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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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Blockchain Could Be Set for $462 Billion Finance Industry Stake by 2030

Blockchain Could Be Set for 2 Billion Finance Industry Stake by 2030

London-based global information provider IHS Markit have estimated that the finance industry blockchain market is set to reach USD 462 billion by 2030.

The value of blockchain in the financial sector reached USD 1.9 billion in 2017, according to IHS Markit’s figures but this total is set to swell significantly given the expected launch of numerous projects over the next few years. The London info provider’s chief analyst Don Tait sees his 2030 projections as entirely feasible, adding, that a positive international regulatory stance will impact the industry over time:

“The Securities and Exchange Commission in the United States, the Financial Conduct Authority in the UK, the Hong Kong Monetary Authority and other regulatory bodies are reacting positively towards blockchain technology within the financial sector.”

IHS Markit indicated many ways in which the blockchain industry will be called upon in the years ahead, including cross-border payments, share trading, and syndicated lending. Tait sees the global financial market as becoming the technology’s most prominent user, including insurance and fintech. He cites the derivatives market, currently worth around USD 544 trillion a year, as having huge blockchain potential, commenting:

“By applying blockchain to the clearing and settlement of cash securities – specifically, equities – investment companies could save up to USD 12 billion in fees.”

The possible applications for blockchain technology have not gone unnoticed by stock exchanges either, with recent with Switzerland’s SIX exchange and Germany’s Deutsche Börse either actively, or at the stage of, integrating blockchain technology into current systems.

 

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Hyperledger Releases Cryptographic Toolbox for Developers

Hyperleadger Releases Ursa, A Cryptographic Toolbox For Developers

In an announcement yesterday, the Hyperledger’s Technical Steering Committee (TSC) unveiled a new project called Ursa, designed to be a cryptographic modular intended to help project developers within the Hyperledger blockchain community build resourceful applications seamlessly.

Ursa is being touted as a shared “flexible cryptographic library”, allowing developers to tap from a resource pool of development toolkits “so blockchain developers can choose and modify their cryptographic schemes with a simple configuration file change”. This would invariably save time and cost in building individual projects.

The TSC revealed that the library has two distinct modules: the first being “a library for modular, flexible, and standardized basic cryptographic algorithms” and a second library for more exotic cryptography, including so-called “smart” signatures and zero knowledge primitives called zmix.

In the announcement, TSC identified Ursa’s security experts as developers who currently handle Hyperledger Indy, Sawtooth, and Fabric. Other community members include academic cryptographers.

Hyperledger expects the library to simplify the processes of developing projects with the objective of avoiding duplicates, cutting down development costs, improving security, and creating a platform for expert reviews. Further, the ease to use model lowers the entry barrier for inexperienced developers.

On a broader event scale, Hyperledger has been used for both institutional and commercial purposes. Sberbank recently conducted an over-the-counter (OTC) foreign exchange by deploying smart contracts on the Hyperledger platform. More so, last month, retail company Carrefour deployed organic poultry tracking system on the Hyperledger DLT.

Germany’s central bank, Deutsche Bundesbank, in collaboration with Deutsche Börse, also successfully completed two blockchain trials developed on the Hyperledger Fabric to test potential applications in securities settlements, transactions, and payments, as well as bond repayments.

 

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Fintech Fusion Shows Ireland’s Intent to Promote Blockchain Hub

Fintech Fusion, a new Irish research program costing EUR 7 million is being launched to focus on paytech, regtech and insuretech technologies.

The project is the brainchild of Dublin’s Science Foundation Ireland’s Adapt Centre and will enable more data-driven research into blockchain development and big data, say its creators. The research will also address the impact of current financial technology on business, both financial and technological, including the retail and wholesale sector.

Ireland currently has a forward-thinking approach to blockchain technology. Recently, National University of Ireland (NUI) authors of a study on the adoption of blockchain approached the government to promote a more widespread use of the technology in the country.

One of the findings of that study showed that only 40% of companies in Ireland had embraced blockchain technology, which the researchers felt was relatively low, despite Ireland’s 13th position on Bloomberg’s 2018 Innovation Index, with high productivity scores and advanced IT infrastructure.

The latest project could take innovation in technology beyond Ireland’s shores with huge implications for the advancement of global financial services in general. The project will be partially funded by Science Foundation Ireland who has pledged to input EUR 2 million, with the remaining EUR 7 million coming from industry partners.

The Fintech Fusion’s academic researchers have managed to land an impressive crew of companies to assist with their work including Deutsche Börse, Fidelity Investments, Microsoft, Gecko Governance, Fineos and Zurich. Also, researchers from three existing Science Foundation Ireland centers will join the project, along with Trinity College Dublin, UCD, DCU, DIT, UL and NUI Galway.

“Fintech is the marriage between finance and technology and offers huge growth opportunities for Ireland both in research reputation and economic impact,” said John Cotter, director of Fintech Fusion at the Adapt Centre. “This will create new opportunities for Ireland, our researchers, and our industry partners.”

Trinity College itself, highly involved in the project, has its own plans for USD 1 billion campus which will be located in the new Grand Canal Innovation District which could provide a home for 400-500 startups, living alongside the offices of multinationals.

 

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