The current state of offshore banking is quite worrying. There are still benefits for asset owners to bank offshore, but “thanks” to the global crackdown on the offshore world, choices are becoming more and more limited.
Unfortunately, the limited choices go both sides; not only asset holders, the offshore financial centers themselves are facing uncertainties.
Once strong players in the offshore world, offshore jurisdictions that rely on the financial sector to keep themselves alive — such as jurisdictions in the Carribean — are facing unwanted fate: The demise of their financial sector.
While they can always innovate — just like Singapore does, by shifting their focus from private/offshore banking to fintech — not many have the resources to keep the jurisdictions’ finance afloat. Most rely on tourism, but that’s just not enough when you take away the income from the financial sector.
It’s a global offshore problem
Switzerland is a classic example of how secrecy — and the whole offshore financial sector — is crushed by the global push toward tax transparency. Politically-fuelled or not, the aftermath is quite in line with what’s expected: The revenue from the offshore sector is declining, and the government needs to find other ways to keep the financial sector going. New financial products are introduced to the market while maintaining the global tax transparency communities happy with the regulatory adjustment.
Another case would be The Bahamas. The Bahamas-based financial analyst and the former Free National Movement MP Lester Turnquest said that The Bahamas was spared from the EU’s tax haven blacklist, but there’s still work to be done — hard work, to be exact — to keep the jurisdiction save from financial annihilation.
The last case would be Mauritius. The jurisdiction’s financial sector is still alive and well, but the jurisdiction has to shift from offshore financial center to leveraging the expertise for asset holders who want to explore investment opportunities in Africa, particularly in countries in the southern part of Africa.
The situations above shed some light for us to understand the situation: Offshore Financial Centers (OFCs) survive for the time being, but the future is quite bleak — if they don’t innovate.
What are the options?
In the evolve-or-die situation as mentioned above, there are several paths traditional offshore jurisdictions can take to stand the test of time. Keep serving offshore clients, while diversifying their line of financial products, as well as adopting technology to gain competitive advantages, such as Internet banking.
The good news is, there is one technology that soars in popularity in recent years, namely blockchain.
Blockchain technology is said to be able to disrupt the current state of things in technology adoption. The level of disruption is said to be similar to the introduction of the Internet in the 90s. The technology will change how companies runs their business, and it’s about time that offshore jurisdictions, specifically offshore banks, need to invest more resources in learning about the blockchain technology.
Let’s delve deeper into the blockchain world, shall we?
First thing first: What is blockchain?
Let’s start with a very brief intro to answer the question, “what is blockchain, anyway?”
Blockchain is a growing list of records, liked and secured using cryptography (considered as the art of writing or solving code through encryption/decryption of something, usually text.) In the financial language, blockchain is a distributed ledger that can record transactions between two party that require both parties’ verification and can’t be undone. Due to those features, blockchain is very secure.
“But what blockchain has got to do with offshore banking?” you ask.
The answer lies to the applications built upon blockchain, as the underlying technological foundation.
We’re sure that you’ve heard about bitcoin. It’s actually the first blockchain-powered technology. Blockchain enables bitcoin to become the digital currency that we know today.
Bitcoin solves the double spending problem without any involvements by any intermediary (e.g., the Government.) All of your bitcoin transactions are recorded in a ledger, and just like what blockchain offers, those can’t be undone.
Now, Bitcoin inspires the development of other applications, such as Ethereum, Ripple, and so on.
The future banking tech, built upon blockchain technology
Blockchain-based fintech startups come and go, but there are several startups that are ready to go mainstream, namely Ripple and Stellar.
Ripple: the SWIFT killer?
Ripple is essentially a real-time gross settlement system (RTGS), currency exchange and remittance network. The fintech startup aims to connect banks, payment providers, digital asset exchanges and corporates via their distributed ledger RippleNet. The platform enables those entities to send money globally easily, securely and less-costly, using the cryptocurrency XRP as the digital tokens for exchange.
What’s so special about Ripple, considered as the SWIFT killer?
Firstly, Ripple is more secure — it adopts a multi-sign feature which essentially requires more than one stakeholder’s signature to authorize account holders’ transactions. This essentially makes hacking difficult and expensive. How about SWIFT? The decades-old system is running on dated Windows computer system.
Secondly, Ripple is much less costly. On average, banks adopting Ripple can save $3.76 per transfer. SWIFT, to compare, charge $25 or more per transfer.
As of October 2017, Ripple has more than 100 banking clients — and counting. Big names using Ripple include Santander, UBS and Standard Chartered.
Stellar: Banking services for the underbanked
Another fintech wants to disrupt the financial world is Stellar.
Stellar is quite similar to Ripple, but target different market segments. While Ripple target banks as clients, Stellar aims to provide services for the underbanked; the startup serves individual clients with blockchain-based cross-border payment solutions, such as remittances and micropayments.
Just like Ripple, Stellar boasts quick money transfer, as well as low transaction costs.
IBM collaborates with Stellar and KlickEx for the development of a blockchain cross-border payment solution. The early client group members include BBVA, TD Bank, and so on.
How blockchain can save offshore banks
From the explanation above, we can see that blockchain technology — and the applications built upon it — can impact offshore banks that want to adopt the disruptive technology.
Here are some ways blockchain — and the services offered by fintech startups like Ripple and Stellar — can save offshore banks from facing the extinction:
1 — Serving clients better
Offering convenience via Internet banking is good, but what’s better? How about offering secure transactions? How about speed?
Indeed, adopting blockchain ensures clients that their transactions are private, secure and fast.
2 — Cutting costs
As mentioned above, the costs of banking transaction are significantly lower when using solutions like Ripple or Stellar. This helps offshore banks to reduce overheads.
3 — Develop new products and services
Some reputable banks, such as our partner bank in Puerto Rico, offers investing opportunities in the form of precious metals, forex and so on. Offshore banks adopting the blockchain can offer additional products, such as investing in bitcoin and other cryptocurrencies.
4 — Raising funds via ICO
ICO — Initial Coin Offering — lets you crowdfund using cryptocurrency. Just like a conventional IPO, a percentage of the newly issued digital token is sold to investors for other cryptocurrencies, such as Bitcoin or Ethereum.
An offshore bank can use ICO to fund its operations, build infrastructure or system, or launch new services.
There are many other ways offshore banks can use blockchain technology, but those four above are good starting points.
Offshore banks — just like any other organizations — need to embrace change. They have to innovate — or else, become irrelevant and obsolete. Hoping for the global community to acknowledge offshore banks and jurisdictions is not a sustainable plan for the future.
Offshore banks should adopt technologies like Ripple to reduce overheads; they should capture cryptocurrency investors and traders by building a platform for that; the point is, they need to embrace technology.
What other choices do offshore banks have, anyway?