for Banks. Paris.
Kaminska, I. (2015). Blockchain promises back-office ledger revolution . Financial Times.
Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved January 10, 2016, from https://bitcoin.org/bitcoin.pdf
NASDAQ OMX Newsroom - Press Release. (2015, May 11). Retrieved January 4, 2016, from http://www.nasdaqomx.com/newsroom/pressreleases/pressrelease?messageId=1361706
Ripple. (2015). http://www.ripple.com/.
Rizzo, P. (2015, November 21). Inside Linq, Nasdaqs Private Markets Blockchain Project. Retrieved January 10, 2016, from http://www.coindesk.com/hands-on-with-linq-
nasdaqs-private-markets-blockchain-project/
Rosenfeld, M. (2012, December 4). Overview of Colored Coins. Retrieved January 10, 2016, from https://bitcoil.co.il/BitcoinX.pdf
Royal Bank of Scotland, Capgemini. (2015). World Payments Report 2015.
Santander. (2015). He Fintech 2.0 Paper: Rebooting financial services. Retrieved January 10, 2016, from http://santanderinnoventures.com/wp-content/uploads/2015/06/The-
Fintech-2-0-Paper.pdf
Shadab, H. B. (2014). Regulating Bitcoin and Block Chain Derivatives. Retrieved January 10, 2016, from http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/
gmac_100914_bitcoin.pdf
skuchain. (2015). Connect to the Commerce Cloud. Retrieved November 22, 2015, from http://www.skuchain.com/
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