Integrating blockchain in a financial institution

An interview with Altona Widjaja, VP FinTech and Innovation Group (The Open Vault), OCBC Bank

Thanks for joining us, Altona. How do you see blockchain technology transforming the way OCBC operates in the next five years?

The excitement surrounding blockchain technology today is such that almost every major financial institution is now exploring blockchain, either as part of an industry consortia or as an individual entity.

Meanwhile, as the allure of distributed ledger technologies continues to mount, the reality on the ground and at a more basic level is quite different. We can unequivocally say that the digital asset management ecosystem will look vastly different as a result of continuing technological advances in multiple domains. But in all likelihood, blockchain innovations could be the most transformative of those advances, and we will likely see a number of real-life applications of blockchain applied to digital assets, including:

• Shares and financial securities
• Smart property
• Tie to a fiat currency
• Local community money
• Coupons
• Digital collectibles
• Access and subscription to certain resources.

Private, permissioned chains amongst a finite set of counterparties and clients could become commonplace, with dedicated processors running in a P2P model on large bank networks and operations capability potentially facilitating multiple private chains to manage a range of asset lifecycle management problems.

Digital asset management could also leverage security properties of blockchain, which include:

• Impossibility of counterfeit
• Immutability
• Disintermediation and ease of transfer
• Transparency and ease of auditing
• No overhead related to transaction processing
• Network effect brought by the unified infrastructure for multiple types of tokens

What applications are you looking into? Are you planning on implementing these technologies in collaboration with other banks in the region?

Our current interests lie in three folds of application:

1. KYC/ AML
2. Trade Finance/Smart Contract
3. Payments

We believe that blockchain application implementation makes more sense with other institutions also joining the “consensus” network. OCBC is always open to collaborating with other banks, not just in the region but with financial institutions elsewhere in the world.

What are the main challenges to adopting blockchain for a bank in Singapore?

The challenges of blockchain adoption are not unique to Singapore but have global reach. For us, the biggest problems are:

1. Scalability

We have noticed that (in general perception as well) the scalability of the blockchain has yet to be proven.

• In a public blockchain like Bitcoin there are thousands of nodes storing copies of blockchain content, many of which are run by hobbyists, so there will always be a low limit on transaction volumes if the network is to remain meaningfully decentralised.
• In private blockchains (a.k.a. distributed ledgers) the issue is less burning because the only nodes running are those who have a direct interest in the successful processing of the transactions. But of course it is still costlier than a single centralised database.
• Either way, we don’t think blockchain is well suited for high frequency trading because the asynchronous, ad-hoc, peer-to-peer nature of the network of blockchain nodes introduces delays that HFT cannot realistically tolerate. Or at least, this will not be one of its early applications.

As a separate point, note also the notion of “pruning” whereby most nodes on a blockchain don’t store the full history of all transactions, but just an ongoing verified representation of the current state. This can completely solve the scaling problem, so long as you’re comfortable with there only being a few copies of the transaction history (which still cannot be modified because then it would disagree with the current blockchain state).

The technology itself largely depends on a consensus model, and that demands a factor of trust between all stakeholders.

2. Regulation

We have yet to determine how blockchain fits in with existing regulations and legislation. A considerable number of aspects of law will need to be reinterpreted or changed through primary legislation. These issues include the legal definition of the finality of settlement which presupposes existing market processes and central data sources held at the CSD. Similarly, there currently exist geographic territorial requirements concerning where data is physically maintained as golden source, a concept that does not fit with copies of the ledger being distributed to nodes on a global basis.

The world of financial transactions survives on one keyword: “trust”.

Which makes more sense to integrate into OCBC — private or public blockchain?

As always, it will depend on the application. We believe that a private or hybrid chain might be more suitable for application in financial services and we are already exploring use cases. This is due to the nature of information stored and the speed advantage over public blockchain that is required.

What are your major concerns and where do you foresee the biggest opportunity?

Of major concern is the adaptability with legacy system and processes. Most banks are massively invested in their financial processing system infrastructures. These systems — often 15 or 20 years old — power transactions between the world’s major businesses and governments; trying to overhaul them altogether is a tall order attached with huge risk. We believe that it will take some time and a step up approach to solve the problem and garner support from major players to adopt the new platform.

The biggest opportunity we see is the unique chance to amalgamate different standards: Interoperability. The world of financial transactions survives on one keyword: “trust”. Take for example the 2008 financial crisis, at the heart perhaps the most critical element was a lack of visibility into the counterparty credit exposure of one major financial institution to another. Probably the most glaring omission that needed to be addressed was that lack of visibility, and here we are in 2016, and we still don’t have it. Blockchain and its growing influence can potentially answer this problem.

This interview is part of Nest’s Unpacking Blockchain series.

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Altona Widjaja (@altona) currently runs The Open Vault, the Fintech and Innovation arm of OCBC Group. He oversees the development of the Fintech acceleration programme, Fintech solution development and Innovation culture building for OCBC Group. With more than 9 years of experience in Financial Services Technology, Consumer Banking and Strategy both locally and regionally. Altona is passionate about technology’s role as an enabler and a challenger of the status quo. He holds a Masters in Technology (Knowledge Engineering) and a Bachelor in Computer Engineering.

After launching a FinTech accelerator, The Open Vault at OCBC, that resulted in 7 proof of concepts and 3 live customer pilots, OCBC is currently investigating how blockchain technology can be implemented within its core businesses.