While it is cryptocurrencies such as Bitcoin that tend to grab the headlines, it may actually be the technology behind them that could transform the traditional financial system. In this two-part Insight, we look at the potential that blockchain has to transform trade and discover that it is already becoming a reality for cross-border payments.
Earlier this month, US e-commerce giant Overstock launched the world’s first cryptosecurity. The $25m bond – launched as part of the company’s wider cryptofinance initiative known as Medici – will be traded on the blockchain, the technology that underlies cryptocurrencies such as Bitcoin. In a press release, CEO Patrick M. Byrne expressed that: “the cryptorevolution has arrived on Wall Street. We’re making it official by offering the world’s first cryptosecurity.”
This is but one of many developments surrounding blockchain technology that has made headlines in recent months. Others include the Commonwealth Bank of Australia’s announcing that they have begun experimenting with Ripple – a payments platform that is inspired by blockchain technology – to transact between its subsidiaries. BNY Mellon has also been experimenting with the technology, developing an employee recognition system that uses its own digital currency, BK Coins, which can be redeemed for gift cards and vouchers. Meanwhile in Singapore, DBS recently hosted an event titled ‘the blockchain hack’ which encouraged people to develop ideas and concepts around how the technology can improve banking in emerging markets.
Yet, despite the banks’ forays into the world of blockchain, it remains a relatively alien concept to the treasurer. For example, at the recent EuroFinance event in Singapore, Gautam Jain, Managing Director and Global Head of Client Access and Product Development at Standard Chartered, asked those in attendance if they had heard of the term – very few had. So what do corporates need to know about this potentially game-changing technology and what benefits can it offer?
The blockchain is a complex piece of technology (explained here in detail by the Khan Academy) but at its core is a simple concept – a distributed public ledger that is backed and secured by mathematical algorithms. Blocks are added one-by-one in a linear fashion providing a full history of every transaction in the chain. Although the primary use of the blockchain is currently to enable cryptocurrency transactions, the blockchain can actually facilitate the transfer of value of anything which is digital, be it cash, an invoice or even a contract and this will always be 100% irrefutable, irrevocable and fully visible.
In the digital age, the transformational power of the technology is, in theory, limitless. For example, it could be used to facilitate free and fair elections, carry public records such as passports, and even store more frivolous items such as coupons and movie tickets. But it is in the financial services industry where the majority of innovation is currently happening.
The theory of everything
In today’s post-crisis world, treasurers around the globe are often found looking for three key things: visibility, control and certainty. And although some treasurers have reached this nirvana in certain areas of their operations, the convoluted and often low-tech traditional way of doing things often prevents this from happening on a large scale.
Take the world of trade for example, an ecosystem what has traditionally been heavily paper-driven, but also one that is beginning to move (slowly) into the digital age. Standard Chartered’s Jain believes that blockchain technology can have a fundamental impact in this space. “If all documentation surrounding a trade transaction is made electronic then in theory the whole transaction can be made on the blockchain,” explains Jain. “The benefit of this is that all parties involved will have a fully secure and visible digital record of the transaction and all the data that is associated with it.”
While this may seem not much of a revolution, Jain is keen to stress that blockchain technology is only an enabler. “You cannot look at blockchain, or any disruptive technology in a silo,” explains Jain. “Where I see blockchain’s role moving forward is as the glue that binds all these new innovations together. It is when you look at it in this way that the potential is limitless and exciting things can start to be developed.”
For example, rather than just uploading static documents to the blockchain, corporates can begin to start using smart contracts that do things once certain conditions are met. “A bill of lading can be turned into a smart contract,” says Jain. “This can be uploaded onto the blockchain, and then traded once certain conditions are met. By doing so you can start making the whole transaction fully automated and visible end-to-end.”
And there is another step that can potentially add further benefits. “If we already have smart electronic documentation being traded on the blockchain that is a great start, but there remain some issues for corporates,” says Jain. He explains that during a trade transaction there are instances when a corporate is in the dark regarding the location of their goods – while in transit from a port to a depot for example. It is here that technology can again provide a solution. “The corporate is exposed to risk during this period, but this can disappear if a chip is placed into the container which transmits its location,” says Jain. “This can then be logged on the blockchain automatically so all involved in the transaction can see there is no issue.”
In this example, electronic documentation, the internet of things (the tracking chip) and the traditional trade transaction have all been married together by the blockchain, giving the corporate an automated and fully visible transaction end-to-end. “This gives corporates not only certainty, control and visibility,” adds Jain, “but also can allow corporates to revisit trade financing and shift towards more event-based financing options, whilst reducing the cost because the risk is gone.”
At the centre of innovation
As is the case with digitisation in general, the ecosystem around blockchain technology is fragmented with lots of companies doing different things to solve different problems. Going forward therefore the big question may be, who can bring these together? For Standard Chartered’s Jain, it is the banks that must do this.
“Previously banks wanted to own the entire value chain end-to-end but disruption has meant that this is no longer possible in most cases,” he says. “It is therefore up to banks to start looking at how they can facilitate the value chain rather than own it.” Banks are well placed to do this because they sit at the heart of the ecosystem. “The fintech firms have their strong points and so do the banks, it is about marrying these together to obtain the best solution for the corporate client.”
Next week we will look beyond the theory, to Ripple, a company that has used the blockchain model to develop its own payment platform that banks around the world have already begun using.