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World’s Central Banks Are Dipping into Blockchain – What’s Ahead for Fintech?

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The term blockchain, or more conveniently known as distributed ledger technology (DLT) to traditional finance is increasingly becoming a popular household name in the banking sector. There may well be more than 200 investment, commercial, and Central Banks as well as other financial institutions including big names such as Bank of America, Bank of China, Bank of England, Bank of Canada, Deutsche Börse, Reserve Bank of India, HSBC (Hong Kong Shanghai Bank), JP Morgan Chase, Morgan Stanley, among others who are currently integrating or planning to incorporate a part of the technology with their business operations.

Heralded as one of the most transformative technologies for financial services, the blockchain could be the key to unlocking a new economic era. Here’s how Harvard Business Review puts it:

“The blockchain will do to the financial system what the internet did to media.”

Redefining the Narrative for Blockchain

The Bank of England may have been the first Central Bank to venture into the DLT space and in partnership with the Bank of Canada and Monetary Authority of Singapore (MAS) published a paper on Cross-border interbank payments and settlements.

With sixty-five percent of the world’s Central Banks reportedly exploring blockchain technology and DLT, what does this mean for the future of finance? Firstly, the true scope of blockchain exploration by these traditional financial institutions can only be truly appreciated when considering the combined weight of their valuation alongside the core value proposition of the technology. This supposedly gives the blockchain industry a stupendous valuation that dwarfs current estimates. Blockchain and finance are often considered to be two peas in a pod – giving this an alternate meaning, perhaps, in the future, anything related to finance will have a string of blockchain technology attached.

This possibly explains the stiff competition among tech giants like IBM, Microsoft, Amazon, Facebook and others vying for a future stake in the blockchain industry – and not settling for small portions. R3 Corda apparently has a stake as a major player across most of these financial-enterprise deals, having well over 250 institutional partners across the world, the blockchain hype may indeed be off the charts.

But the story wasn’t always this glittery, as legacy financial institutions always slighted cryptocurrencies – the premier products of blockchain during its limelight; mostly due to Bitcoin – a decentralized entity, and largely considered to be a repulsive aberration of financial principles. However, over the years, most traditional financial institutions have warmed up to the idea of a distributed ledger technology and have found useful applications in operational efficiency. For them, it’s more about the blockchain and less of Bitcoin – still a wonder though how they justify that unholy separation.

The Potential for Banks

For Central Banks, the DTL has several use case parameters set to address numerous pain points. As detailed in a whitepaper published by World Economic Forum, there are about 10 use cases. However, major areas of interest seem to revolve around cross-border payments, securities settlement, fraud detection/security and trade finance. Banks tend to focus more on border payments – how to ease the transfer of cross-border payments, as DLT is known for speedy transactions that could cut down the time spent in processing transactions in incumbent systems.

The Bank of Canada is currently running several partnerships to exploit the most out of DLT. Its current flagship projects – to include project Jasper – looks to transform wholesale payment systems and possibly integrate their findings with “other assets such as foreign exchange and securities.” Other initiatives would include exploring the opportunities in “securities settlement system using central bank money, cross-border/cross-currency settlement system as well as Digital Fiat Currency projects.”

According to the Bank of Canada:

“One estimate suggests DLT could enable banks to save as much as USD 20 billion a year in global back-office costs if applied to cross-border payments, securities trading and regulatory compliance.”

For this reason, the development of Central Bank Digital Currencies (CBDC) became a subject of focus for most banks. A report by Bank for International Settlements (BIS) revealed 40 central banks around the world are supposedly researching CBDC. The central bank’s design of a digital currency typically involved the use permissioned blockchain
network, granting only participants with access to participate in consensus.

Last year, talks about CBDC perhaps made more news than other financial innovations these banks could have thought of. Though, the subject of CBDC still remains sketchy at best as a study between IBM Blockchain World Wire and the Official Monetary and Financial Institutions Forum (OMFIF) revealed mixed results on the subject of CBDC among 21 banks. However, there were growing sentiments towards using DLT and smart contracts.

Moreover, considering the size of the digital currency market, it still remains to be known how an actual retail cryptocurrency issued by the bank will impact economies. For now, the versions of bank-issued digital currencies such as JP Morgan Coin are intended for inter-bank settlements with only institutions in mind.

Between banks are rising opportunities to share resources to develop CBDC protocols that would enable inter-bank transactions. In May, the central banks of Thailand and Hong Kong signed an agreement to research CBDC in the hopes that their experience sharing will foster the development of quality financial services through the platform.

