Blockchain technology is being hailed as ‘the new economy’ and the next revolution after the internet. It is the buzzword of the year, with companies significantly increasing their stock value simply by adding ‘blockchain’ to their name. With so much hype surrounding the technology, it is only natural to wonder whether blockchain technology will truly live up to its word. It took decades of refinement before the internet transformed from hype to the essential tool it is today. Will blockchain go down the same road?
Industry experts across markets believe the sector most ripe for change on the blockchain is banking and payments. It is cumbersome to transfer money across the global financial system and money transfers can take days or weeks to arrive at destination. Moreover, intermediaries charge service fees on money transfers and sometime succumb to instances of fraud, resulting in greater regulation and higher costs for all parties. Blockchain promises to reduce middlemen and costs, while increasing security, speed, cash flow and capital investments.
In terms of blockchain, to date, few have done more for the global banking industry than Ripple. The US tech firm is providing global financial-settlement solutions powered by blockchain to enable banks to transact directly with each other and lower settlement costs. Its digital asset XRP has become the fourth biggest cryptocurrency by market capitalisation, and banks are now joining in droves to improve their cross-border payment capabilities.
June 2017 saw the rollout of the first blockchain-powered instant-remittance service, jointly adopted by Japan and Thailand to establish a new payment rail between the two countries. The collaboration between Thailand’s Siam Commercial Bank and Japan’s SBI Remit, which uses Ripple’s blockchain, will help to boost the speed, efficiency and cost of the countries’ remittance corridor. A deposit transaction between the two countries can be completed in two to five seconds, drastically reducing the current two business days for payments.
Ripple’s has also set up a Global Payments Steering Group, the first interbank blockchain group for global payments that will enable member banks (including some of the world’s largest) to facilitate payment-transaction rules with formalised standards over the Ripple blockchain.
Ripple is joined by many other global tech firms partnering with the major banks of the world to develop solutions that look to disrupt current banking operations and craft cost effective, fast, transparent and secure solutions to transform banking transactions as we know them.
Millions are being invested in blockchain research and pilot projects around the globe, and not just in financial services
Firms such as R3CEV and the NexGroup are launching distributed ledgers inspired by blockchain which address specific requirements that would otherwise not be addressed through the use of a permissioned blockchain. The company was able to create a platform that merges various functions into one system and converge application servers, messaging engines, workflow managers and databases, working seamlessly within and across businesses.
NEX Group has announced that Baton Systems, a new high-speed payments infrastructure provider, will offer its services through the NEX Optimisation platform. NEX Optimisation and Baton have been working in partnership with one of the largest – as yet unnamed – global banks to deliver a new post-trade solution for FX spot transactions delivered through the NEX Infinity platform. The solution is expected to go live in the coming weeks.
Some industry experts challenge the optimism surrounding blockchain for banking. R3 received significant criticism last year when it announced it was no longer basing itself on blockchain technology, but rather it should be considered as blockchain inspired. Critics said that by stepping off at a tangent, R3 had proven that the private blockchain was not truly a workable solution for banks.
The back-office tasks of reconciliation and settlement still operate by end-of-day and next-day batch processing. This means that the more trades a bank puts on, the more risk it stacks up. Baton Systems is quoted as saying that blockchain does not solve this challenge.
The US Depositary Trust and Clearing Corporation White Paper concluded that shifting towards real-time settlement does not require blockchain technology and that patch solutions might achieve greater efficiency, reduced settlement risk and speedier, cheaper payments using existing systems.
Other analysts report that investors in capital markets have become a bit wary about the technology. Research shows investors think it will take three to five years or more to see widespread blockchain adoption.
Despite these voices, millions are being invested in blockchain research and pilot projects around the globe, and not just in the financial services industries. It is safe to say that expectations are high and there is much optimism surrounding the potential of this technology that looks like it is set to transform how we currently do business across the board.
Nicholas Warren is a senior manager in the Financial Services Practice Group at Chetcuti Cauchi Advocates. Co-author Sarah Vassallo is a legal trainee at Chetcuti Cauchi Advocates within the Financial Services Department.
ask.nwa@cclex.com