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Blockchain Technology and the Financial Services Market State-of-the-Art Analysis

Authors:
  • HHL Leipzig Graduate School of Management

Abstract and Figures

For several years, the hype surrounding the distributed ledger approach and blockchain technology has grown steadily, fostering discussions and research activities on potential areas of application throughout the financial services industry. Current research and several use cases reflect the first feasible implementations of the technology, bringing major changes for segments and processes within the industry. An increasing number of banks are realizing the urgency of the topic and are exploring ways of using blockchain technology. A differentiated approach is necessary to elaborate on the potential impacts on industry segments and financial institutions, as blockchain technology is characterized by complexity and several limitations. Drawing from a broad range of statements from experts from both Infosys Consulting and institutions from various sectors of the industry, this paper provides a high-level business-case viewpoint on the potentials and limitations of the blockchain technology. To that end, both promising and non-promising areas of application are highlighted and discussed. After an introduction of the technology, three main fields of application have been investigated here: Payment transactions, trade finance and the over-the-counter market. The paper gives an analysis of the status quo in each of these fields and shows where and how blockchain technology could be used or is already deployed. The authors show what is currently done to introduce the blockchain and what the next steps should be.
Content may be subject to copyright.
CONSULTING
Blockchain Technology
and the Financial Services Market
State-of-the-Art Analysis
External Document © 2016 Infosys Limited2
External Document © 2016 Infosys Limited 3
Introduction
Key findings
Distributed Ledger technology in the financial services industry.
Built for disruption – how blockchain technology works.
No magic potion for everything.
Who is in? The main stakeholders.
Implications for the financial services industry.
Payment transactions.
Cost and complexity reduced.
Promising examples on their way.
What’s next?
Trade finance.
No trade-offs – speed and security combined.
Possible use cases in trade finance.
Current projects: collaboration is key.
What’s next?
The over-the-counter market.
Efficient markets and reshaped business models.
Promising signs – big revenues for FinTechs.
What’s next?
Conclusion and outlook.
About Infosys Consulting & HHL Leipzig Graduate School of Management
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Table of contents
External Document © 2016 Infosys Limited4
Introduction
For several years, the hype surrounding the dis-
tributed ledger approach and blockchain technol-
ogy has grown steadily, fostering discussions and
research activities on potential areas of application
throughout the financial services industry. Current
research and several use cases reflect the first fea-
sible implementations of the technology, bringing
major changes for segments and processes within
the industry. An increasing number of banks are re-
alizing the urgency of the topic and are exploring
ways of using blockchain technology. A differenti-
ated approach is necessary to elaborate on the po-
tential impacts on industry segments and financial
institutions, as blockchain technology is character-
ized by complexity and several limitations.
Drawing from a broad range of statements from
experts from both Infosys Consulting and institu-
tions from various sectors of the industry, this pa-
per provides a high-level business-case viewpoint
on the potentials and limitations of the blockchain
technology. To that end, both promising and non-
promising areas of application are highlighted and
discussed.
After an introduction of the technology, three main
fields of application have been investigated here:
Payment transactions, trade finance and the over-
the-counter market. The paper gives an analysis of
the status quo in each of these fields and shows
where and how blockchain technology could be
used or is already deployed. The authors show what
is currently done to introduce the blockchain and
what the next steps should be.
Background information on white paper
Identification of relevant areas of
application
12 interviews conducted
(8 from banking, 4 from FinTech)
Deep dive into the identified areas
of application
21 interviews conducted
(13 from banking, 8 from Fintech)
· 81 experts contacted, literature research through more than 70 publications
· 33 Interviews conducted (21 from banking, 12 from Fintech)
Research on macro level Research on micro level
External Document © 2016 Infosys Limited 5
Blockchain has promising potential in
several financial services areas.
1
3
5
2
4
6
Other promising areas for blockchain
applications include lending business,
insurance, real estate and factoring.
Collaboration between FinTechs and
banks is key for broad implementation.
Blockchain technology is currently not
sufficiently regulated and future suc-
cess will depend on clarifying legal
aspects.
Investment banking and transaction
services are the most promising fields
of blockchain application in the near
future.
