Blockchain applications for finance: just a passing fad or is this a revolution?

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BELEM BLOCKCHAIN

8 min readSep 22, 2017

Blockchains are at times described as a revolution, capable of completely overturning the functioning of the financial industry as a whole, and at other times as a very elegant solution to a problem that still needs to be defined. So what’s going on here?

What exactly is a blockchain?

On the list of TCP/IP (internet communications), SMTP (email), or FTP (file transfers) protocols, blockchains could become the method for transferring ownership over the internet.

Blockchains can in fact be compared to public accounting records that are time-stamped and immutable (in perpetual expansion with the addition of new information). These accounting records do, however, differ significantly from traditional systems: they are validated and updated without any central authority. Control and validation of the records is carried out via a distributed network of peer-to-peer computers, which provides them with unequalled resilience.

Today there are two main types of blockchain protocols:

Public blockchains such as Bitcoin or Ethereum, open to all;
Consortium blockchains, access to which is restricted to members.

Public blockchains promise full disintermediation, but consequently suffer from legal insecurity. Consortium blockchains, also referred to by the term DLT (Distributed Ledger Technology), could simplify the functioning of marketplaces and reduce transaction costs, in a clearer legal framework. However, the choice of the governance model for these blockchains remains a sensitive issue.

The main applications for blockchains that have been defined at this stage are:

the transfer of value without duplication of ownership (currency, financial security, vote, etc.)
proof of existence (notarised document, patents, copyright, etc.),
coding of business rationales, using smart contracts, in order to automate processes.

But what’s it for?

Bitcoin, the first decentralised digital currency which made its appearance in 2009, introduced the blockchain concept.

The major innovation of Bitcoin was that it made it possible to transfer digital ownership, without duplication of this ownership being possible. In this area, Bitcoin is and remains the first application of blockchains.

Financial institutions were among the first to take an interest in blockchains with the idea of rationalising their costs. They would be able to save over $100bn in structural costs according to certain top consulting firms.

The major applications of the blockchain protocol in this area today mainly involve market infrastructures and are carried by consortium blockchains. We’ve selected a few applications that we see as promising.

Recordkeeping for unlisted companies

If Bitcoin uses a blockchain register to transfer monetary value, a blockchain can also be used as a securities register. Because unlisted companies have reduced financial obligations, financial institutions have taken a close interest in the use of a blockchain for issuing their securities and recordkeeping.

Thanks to the reduction of transfer costs and the increased transparency, the aim is to make the financing of SMEs more fluid and to encourage the emergence of a more liquid secondary market. In France, seven major financial institutions have joined forces to develop a post-market architecture for SMEs[1].

Settlement-delivery of securities

The purchase and sale of shares on an organised market involve a large number of players (ordering bank, custodian, trader, market, clearing house, central depository). The existing system works efficiently but it does have certain limitations: operational risk linked to reconciliation by the various players of recordings in their own systems, settlement-delivery risk, or long and costly change system.

Blockchain technology could modify the processing of market transactions by enabling their end-to-end management, from the placing of the order to settlement-delivery, without breaking the chain. In fact, a blockchain can be imagined as a chain whose links resemble the ordering banks, brokers, market, custodians, central depositories, regulators, etc. The details of each transaction could be directly shared and confirmed by all of these players via a smart contract.

In January 2016, the biggest Australian stock exchange, the Australian Stock Exchange (ASX)[2], announced that it was working with the start-up Digital Asset on replacing its clearing and settlement-delivery system CHESS by a private blockchain. ASX estimates that the cost savings generated would be between € 2.5 and 3.2bn for end users.

Interbank payments: towards a central bank crypto currency?

The Monetary Authority of Singapore (MAS) has just announced that it is working on a blockchain version of its local currency, the SGD. With the Urbin[3] project, carried out with the banking consortium R3, the MAS issued a token that is fully covered by the real currency, which can be used for settling interbank payments in a very quick and transparent manner.

So, this could be the birth of the first cryptographic fiduciary currency which could expand the concrete possible usages of blockchains.

