The swift development and promises of blockchain means it has moved from theory to reality. An April 2016 research briefing by Morgan Stanley found that financial institutions alone are expected to spend over US$1bn on blockchain projects in 2017.
Distributed ledger technology (DLT) is not new, but interest around its potential applications is rising and opportunities for blockchain – from fraud prevention and risk mitigation to faster settlement and more transparent payment flows – cannot be ignored. Blockchain can be defined as a “single immutable record of events”; hence offering compelling benefits. We are at the beginning of the journey and the ways in it will change business models, processes, and ecosystems are yet to be seen. Nonetheless, we can expect immense potential up and down the value chain.
A key question still remains – are we just a short distance (one to two years) away from witnessing the radical, transformative effects of blockchain technology? Or is five to 10 years a more realistic timeframe before the technology fully matures and achieves wide adoption? We have always stressed that blockchain adoption will be a step-by-step process instead of an overnight revolution, but we expect some commercially-viable implementations by early 2018.
Since blockchain has the power to transform banking infrastructure, we see start-ups and financial technology (fintech) players introducing disruptive and innovative solutions that challenge the traditional relationships between corporates and banks. Blockchain, in itself, could remove the need for trusted third parties to guarantee a transaction. As such, it can initially question a bank’s purpose.
However, it is highly unlikely that the banking landscape of tomorrow would ever become an ‘unpermissioned public network’. Due to know-your-customer (KYC), anti- money laundering (AML) and other data privacy related considerations, DLT has to be applied in a permissioned context. We expect DLT to be integrated in the financial industry through industry consortia and with close regulatory support¸ since further mainstream adoption will need interoperability between some distributed ledgers thereby driving common standards.
Deutsche Bank regards this evolution as a tremendous opportunity to revisit its internal infrastructure, and a way to further enhance clients’ overall experience when working with the bank.
In transaction banking and especially in the corporate treasury space, the main drivers for the increasing focus on digitalisation include the macroeconomic environment and regulatory requirements, new technological capabilities, as well as the increasing focus on cybersecurity and data privacy.
Emerging use cases benefiting corporate treasurers
For the financial services community, blockchain’s ability to transfer value in a new way has the potential to transform the entire industry. The technology can help to keep track of payments, transactions and trades such as bonds, loans or stocks. At present, these services require the involvement of an ecosystem of banks, traders, exchanges and clearing houses and it can take up to two days to effect settlement of bonds against payment. If this type of information could be shared using this technology, the settlement of bonds against payment could potentially be processed within minutes.
Benefits need to be looked at from both client and capital perspectives; particularly the potential capital benefits when reducing collateral requirements through shorter settlement cycles for securities, thereby freeing up a company’s working capital. In addition to this use case around post-trade settlement, we also see strong value for treasurers in the following areas:
• International payments: International payments still present several challenges when it comes to time for execution and security. Moving to a blockchain should shorten settlement time, speed up transactions and reduce the risk of fraud.
• Trade finance: A common challenge in trade finance is to ensure the goods transfer before the payment is made. With blockchain, all parties – including bank, trading houses, seller and buyer, customs, freight forwarders – are able to see when goods have been shipped before releasing the funding. With the adoption of both the “Internet of Things” (IOT) and electronic tracers on goods, the time spent on these steps could be shortened even further.
• Data management and reconciliation: Providing rule-based standards on data could enhance the quality and auditability of any transaction. Blockchain can also make reconciliation of complex data easier and reporting more efficient, since a common ledger is applied.
However, it is important to stress that there are some areas – such as product quality assurance, security, legal requirements and governance – which the market needs to focus on when thinking about applying DLT to regulated financial markets, particularly for the transaction banking product lines. The underlying business processes of payments and trade have to meet many regulatory requirements. Therefore, it will take some time before they can be adapted to a blockchain environment. However, what is unrealistic today can be realistic tomorrow.
For corporate treasurers, blockchain could be viewed first as a “process automation engine”; for instance linked to instructions for robots in manufacturing by using smart contracts.
The World Economic Forum (WEF) predicts that banks will spend up to US$400m on blockchain technology by 2019, confirming the deep commitment from industry players to this global digital transformation.
In common with its peers, Deutsche Bank is running a portfolio of activities around blockchain in order to fully explore the potential of DLT for the bank, its clients and the markets it operates in. Some of these are driven internally, and innovation is facilitated from the Deutsche Bank Labs. In other areas where the bank would not look to test on its own, it collaborates with industry partners such as the bank consortium DLG R3, thereby promoting interoperability in the industry. It proactively engages with public authorities, regulators and central banks to share insights on the potential impacts in individual markets.
The bank also has an ongoing dialogue with its clients which will help it to actively and more importantly jointly define new market standards for a well-functioning future market infrastructure.
Big data is now a commonplace term in boardrooms across the globe and data management has never been more important. As for the teams and individuals enabling these advances? They’re the corporate rock stars of the day.
The future of digital treasury tech will bring about the death of shared services, payment factories and supply chain finance, argue Standard Chartered executives. They met with GTNews to discuss seeing a greater connection between treasury and the physical supply chain and the dramatic digital advances being seen in Asia, Africa and the Middle East.
Tomorrow’s treasurer will undoubtedly need to be tech savvy – as will every senior finance professional. Importantly, they will also have to have the ability to re-imagine their KYC, regulatory and compliance ecosystem if they are to keep up with the evolving regulatory environment and have access to the liquidity and services they require when and where they want them.
Data will become the "centre of gravity" for the new banking business model under PSD2, providing consumers are willing to share their data, argues Dick Oskam, head of transaction services, ING Wholesale Banking.