Distributed ledger and blockchain are
not one-size-fits-all solutions.
Key findings
External Document © 2016 Infosys Limited6
(2) Tokens are used as unit of exchange/
account in distributed ledger transactions.
They are mostly referred to as cryptocur-
rency’ or digital currency’. Some crypto-
currencies (e.g. bitcoin) can be exchanged
against fiat currencies. More importantly,
tokens can not only be used to account for
money; they can also represent any kind
of asset, such as bonds, rights, gold bars
or even cars.
(3) The structure defines how transac-
tions are stored in the ledger (see Figure
2). Most prominent is a concept called a
‘blockchain’. A blockchain consists of elec-
tronically chained blocks that contain the
transaction records of a given time frame.
Since a blockchain sums up all blocks (i.e.
Distributed ledger tech-
nology in the financial
services industry.
In many of its segments, the financial ser-
vices industry currently follows a central-
ized ledger approach, in which trusted
third parties process transactions be-
tween two or more parties. The central
tasks of those trusted third parties are the
certification of ownership and the clearing
of transactions.
Built for disruption – how
blockchain technology
works.
Since a decentralized network of com-
puters conducts intermediary tasks over
the internet, the distributed ledger ap-
proach eliminates the need for a trusted
third party (see Figure 1). All transactions
are recorded into a digital ledger, which
is publicly available and fully distributed
to all members of the network (so-called
nodes). As each network member holds
a valid copy of the ledger, the network it-
self is able to certify asset ownership and
clear transactions, providing a mechanism
that offers higher security than the cur-
rent central ledger approach. Transactions
are visible to all network participants and
are immutable once they are recorded in
the ledger. Moreover, the distributed led-
ger approach could increase transaction
speed and decrease transaction costs,
because operations are performed peer-
to-peer between the corresponding par-
ties rather than indirectly through trusted
third parties.
A distributed ledger system consists of the
following five components: (1) a network
of nodes, (2) tokens, (3) a structure, (4) a
consensus mechanism, and (5) rules.1
(1) The network of nodes is composed of
the members and computers of the net-
work. Nodes are responsible for the main-
tenance of the ledger and the verification
of transactions. Since the distributed led-
ger technology is a network approach, it
benefits from a high number of nodes. The
greater the number of network members
working on the verification of the trans-
actions, the higher the mutual processing
power. Ultimately, transaction speed and
cost structure improve.
all transactions), it represents the whole
ledger. In practice as well as here, the term
‘blockchain’ is often used more broadly to
refer to a distributed ledger approach
using a blockchain structure.
(4) The consensus mechanism performed
by the network of nodes, prevents so-
called double spending and determines
the ‘correct’ version of the ledger. Double
spending occurs if particular tokens are
spent twice, such as when party A owns
only four tokens but transfers three tokens
to party B and three tokens to party C at
the same time. To prevent this issue, the
network of nodes has to perform a consen-
sus mechanism to eliminate the manipula-
tion of transactions (see Figure 3, page 7).
Figure 2: The structure of a blockchain; source: Own illustration based on Bitcoin (2015) and
Nakamoto (2009)
Figure 1: Centralized vs. distributed ledger approach; source: Own illustration based on Santander
(2015) and Goldman Sachs (2014)
Ledger
Centralized ledger
Distributed ledger
Transaction records
BLOCK 1 BLOCK n BLOCK N
Trusted third party
No trusted
third party
Central authorities certify ownership and clear transactions
Ownership certication and transaction clearing by the entire network
of institutions – no need for central authorities
External Document © 2016 Infosys Limited 7
The best-known mechanism is ‘proof-of-
work’, which is applied by bitcoin (see Fig-
ure 4). The network of nodes has to solve
difficult and costly puzzles to add new
blocks to the blockchain, i.e. record new
transactions in the ledger. This require-
ment prevents double spending because
it would be too costly and computational
power-intense for any third party to out-
perform the whole network in solving
these puzzles to manipulate transactions.
Another mechanism, called ‘proof-of-
stake’, prevents double spending through
the idea of token ownership. The greater
the share of ownership of certain network
members, the more blocks these mem-
bers are allowed to add. The assumption
is that a member’s self-interest not to act
fraudulently increases with increasing
coin ownership.