International payments

A currency never leaves its monetary zone of origin: any transfer of money has a counterpart on the books of the issuing central bank in the form of a transfer between two commercial banks. Accordingly, to access the world markets, each bank has to create commercial relationship with a network of correspondents, known as correspondent banking. The result is that international transfers are slow, not always reliable and expensive.

The blockchain network Ripple[4], which today groups together 75 banks, intends to transform the transfer of funds as radically as email transformed communication, through a real-time international payment infrastructure, in which Ripple plays the role of pivotal currency, connected to banks and to market makers, which should result in transparency, trust, speed and lower costs..

International trade

The ongoing rationalisation of processes linked to international trade is being hampered by major constraints, mainly relating to the use of paper documents in the logistics chains. Around half-a-dozen players are involved in the purchase or sale of an asset (the buyer, the buyer’s bank, the loader, the maritime transport company, the seller, the seller’s bank, etc.). Many documents are still created manually and entered in different systems, which often results in errors and fraud.

To rectify these problems, Natixis, Trafigura, and IBM[1] have been working on a blockchain solution applicable to trade in crude oil in the USA. By including the buyer, the seller and their respective banks on a single distributed register, all of the parties can simultaneously view and share the data relative to the status of the transaction (from confirmation and validation of the new transaction, through inspection of the cargo to final delivery, then cancellation of the related letter of credit). This solution makes it possible to reduce the duration of the cash cycle and the transaction management costs and provides greater transparency over transactions reducing the de facto risk of fraud.

Financing

Furthermore, on the side of public blockchains, we are witnessing an unprecedented wave of technological innovation, driven by a new means of financing: ICOs (Initial Coin Offerings) or Token Sales. Operating on the basis of the same principle as an IPO, an ICO is a fundraising using tokens. The token has a dual function: it is used to finance the project and is the endogenous engine of the application.

For example, the blockchain Ethereum financed its development through an ICO which involved the issue of Ether, tokens which are used as fuel run the IT programmes hosted on the blockchain. We’ve recently seen a lot of ICOs, some of which are a bit crazy but others which are interesting: Sia[6] is a decentralised cloud solution, BAT[7] is a project of the Mozilla founder based on a dedicated internet browser which completely overhauls the on-line advertising paradigm, the Bancor[8] project is the brainchild of one of the architects of the euro, etc.

So, what’s next?

This list of applications in the financial field, which is just a small sample, shows the disruptive potential of blockchains. However, there are still many challenges that are yet to be met.

For example, the issues relating to confidentiality of data recorded in a shared register have still not been resolved, even though work underway is promising (MimbleWimble[1], Quorum[2], etc.).

Although solutions will be found for the technical challenges, what the industry needs is a clear regulatory framework. In this regard, it is interesting to note that French lawmakers are playing a pioneering role in this area. Regulators are also following these developments with interest, because a blockchain architecture will provide them with a comprehensive and transparent vision of the markets. Their support will be crucial for experimenting with the industrialisation of competitive solutions.

So, are blockchains a revolution of a passing fad? It’s too soon to provide a definite answer, but the market does tend to overestimate the consequences of technological breakthroughs in the short term, and to underestimate their impact over the medium term.

The BELEM team though is convinced that the blockchain protocol blockchain will completely overhaul the world of finance, and that the first commercially viable solutions will emerge within the next two to three years, in the after-market area. We also believe that the transformation of the financial industry by blockchain will result from a combination of consortium blockchains, shared among players within a single sector, and public blockchains, which will provide an unequalled level of security and resilience.

BELEM enables financial institutions to leverage blockchain technology thanks to a vertical offer of services: training, ideation, prototypes, and industrialisation.

Our added value lies in the complementarity of our team in finance & technology.

For more about BELEM: www.belem.io — @BELEM_project

Blockchain applications for finance: just a passing fad or is this a revolution?

What exactly is a blockchain?

But what’s it for?

So, what’s next?

Written by Romain Rouphael