CBDCs could change the narrative for digital currencies as a whole. Should it be widely adopted, on one hand lies the possibility of the acknowledgement of cryptocurrencies and thereby create massive adoption and at that make the already volatile cryptocurrency market spike further in valuation. On the other hand, a CBDC coupled with strict digital currency regulations could oust non-regulated cryptocurrencies and create a huge problem for Bitcoin and a host of other altcoins; perhaps it won’t be extremely destructive considering the decentralized nature of Bitcoin.

Still Hesitant

Despite the potential DLT could serve the banking industry, possibly saving banks billions of dollars, developments and adoption seem rather slow considering the amount of investments sunken in the research and development of DLT-related products. Having come this far with several initiatives and collaborations, could banks begin to resent their initial thrust into DLT – after all they were only super enthused because such a system like Bitcoin going on a decade seemed efficient thus far. McKinsey describes the current stalemate as blockchain’s Occam problem;

“By late 2017, many people working at financial companies felt blockchain technology was either too immature, not ready for enterprise level application, or was unnecessary. Many POCs added little benefit, for example beyond cloud solutions, and in some cases led to more questions than answers. There were also doubts about commercial viability, with little sign of material cost savings or incremental revenues.”

As for retail banks, the hesitation may roost on Bitcoin’s extreme volatility, as with other wild roller-coaster-rides in the digital currency markets, largely due to the unregulated nature of these emerging assets. Besides, for some banks like the Bank of Korea, CBDC may appear to be a moonshot project at best, and do not consider it a matter of urgency; the Bank would rather gather more information on the benefits and costs of CBDC implementation first. With Italy, it clearly stated that it had no inclination to embark on a CBDC despite vouching for its qualities. A few others are well concerned about the overall impact of the CBDC on their fiat system.

Another huge deterrent stems from the uptick in competitive solutions being offered by legacy institutions, thereby making DLT traction a bit slow. One of such includes SWIFT’s global payments innovation initiative (GPI), which is reportedly tackling initial pain points with an attempt at providing higher transaction speeds and increased transparency between transaction parties.

One of the world’s top bank Citibank has dumped its Citicoin project which it had been developing for about 4 years. It announced earlier this year that it is now considering SWIFT on the premise that SWIFT already has a ready market with about 10,000 financial institutions already onboarded.

It’s Inevitable

It’s not all gloom for the banking industry, as the competition with emerging digital assets gets stiffer – and it will probably get worse for banks. Recently, Facebook’s cryptocurrency became an important subject as its founding infrastructure could threaten the future of legacy financial services.

The International Monetary Fund (IMF) has predicted that central bank digital currencies (CBDC), or state-backed crypto, would soon be a reality, with central banks already issuing them in the near future. This means the end to the struggles for an inclusion into the DLT market may not be too far off.

On the off chance that digital asset regulations kick off almost simultaneously around the globe, the developments of DLT-related banking products may surge, however, the industry has to fine tune its scaling strategies as the world gravitates from fiat currencies to emerging systems of value exchange.

There’s still so much more to be done by banks before incumbent systems can fully trust DLT. Therefore, more research and contingency methods would have to be in place before a complete shift occurs. However, the psychological shift is first, banks need to come to terms with the changing system as peer-to-peer systems are taking over, soon there would be lesser demand for banking services – which for the most parts lack the allure to keep customers.

Other emerging doubts could be stemmed through standardization of DLT objectives and strategies. Above all else, banks venturing into the blockchain space must do so for the long-haul, as the nascent technology still has room for growth, and perhaps evolve into a more suitable system for the banking industry.

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Bank of America Secures Tamper-Proof Blockchain Patent

America’s second-largest bank after Morgan Chase may have taken a reluctant step closer to cryptocurrency storage with the securing of its “tamper responsive” blockchain patent.

The Bank of America filed for the patent in 2016 for a technology which acts as another barrier against hacking into clients’ private keys. The patent describes how, during attempts to hack remote storage of private cryptocurrency keys, “such devices do not provide for a real-time response to such breaches, such that misappropriation of private cryptography keys is prevented”.

To prevent these “misappropriations” the new tamper-proof invention “points out to a structure having redundant keys in which the system automatically reacts to tamper attempts by removing the key from the potentially compromised device”.