(5) Rules set out a protocol for interac-
tions between participants. Two of the
most influential protocols are seen on the
bitcoin and Ripple networks (see Figure 5).
Whereas bitcoin is a cryptocurrency with
a built-in payment system, Ripple is a pay-
ment system for arbitrary assets. The two
protocols differ in their consensus mecha-
nism, transaction fee policy, creation of
new tokens and other aspects. Hence,
rules strongly influence the character of
distributed ledger systems and determine
the way the system can be applied.
Figure 3: The process of a distributed ledger transaction; source: Own illustration based on Santander (2015) and Goldman Sachs (2014)
Ripple protocol
· Payment system for arbitrary currencies
· Iterative consensus process
· Ripple Labs issues new tokens
· Any kind of asset can be tracked
· Transactions have an XRP cost
Figure 5: Bitcoin protocol vs. Ripple protocol; source: Own illustration based on Accenture (2015),
Bitcoin (2015) and ECB (2015)
Two Basic Protocols
Bitcoin protocol
· Currency with built-in payment system
· Proof-of-work consensus process
· Mining of new tokens by network nodes
· Only bitcoins can be tracked
· Transactions are basically free
1 2 3
Transaction recorded
in new block
Block validation
through network
A intents to send funds to B
Add block to
existing chain
Figure 4: Proof-of-work vs. proof-of-stake; source: Own illustration based on Accenture (2015),
Bitcoin (2015) and ECB (2015)
PROOF-OF-WORK
· Users solve puzzles to mine new block
· This implies running hash algorithms
to verify transactions
PROOF-OF-STAKE
· Users mine based on coin ownership
· High share of ownership implies user’s
self-interest
External Document © 2016 Infosys Limited8
No magic potion for every-
thing.
Although the distributed ledger technol-
ogy has the potential to change and im-
prove the current financial services indus-
try, it does not constitute a one-size-fits-all
solution. Potential business cases need to
fit to the technology’s specific character-
istics, which are:
Security: All transactions recorded
in the blockchain are immutable and
transparent. Therefore, the applica-
tion of the technology is appropriate
for use cases in which security plays a
major role.
Decentralization enables business
models that replace any trusted third
party or intermediary because a trust
relationship between unknown par-
ties is established.
Any asset possible: Tokens used by
the network allow the exchange of
any physical or non-physical asset so
that the blockchain can be used for
different kinds of transactions.
Internet as basis: The blockchain
uses the internet as the underlying
infrastructure to process transactions.
This enables business cases to provide
banking services without the need for
a banking infrastructure.
Lower costs, higher speed: In some
cases, the blockchain could reduce
transaction costs and increase trans-
action speed. This feature depends
mainly on the number of transactions
and the network size.
Besides these characteristics, some pos-
sible obstacles or limitations have to be
mentioned: Since the blockchain tech-
nology is a network approach, a certain
number of members is required to partici-
pate in the network to offset the costs of
setting up the blockchain infrastructure.
Furthermore, severe consequences of IT
instability or human error can interfere
with blockchain business use.
Despite technological characteristics
and requirements, the application of
blockchain technology to business cases
requires a solid legal framework that
regulates the rights and obligations of
all participants and also takes into ac-
count the rules, laws and taxes imposed
by public authorities. At the moment, le-
gal bodies have just begun to take notice
of the technology and are far away from
releasing a legal framework. In light of the
above, the distributed ledger technology
can develop its full potential only if the
mentioned criteria are fulfilled (see Figure
6, page 9).
Who is in? The main stake-
holders.
Blockchain expertise mainly comes from
more than 300 leading FinTech start-ups
(FinTechs) spread world-wide. These com-
panies mostly have a deep understanding
of the technology since they are already
working on first business cases. Although
only a few large-market cases presently
exist, FinTechs are already generating
remarkable revenues. Banks also have a
deep understanding of the technology,
which arises from their own research as
well as from collaborations with other
banks, such as R3 CEV, and FinTechs. Re-
search especially occurs in innovation labs
or company development departments. In
2015 already, 47% of financial institutions
were exploring ways of using blockchain2
and many globally operating banks are
developing their own cryptocurrencies,
such as SETLcoin by Goldman Sachs and
Citicoin by Citibank. Additionally, banks
are investing in blockchain start-ups and
publishing the results of their research in
the form of articles and white papers. Di-
verse models of collaboration among all
these players are conceivable; one would
be that FinTechs operate on top of and
in collaboration with banks, serving the
broad customer base.
