With the overexcitement of blockchain technology beginning to quiet down to talk of more practical use cases of the technology, some industry analysts are betting on a few ways distributed ledgers can transform the market.
Some argue trade finance and smart contracts will be the first to see some of the biggest disruptions from blockchain. The theories have impressive potential but are far from the initial warnings that blockchain would disrupt the entire payments, banking and finance ecosystem.
Misys, a financial software firm that has spoken outwardly about the need for better banking services and FinServ disruption, is the latest to enter the conversation about how blockchain will really impact the industry.
“Blockchain Beyond the Buzz,” published this week, outlines Misys’ position on distributed ledgers. According to its analysts, the initial major use case for blockchain — cryptocurrencies — has surpassed its “hype pinnacle,” Misys described, with investments in bitcoin startups on the decline.
“As financial services firms invest millions of dollars, distributed ledger technology is considered by some to be overhyped,” writes Misys.
Meanwhile, interest in blockchain-based technologies independent of cryptocurrencies is on the rise.
“With unprecedented collaboration between financial institutions and technology providers, DLT [distributed ledger technology] has the potential to optimize business processes and eliminate inefficiencies between organizations,” said Patricia Hines, a senior analyst with Celent’s Banking Group, which co-produced the report. “But a broad lens is required to maintain a true perspective on who the winners will be as the DLT ecosystem matures.”
According to Misys, the primary benefits of blockchain within the financial services space apply to security and the reduction of cost and time of financial processes. The report points specifically to cross-border payments, KYC/digital identity management, supply chain finance and trade finance as key possibilities in which blockchain can mature.
Trade Finance
In this area, Misys argues, blockchain technology could improve certain outdated processes. Trade finance today lacks a centralized clearing house, despite having the need to connect multiple stakeholders in a transaction — buyers, sellers, banks, exporters, logistics firms, regulators and more.
The risk of document fraud, a lack of transparency into transaction flows and the length of time it takes to verify and reconcile the documents involved also lead to friction in today’s trade finance market.
With blockchain’s potential to digitize trade documents, Misys noted, these points of friction could be reduced.
Supply Chain Finance
Though both banks and nonbanks tackle supply chain finance, there are several pain points, as Misys points out, due to a lack of transparency across the supply chain. Invoice fraud and the risk that lenders face of borrowers pledging assets as collateral more than once. Distributed ledgers, the paper says, can lead to better tracking of goods in the supply chain, streamlined authentication, KYC compliance and more.
“When financing approved invoices, lenders can ensure that the underlying goods aren’t counterfeit, made in sweatshops or comprised of toxic chemicals,” Misys offered. Moving all of the parties involved in global trade onto a common distributed ledger, it continued, can digitize, automate and enhance the authentication and management of trading goods and their corresponding documents.
Cross-Border Payments
FX, account maintenance across borders and the expense related to foreign exchange management are all a burden on corporate treasury teams, Misys wrote. Not to mention, there are multiple entities involved in the process of cross-border payments, including intermediary banks, which make the process slow and nontransparent. Distributed ledgers have the potential not only to hasten international payments but to cut the middlemen out and, therefore, heighten the transparency and security of global transactions.
KYC/Digital Identity Management
With so much talk of heightening transparency, it’s no wonder Misys considers another potential for blockchain to directly impact the area of regulatory compliance. Know Your Customer regulations can pose complex challenges for both banks and corporations, the paper stated, especially as corporations work with multiple banks across the globe, making compliance that much more difficult, considering the changing regulatory landscape across borders.
Misys positions blockchain as a potential way to streamline digital identity management to make client onboarding at banks faster — without compromising security and compliance. Distributed ledgers have the capability of storing customer information and documents, offering a secure way to share client data with multiple parties.
And Beyond
The potential for blockchain, of course, doesn’t stop at these four possibilities. As Misys explained in its report, there are a plethora of options for blockchain within corporate banking and beyond. But few have entered into the proof-of-concept stage.
If any of these areas is to accelerate development towards greater efficiency and transparency for corporations and their financial services providers, innovators need to move forward, Misys argued.
“We are on the precipice of an exciting technology-led transformation,” said Misys Global Head of Product Management Boris Lipiainen in a statement. “But it is early days, and it isn’t yet clear how quickly blockchain will become mainstream.”