According to the patent:

“In other specific related embodiments of the system, the one or more sensors further comprise at least one of a shock sensor, an acceleration sensor and a temperature sensor, in such embodiments of the system, the first processor is further configured to, in response to receiving the tamper-related signals from at least one of the shock sensor, the acceleration sensor and the temperature sensor, delete the one or more private cryptography keys from the first memory.”

The patent offers the holders a highly marketable product. It seems likely that larger companies more at risk to large-scale hackings may find the Bank of America tamperproof system highly applicable to be used alongside their current cybersecurity measures. However, in terms of the bank’s own stance on cryptocurrency, it seems unlikely that it will be offering its own cryptocurrency storage anytime soon. It cannot, under any circumstance, be cited as one of the more crypto-friendly financial institutions in the US.

Clients of the bank have been barred from using its credit cards to purchase cryptocurrencies. Bank of America’s latest annual report references cryptocurrencies as a threat to its business model; apparently, it sees the way to combat this is as to get ahead of the game and monetize cryptocurrency use cases via patenting innovations such as the “tamper responsive” patent.

 

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Bank of America Has Patent Pending for Crypto Storage Technology

Multinational investment and financial services bank, Bank of America has applied for a patent that covers a cryptocurrency storage system for use by custodians.

Specifically, the application describes a computing device that can manage blockchain encryption tags and handle a substantial number of daily transactions.

The US Patent & Trademark Office published details of the application on Thursday following its initial filing in April. It outlines a system of entrusting cryptocurrency accounts’ secured private keys to a custodian third party such as a bank. It appears to anticipate a future where the general public has mass adopted cryptocurrencies and require traditional banking services for their assets.

Describing its place and necessity in the future of financial services, the application reads: ”As technology advances, financial transactions involving cryptocurrency have become more common. For some enterprises, it may be desirable to securely store cryptocurrency.” The Bank of America began its development of this online cryptocurrency vault system in 2014.

Don’t Take This as a Pro-Crypto Stance

While Bank of America may have applied for dozens of blockchain patents (several including cryptocurrency solutions) and invested substantially in blockchain research, top executives at the firm have open criticized Bitcoin on multiple occasions. The chief technology officer called it a ”troubling” payment system due to what she referred to as the lack of ”transparency” that makes it more challenging to catch wrongdoers in the system.

Clients of the bank have been barred from using its credit cards to purchase cryptocurrencies. Bank of America’s latest annual report references cryptocurrencies as a threat to its business model; apparently, it sees the way to combat this is as to get ahead of the game and monetize cryptocurrency use cases via patenting innovations.

The report warns of concerns that people will turn to alternative investment methods outside of its jurisdiction, reading: ”clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies.”

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Bank of Queensland Rules out Crypto Purchases Using Mortgage Equity

The Australian Financial Review has reported that the Bank of Queensland will prohibit its customers to use loan equity to purchase cryptocurrency.

The Bank of Queensland, one of Australia’s largest banks, which is publicly traded on the country’s stock exchange, has made the move as it believes recent crypto price instability has made amendments to its rules necessary. Other banks have discouraged its borrowers using real-estate mortgages for crypto purchases, but as yet haven’t officially prohibited the activity.

The bank has stated in its new rules “any loan purpose that involves the acquisition of or usage of cryptocurrency is unacceptable”.

Australian regulators are increasing scrutiny over crypto space. Austrac, the country’s financial intelligence agency, has announced new rulings which have mandated further customer scrutiny across cryptocurrency exchanges. Added to this, the Australian tax office has sought public feedback regarding crypto earnings.

Also, the ATO reported that it would be enforcing its tax requirements this year by using 100-point checks, a security checking system long favored by the Australian government and other sectors, and also call on bilateral agreements with other countries to identify users for tax payment purposes. There are currently over 40 countries who have such agreements with Australia including the US and the UK.

It’s been reported that some lenders are now monitoring borrowers accounts in order to check if such accounts are being used for cryptocurrency trading. An anonymous broker reportedly claimed, “They (banks) are concerned because the Australian Taxation Office, Treasury, the Reserve Bank of Australia and Austrac are crawling all over it.”

In a similar move, but in this case focusing on customer credit, banks such as JP Morgan Chase, Citi and Bank of America have suggested bans on credit being used to purchase cryptocurrency due to the volatility of the market.

Reserve Bank of Australia (RBA) official Tony Richards in a speech to the Australian Business Economists recently expressed his admiration of Bitcoin but thought it would not be adopted into the country’s mainstream financial system.

 

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