Regulators like the ECB initially focused
on cryptocurrencies but are now moving
on to further applications, especially in
transaction banking. The Bank of England,
the Federal Reserve and the Monetary
Authority of Singapore conduct the most
advanced research. Regulators are aware
of blockchain technology’s potential to
solve problems within regulation itself,
such as those related to anti-money laun-
dering (AML), know your customer (KYC),
and counter-terrorism financing (CTF).
Although regulators have begun dealing
with the technology, they are still some
time away from enacting a comprehen-
sive legal framework that is capable of
regulating the various blockchain applica-
tions.
Although banks, FinTechs and consul-
tancies jointly discuss the technology,
research is still in an early stage. The ma-
jority of activities aim at understanding
the technology and its implications for
financial services to create the basis for a
comprehensive discussion on specific use
cases.
Implications for the financial
services industry.
Currently, the distributed ledger approach
is tackling numerous business areas and
processes but does not offer a perfect fit
for implementation in every corner of the
industry. However, the reach of the tech-
nology might increase in the near future,
as research is ongoing to extend the per-
formance boundaries.
Limitations of the technology, combined
with characteristics of particular areas
within financial services, constrain prompt
implementation in some business fields.
Segments and products that have no col-
lateral behind them generally hold no
potential for administration improvement
through the implementation of the de-
centralised ledger technology. Thus, the
business areas of agreed overdrafts and
discount credits do not constitute pro-
spective areas of application. Currently,
the deposit business plays a minor role
and shows low potential for a beneficial
blockchain use. Although in the future the
technology could be employed to secure
deposits and better map interest pay-
ments, current projects focus on crypto-
currencies and do not indicate an early im-
plementation within the deposit business.
In the current stage, cash transactions are
precluded, as the focus lies on digital so-
lutions and non-cash transactions. Owing
to low margins, retail banking is not pres-
ently considered to be a promising field.
One major limitation of the blockchain
technology is the inability to improve the
enforcement of payment titles and map
External Document © 2016 Infosys Limited 9
k-double auction scenarios in several pro-
tocol types. Hence, it does not function as
a legal authority (except for documenta-
tion).
On the other hand, the blockchain tech-
nology shows a huge potential for vari-
ous products, processes and areas within
the industry. Three fields of application
stand out: Payment transactions, trade
finance and the Over the Counter (OTC)
market.
Within the field of payment transactions,
the technology could be used to over-
come current problems of the correspon-
dent banking system and international
money transfers. The fee-intensive and
fragmented processes of cross-border,
non-cash transactions could be eliminat-
ed by the exclusion of third parties, direct
money transfers and efficient interbank
settlements. The possibility to create a
competitive marketplace of liquidity pro-
viders potentially ensures the best ex-
change rates for international exchange
and payment transactions.
Second, as trade finance is one of the seg-
ments in financial services that could not
keep up with technological developments
and digital evolution, blockchain technol-
ogy could induce a needed transforma-
tion. The current legal situation in trade
finance could be transferred to the block-
chain, which would create strong legal
certainty. The technological capabilities
of delivering trust, security, risk mitigation
and fast processes at low cost offer true in-
novation potential.
Third, the blockchain technology could
redesign the OTC market infrastructure
and lead to elimination of obsolete mar-
ket participants. Huge costs savings might
be possible by using smart contracts that
could automate the execution of OTC
agreements. Direct trade without trusted
third parties could be executed, whereby
customers no longer need to depend
on their brokers. The technology has the
potential to reduce settlement risks by
enabling almost instant settlements and
avoiding latencies of about T+3 days to
settle.
Figure 6: Potentials and obstacles for applications; source: Own illustration based on expert interviews (2015) and analysis results
POTENTIALS
The current distributed ledger technology is not always an appropriate solution, since it can
only develop its full potential if a large network and low transaction volumes are given.
