Op-ed

A Glimpse into the Decentralized Future of the Finance Sector

Blockchain is set to change the financial industry, and the first steps of this revolution are here

Blockchain makes fraudulent activities almost impossible due to the distributed infrastructure’s ability to share data that is secure and unalterable, thereby ensuring data integrity and transparency. On top of this, Blockchain technology empowers users by offering them control over their transactions and data while reducing the clutter and complications of adding operations to a single public ledger. From a broader perspective, Blockchain technology has the ability to significantly reduce costs for organizations, as highlighted in the below industry examples.

In the Industry

Today, more and more organizations in the financial sector are concentrating on disruptive business models through the use of Blockchain. It can be argued that the most prevalent Blockchain disruptions have been recognized in the Banking, Trade Finance, and Supply Chain sectors.

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Banking

Nir NetzerThe banking sector provides arguably the most prevalent example of B2B Blockchain disruption due to the platforms tamper-proof ledger, which provides an alternative to banks and traditional methods of financial institutions. Blockchain offers banks a new level of accuracy and data sharing within the financial services ecosystem. The Financial Times estimates that implementing Blockchain technology in Banking will cut third-party costs by up to $20 billion annually. Furthermore, the Santander FinTech Study suggests that by 2022, distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance by $15-20 billion per annum.

One successful example of Blockchain application in banking is Ripple, a company that is helping banks process international payments through Blockchain. The company has built a real-time gross settlement system allowing quick and accurate payment processing. A study conducted by the company suggests that utilizing their platform will eliminate $18 billion annually in liquidity and payment operation costs for banks.

Trade Finance

The Trade Finance sphere is a tedious and bureaucratic space. Both stock and share purchases are required to pass through brokers, exchanges, clearing, and settlement. As a result of this, such transactions typically involve a complicated paper trail that is vulnerable to document fraud, requires international courier services and can take as long as a month to be completed…until Blockchain. Blockchain allows all parties to track documentation through a secure network and requires no third-party verification, thus contrasting to the current cumbersome and lengthy paper-heavy process.

The first Blockchain based trade-finance deal was a letter of credit transaction and occurred two years ago between Ornua Group (formerly the Irish Dairy Board) and the Seychelles Trading Company following a collaboration involving Barclay’s Bank and Israeli start-up Wave.

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The start-up connects all members of the supply chain to a decentralized network, thus allowing for the direct exchange of original and unique documents. The application also manages ownership of documents on the Blockchain, which eliminates disputes, forgeries, and unnecessary risks. The Wave platform cut a process that usually takes between seven to ten days down to less than four hours and guaranteed the export of $100,000 of agriculture. By utilizing Blockchain in the transaction, both parties were able to transfer the shipping insurance and other original documents cryptographically, significantly reducing the possibility of document fraud.

Supply Chain

Logistical planning is overwhelming. It requires full transparency and collaboration with others to optimize the flow of physical goods and the flow of information and financial transactions. The fact that much of the logistics value chain is bound to manual processes as a result of regulations is a clear aggravating factor. For example, supply chain companies must often rely on manual data entry and paper-based documentation to adhere to customer processes. As a result, it becomes difficult for these companies to track the origin of goods and the status of shipments as they move along the supply chain, creating friction in global trade.

A Corporate Solution

It is clear that Blockchain has the capacity to alleviate many of the frictions in global trade including procurement, transportation management, and customs collaboration. In order to unlock efficiency in ocean freight, Maersk and IBM are developing a global Blockchain-based system for digitalizing trade workflows and end-to-end shipment tracking (see figure). The platform allows stakeholders in the supply chain to view the progress of goods through the supply chain, locate containers in transit and check the status of customs documents and other data. The technology ensures secure data exchange and a tamper-proof repository for the data. Both companies forecast that the solution will track tens of millions of shipping containers annually as well as significantly reduce delays and fraud, resulting in billions of dollars in potential savings in the logistics industry. Not only will the solution dramatically improve global trade logistics, but the World Trade Organisation estimates that reducing barriers within the international supply chain could increase worldwide GDP by up to five percent, and total trade volume by 15 percent.

To Conclude

With rapid global adoption, the value of Blockchain technology speaks for itself. It can be argued that at the heart of many useful Blockchain applications are two basic human needs: security and convenience. Wave’s decentralized network ensures full transparency throughout the exchange of documents (thus tackling the security need), and IBM’s digitization of trade workflows is a salient example of convenience. So, what’s the message? What does it look like when Blockchain disrupts security and convenience in your industry, and how can you utilize your innovation to meet underlying basic human needs?

On November 19, 2018, FinTech-Aviv will host the Annual Blockchain Event at Rise Tel Aviv.

Nir Netzer is the Founding Partner of Equitech Financial Consulting and Co-Founder of the FinTech-Aviv community.

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