Distributed Ledger Use Cases in the Financial Industry

The Banking and Insurance sectors are very active in its pursuit of faster and less costly solutions to their largely legacy transaction processing infrastructures; blockchain-based distributed ledger technology is at the forefront of a number of new initiatives being investigated and prototyped. 

A growing number of broad blockchain initiatives have attracted Venture Capital and Corporate financial investments.  Some of these initiatives are:

  • R3, a distributed ledger provider and consortium of banks, the foundation members being Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo. They are each connected on an R3-managed private peer-to-peer distributed ledger, underpinned by Ethereum technology and hosted on a virtual private network in Microsoft Azure, the public cloud platform offering “Blockchain as a Service” (BaaS) in an accelerated development environment.
  • Bank Santander has established a subsidiary, Santander Innovations, to assist FinTech companies grow from a seed stage through to a more mature stage, including support for innovative blockchain solutions with the “DL Challenge” to encourage and support early stage startups using distributed ledger technologies.
  • IBM and Samsung have jointly developed the Autonomous Decentralised Peer-to-Peer Telemetry (ADEPT) proof-of-concept to validate the feasibility of both implementing the foundational functions of a decentralised Internet of Things (IoT) and enabling device autonomy in IoT transactions and marketplaces.  IBM has also launched Cloud services to help developers build and manage blockchain networks.
  • BNP Paribas and SmartAngels are building a distributed ledger that will permit private companies to issue securities on the primary market and give investors access to a secondary market using blockchain technology.

Asset and value management, contracts, regulation - Many areas of the financial market could clearly benefit from distributed ledger technology. The following are just some examples:

Asset Registries

Distributed ledger asset registries could be deployed to manage virtually any asset class (e.g. shipping vessels, aircraft, automobiles etc.) and provide a complete unalterable audit trail of ownership, maintenance and valuation from manufacture right through to disposal.

Intra Group Payments

Banks are exploring the use of distributed ledgers to move money country to country across their own networks for faster processing and lower costs.

Cross Border Payments

The current process for cross-border payments relies on intermediaries (correspondent banks) before reaching the ultimate physical location.  The process is slow with expensive customer fees and bank risks due to weaker banking standards in some jurisdictions.  The blockchain offers new possibilities, with no geographical borders, middlemen or opacity that has plagued legacy cross-border payments, with the added benefits of fast processing and the potential for lower fees.

Securities Issuance and Settlement

The Securities Exchange Commission has approved the issue of public securities via blockchain-based technology.  This signals a significant shift in the way financial securities will be traded in the future. Electronic dealing systems have transformed front office trades to virtually instantaneous but the actual swapping of payments can still take days, creating risk in the banking system.  Leading financial institutions including Barclays PLC, CitiGroup, Goldman Sachs and UBS are looking to blockchain technology to substantively instantly settle securities without the risks associated with traditional settlement methods.

Collateral Management

Banks are investigating the use of blockchain for collateralized trading markets including OTC derivatives, repo and securities lending.  Collateral Management is a critical topic because of the volumes of business and the new regulations being introducing increased are increasing complexities.  A number of organisations including BNP Paribas, Deutsche Bank, SIX Securities and the Depository Trust and Clearing Corporation (DTCC) are looking to blockchain as a possible solution, some are running proof-of-concepts to see if such a solution is scalable and how such a solution could be integrated into their core infrastructures.

Syndicated Lending

Syndicated Lending solutions are being trialled. The current settlement time for a syndicated loan is around 20 days, heavily paper-based, manually driven involving many spreadsheets and phone calls. Turning a syndicated loan into a Smart Contract will reduce manual labour as all information is recorded digitally on the distributed ledger, removing the need for reconciliation and corporate actions can be performed automatically, reducing back-office workloads.

Trade Surveillance

The blockchain could become a platform for trade surveillance as the focus shifts to the front office and sell-side firms using blockchain derived metadata to benchmark normal trading patterns for individuals or traders. Trading surveillance traditionally focussed on monitoring equities but MiFID II regulations in Europe is extending coverage to other asset classes such as fixed income, foreign exchange, OTC markets, dark pools and internalised flows and cross-asset surveillance.

Peer-to-Peer Insurance Platforms

Distributed ledger technology could support the rise of peer-to-peer insurance platforms and contribute to enabling self and mutual risk management frameworks. Distributed mutualisation combined with the ‘wisdom of crowds’ could support efficient claim management and fraud reduction.  Insurance companies’ role could potentially evolve from that of risk handlers to one of risk management advisors. Blockchain-based insurance solutions could in theory blossom into fully funded blockchains. Premiums would be paid and recorded on the blockchain, and claims payments and surplus distributions would equally be paid through the blockchain. Prescribed rules and scripts, under certain conditions, would lock and unlock funds.

The blockchain can facilitate the setup and management of insurance contracts using Smart Contracts technology to ensure data accuracy, correct payment and settlement of premiums, brokerage, commissions and claims.  All parties to a contract will have access to identical exposure data which will resolve existing data quality issues and help to leverage better modelling models to measure aggregate exposures and to make capital allocation decisions.   

Microinsurance is sometimes made prohibitively expensive due to the costs of collecting underwriting data and administering claims.  Often underwriters and actuaries have to travel into the field to perform these tasks, and this increases the expense ratios of companies to a point where they cannot be profitable.  Using blockchain based decentralized consensus, they can employ individuals within community based insurance programs to perform these tasks. By collecting and submitting data which is then sent to either the policy activation or claim payment mechanism of a Smart Contract, underwriters and adjusters and their associated costs are removed from the process thus dramatically increasing the viability and profitability of the insurance program.

Regulatory Reporting

By its nature a blockchain is an unaltered chronological record of transaction history, delivered in a fully transparent and accessible form.  Many regulatory processes require a document to have gone through certain states before any given state (e.g. AML, KYC, KYCC processes).  Recording these state changes in the blockchain conclusively demonstrates compliance with these processes without the need of an intermediary.  This could be extended to include proof-of-audit/control whereby each new version of a document could be denoted to have changed according to a defined set of rules.  The result of these rules-based processes could potentially dramatically reduce the cost of governing regulatory compliance.

The bottom line is that there exist plenty of interesting opportunities and rewarding business models for blockchain-based distributed ledger technology in the Banking and Insurance Industries. While many already thought the internet and the cloud to be the last real revolutionary technical inventions, both will soon be at least equally complemented – if not surpassed - by the blockchain, making digital transactions of next to all kinds much more secure and reliable. The soil is just getting prepared. Worldwide.

A current KuppingerCole Advisory report provides you with more detailed information about the impact of blockchain on the Financial Industry.



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