OBSTACLES
· High security through immutability
of records
· Decentralization eliminates the need
for a trusted third party
· Transparency through publicity of the
ledger‘s transactions
· Low transaction costs and quick
execution
· Not limited to the exchange of
monetary assets
· Wide spread of the internet
· Not appropriate for massive transactions
(e.g. mass payments) due to complex
verication process
· Network approach requires a sucient
number of members
· Complexity of the concept exacerbates
its distribution
· Severe consequences of IT instability
· Slow adoption by banks due to possible
loss in revenues
· Lack of legal regulations interferes
implementation
External Document © 2016 Infosys Limited10
1) Payment transactions.
Payment transactions constitute a major
business area of global transaction bank-
ing and involve the administration of
liquidity in any currency for companies,
individuals and financial institutions. Over
the last decade, global payment revenues
have increased sharply, and forecasts indi-
cate a further rise. The numbers of global
and European non-cash payments are
also constantly growing and expected to
further increase (see Figure 7). In 2015, the
share of global non-cash transactions was
20%. The contribution of payment rev-
enues to total banking income has been
increasing steadily and is expected to re-
main at a mid-term level of 40%, with the
trend toward revenues being driven mainly
by fees and not by interest.3
To transfer funds internationally, banks
lacking a correspondent relationship de-
pend heavily on other correspondent
banks. Thus, they have to establish a pro-
cess that involves a chain of banks and in-
curs transaction, third-party and exchange
rate fees, accruing for each player within
the settlement process. This practice often
creates cryptic transfer routes and over-
lapping processes and is further compli-
cated by diversity in the clearinghouse
memberships of banks (see Figure 8). Pay-
ment systems are based on local laws and
practices within existing domestic bank-
ing. The lack of a common global standard
reduces the ability to seamlessly pass data
and back-office information and creates
both settlement and non-settlement risks.
Despite all the mentioned obstacles, inter-
national payment systems have become
increasingly more efficient during the past
decade. Improvements include offering
the ability to settle cross-border payments
within 24 hours and, in countries like the
UK, introducing first real-time payment
systems. Nevertheless, an appropriate
potential for improvement of legacy sys-
tem processes must be developed soon to
meet future industry demands.
Cost and complexity reduced.
The deliverable performance of a technol-
ogy often depends on whether it can be
modified and improved through further
research. With respect to payment sys-
tems, determination of this possibility in-
volves an analysis of certain requirements
the blockchain must meet to be ready for
implementation. Primarily, the technol-
ogy must prove superior to current pro-
cesses and must add value in terms of
lower transaction times, costs and efforts
per payment transaction, simultaneously
guaranteeing high security standards and
satisfaction of regulatory requirements for
all involved parties. Analysis of this evi-
dence can disclose fundamentally differ-
ent results across various financial institu-
tions, and a differentiated and individual
consideration is necessary before imple-
mentation starts. The requirements for a
mass implementation fall into two broadly
defined categories: the legal aspects,
which present the major hurdle for most
Figure 8: Example of an international payment transaction without blockchain; source: Expert interviews (2015), US Department of Treasury (2007)
and VISA (2006), Illustration adapted from ’ The Ineciencies of Cross-Border Payments’ by VISA (2006)
Figure 7: Number of non-cash payments in Europe from 2005 to 2020 (in billion transactions, no
ATM transactions included); source: A.T. Kearney (2013)
Company A (USA) needs to make a payment to company
B (Japan) – company A requests its bank (bank A – USA) to
send a U.S. dollar payment to company B
The clearing house executes the fund transfer by credi-
ting the account of another U.S. clearing house member
(bank C)
Bank A does not belong to the corresponding clearing
house – has to request its correspondent bank (bank
B), which is a member of CHIPS, to facilitate the transfer;
SWIFT message from bank A to bank B
Bank D in Japan is bank C‘s correspondent bank and recei-
ves payment from bank C; SWIFT message from bank C t o
bank D
Bank B, a member of the clearing house, sends the funds
transfer command to the clearing house
Company B has an account with bank D and receives the
funds
Bank B
(USA, clearing house
member)
Bank C
(USA, clearing house
member and correspon-
dent partner of bank D)
Bank D
(Japan)
Bank A
(USA)
Company A
(USA)
Clearing
House
Company B
(Japan)
1
4
1
22
55
3
6
6
3
4
2005
70
2010
87
20 15 E
121
2020 E
177
CAGR
+ 5%
External Document © 2016 Infosys Limited 11
of the participants, and the technological
aspects, which have to be guaranteed at
any time.
Legal requirements: Legal arrangements
should be defined for the insolvency of
a blockchain participant, liability for en-
forcing anti-money-laundering standards
(AML), and managing over-lapping juris-
dictions. Furthermore, legitimation as-
pects and procedures must be considered,
such as the identification of beneficiary
parties and politically exposed persons
(PEP’s). Legal ambiguity constitutes a ma-
jor hurdle for implementing the block-
chain in international payment systems, as
many aspects remain to be clarified.
Technological requirements: Certain
technological properties are vital for broad
use. The screening of beneficiary parties
needs to be adjusted and extended to IP
addresses and block-chain accounts – a re-
quirement that should be put into practice
without any major problems.
The most promising fields of application
within payment systems seem to be in-
dividual transactions and cross-border
payments of different volumes, which can
be large corporate and inter-bank transac-
tions. Initial concrete approaches within
cross-border payment processes state the
potential advantage of broad peer net-
works consisting of verified partners, such
as banks. These networks could employ a
private blockchain solution, allowing each
member to send funds and transaction-
relevant information directly to other
members.
Making use of the technology in such
a way could change the course of the
prevailing correspondent banking system.
International payment transactions could
be executed by omitting the use of third
parties like clearinghouses and to a large
extent the branched chain and cross-
transfer of information and funds (see
Figure 9). This principle of implementation
could theoretically be beneficial for
national payments as well. Blockchain
technology could therefore serve as a
perfect means for account settlements
within book transfers.
The key benefits would clearly be cost
reductions owing to the elimination
of transactions, and data processing
could be shaped much more efficiently.
International and domestic money
transfers and cross-currency transfers
would become much faster, and a time
and cost reduction due to 24/7/365 real-
time settlement availability, simplified
transactions and automated accounting
adjustments would potentially be possible
via the blockchain and thereby constitute
a major improvement.
At present, the detailed scope of impact
and cost-saving potential in the case of
such well-functioning global blockchain
payment systems is not possible to
estimate because of the unknown
implementation costs for financial
institutions. Also unknown is how
certain banks might delay the process
of implementation by resisting changes
owing to the fear of losses in chargeable
transaction fees.
Ripple Labs,4 a San Francisco-based
venture-backed start-up, is currently
doing research in exactly this field.
The self-developed Ripple transaction
protocol (RTXP) can serve as a central
script, which aims at allowing members
of such a network to conduct cross-
currency transactions within 3 to 10
seconds.1) Through RTXP, every member
can take advantage of the lowest prevail-
ing exchange rates, as an open-market
principle creates a competitive set-up
for liquidity providers and guarantees
the lowest exchange rate fees for
transactions. The cryptocurrency Ripple
XRP constitutes an optional bridging
currency between all tradable currencies
and can be used by each member of the
network. Although the Ripple network is
constantly growing and developing, the
scalability of the Ripple protocol and the
usability of the bridging currency have
not yet been tested.
1) Principle can also be beneficial for national
payments and the blockchain can serve as a perfect
mean for account settlements within book transfers.
Figure 9: Example of an international payment transaction with a blockchain; source: European Payments Council (2015), Ripple (2015), expert inter-
views (2015) and analysis results, own illustration based on expert interviews (2015) and analysis results
Banks are veried partners within a peer network that
uses a private Block-chain solution with private keys.
Each member of this Block-chain platform can send funds
and information directly to other members, open market
principle guarantees lowest exchange rate fees.
Information and back-oce data is saved and integrated
into each block of transaction.
Ripple transaction protocol (RTXP) can serve as a central
protocol which allows members to conduct cross-currency
transactions in 3 to 10 seconds.
Company A (USA) needs to make a payment to company
B (Japan) – company A requests its bank (bank A – USA) to
send a U.S. dollar payment to company B
Bank A directly executed the fund transfer to bank D via
the Blockchain protocol (information and back oce data
is stored in the blockchain)
Company B has an account with bank D and receives the
funds
Bank B
(USA)
Bank C
(USA)
Bank D
(Japan)
Bank A
(USA)
Company A
(USA)
Company B
(Japan)
1
2
3
1
2
3
External Document © 2016 Infosys Limited12
Promising examples on their
way.
Although applied use has begun, the
overall process of blockchain im-
plementation within payments is still
focused on prototype testing.
Nevertheless, potential areas of appli-
cation increasingly arise.
Some examples from FinTechs as well as
banks:
Bitpay, an Atlanta-based start-up,
allows customers to accept payments
in bitcoin and to receive funds
directly into their bank accounts.
SatoshiPay, a Berlin-based start-
up, is investigating the area of
nanopayments via the blockchain,
and early results suggest complete
new service models like the propor-
tional payments for magazine article
paragraphs.
BNP Paribas is currently testing
an internal bitcoin integration in
currency funds.
The Royal Bank of Scotland is
about to start a pilot Ripple protocol
program.
Citibank and UBS are currently
developing and testing their own
cryptocurrencies.
The German Fidor Bank has
established a partnership with Ripple
Labs to provide customers with
money transfer services in multiple
currencies at a lower cost.
Moreover, banks are heavily investing
in and collaborating with FinTechs, as
they are known for having a deep
understanding of the technology, while
establishing additional internal research
labs. Networks of FinTechs, banks and
other financial institutions are emerging
and growing as players understand
that joint research and testing of the
technology is most efficient. R3 CEV,
probably the most popular FinTech and
consisting of more than 50 different
financial companies, is currently setting
up a hermetically sealed market and
ecosystem to test-run products and
processes in various fields. Financial
institutions like SWIFT and VISA realized
that their business models might be
soon in grave danger and are engaging
in research so as to play a major role in a
potential future of blockchain processes.
Regulators are aware of the technology’s
potential to solve problems within
regulation itself and strongly focus on
requirements within global transaction
banking in the course of piloting and
implementation. The urgency of the need
for action is growing.
What’s next?
A broad implementation and use of the
blockchain technology would change
and disrupt the financial services industry
and payment systems on an international
scale. Processes would alter in terms of
time required, and the revenue models
of many financial institutions might
become obsolete. The technology has
the power not only to shape payment
and settlement processes more rapidly,
cheaply and safely, but also to redefine
the entire system of international money
transfers. However, to ensure broad use
in the future, major limitations need to
be addressed, and the properties of the
technology have to be further developed
and improved.
External Document © 2016 Infosys Limited 13
2) Trade finance.
The International Chamber of Commerce
(ICC) estimates that today between 80%
and 90% 5 of international trade uses trade
finance products. In absolute figures, this
percentage corresponds to a trading
volume of around $14 trillion.6 Hence, the
slow pace of innovations in trade finance
is surprising. This lag is mainly due to the
lack of technological solutions to some of
the core problems in international trade:
Manifold risks inherent in international
trading contracts can result in insecurity,
mistrust and low trading volumes. In
addition, long distances, different
languages and the unknown solvency of
the trading partners all hamper the flow
of goods across borders. These challenges
create the need for financial products
that provide adequate levels of both
security and liquidity. As financial services
aim at balancing differences between
trading partners and at minimizing risks,
Bolero is a platform-based trading en-
vironment that allows trusted parties
to exchange documents online while
adhering to an internal ‘rule book’.
7
Although this network is over 12 years
old, with 6 million trade documents
per year worth 80 billion USD of trade
transactions.
Figure 10: Bolero platform; source: Own illustration based on Bolero (2015) and expert interviews (2015)
banks are backing trade relations with
guarantees,
insurance on open account
transactions,
standby letters of credit (SBLC)
and payment promises like the
letter of credit (L/C).
For centuries, the core of these products
has been the same. Processes are still
manual and largely based on paper
documents. Despite its immense value
for the creation of trust between trading
partners, the L/C has lost in significance
because it could not keep pace with the
increased speed in trade transactions. It
is surprising, for instance, that now the
possessor of a bill of lading (B/L), which
is a paper document, has the power of
disposition over the traded goods. In
large part, international trade is therefore
processed on an open account basis,
which implies either an increase in cost
or insecurity for the trading partners in
comparison to the L/C.
Nonetheless, digitization has begun
to make its way into trade finance and
has generated first attempts to reduce
costs and cycle times. Examples of this
development are the company Bolero
and the bank payment obligation (BPO)
(see Figure 10 and 11).
Despite the progress to date, a break-
through innovation in this segment
is still to come. Currently no solutions
exist to core problems, such as a digital
representation for the transfer of
ownership or an automated checking
of L/C conditions. Fraud via double
financing or the scarcity of trade finance
products in developing and emerging
markets are further issues that cannot
be fixed with the limited closed-shop
architecture of current digital products.
BANKS
FREIGHT CARRIER
EXPORTER
IMPORTER
BOLERO PLATFORM
B/L
L/C
External Document © 2016 Infosys Limited14
No trade-offs – speed and
security combined.
To deliver noticeable value, blockchain-
based solutions have to address the
different needs of trading partners,
financial institutions and freight carriers.
Moreover, certain legal and technological
requirements must be met. Especially for
trading companies, low barriers to entry
like the elimination of fixed costs are
important to allow widespread adoption.
High security and privacy standards are
also a basic prerequisite in international
trade. Beyond that, the trading sector – or
at least parts of it – is in need of a means
to eliminate counterfeit products from
international markets. Standard trade
finance products are usually characterised
by a trade-off between low cost and
high security. Now, for the first time, a
technology can overcome this trade-
off while offering the possibility of
collaboration in a secure way over long
distances at low process-related costs.
Figure 11: BPO framework; source: Own illustration based on SWIFT (2015), ICC (2014), Wolf (2013)
The BPO is a young, promising bank-
to-bank instrument, supported and
developed by the ICC and SWIFT. An ICC
standard for this instrument (URBPO) was
introduced in 2013. The product is based
on an inter-banking communication
platform called the trade matching
application (TMA).
The core of the TMA is a matching process
of predefined trade data (the ‘baseline’)
and B/L data. The match allows the
obligor bank to guarantee the payment
(i.e. issue the BPO) to the recipient bank,
and the sending of a paper-based B/L is no
longer required. Currently, the BPO is said
to be the most advanced digital product
in trade finance.
There are two major requirements
though, that have to be met for
blockchain technology to show its full
potential:
Financial services requirements: From
the financial services perspective, it is
critical to create a global marketplace for
the offering of trade finance products.
Such an open-shop solution would
intensify competition, efficiency and
product transparency. Moreover, a
flawless exchange between financial
institutions, like trade with guarantees,
payment titles, loans, securities, would
provide space for the optimization of risk
strategies and liquidity management. An
improvement in current processing is also
urgently needed. Today, for example, the
operational processing of a L/C consumes
considerable time owing to manual
work and bureaucracy. A reduction
in those efforts would decrease cycle
times and improve the cost structure
of trade finance products. However,
the abolition of paper documents
and the implementation of digital
equivalents would have advantages
beyond process efficiency. The ability
to guarantee the origin and uniqueness
of an invoice and its associated
asset would dramatically reduce the
damage caused by double financing.
Legal requirements: Concerning the
legal framework of possible blockchain
solutions, existing laws and standards
will inevitably be transferred to the
blockchain. Adherence to common
trading standards, like ICC UCP 600
for the L/C, and legal standards would
increase the probability that such a
platform or blockchain-based products
are accepted by a broad audience.
Therefore, during the development of
such solutions, integration of important
trading institutions should be considered,
for example ICC, IMF, WTO or the World
Bank.
B/L
Sales Contract
Create „Baseline“
Receive
Data Match
Insert
B/L Data
Request
BPO
Request
BPO
Freight
Carrier
ExporterImporter
Obligor
Bank
Trade Matching Application (TMA)
1. Creation of „baseline“
2. Data match (document against baseline)
Recipient
Bank
BPO
External Document © 2016 Infosys Limited 15
Possible use cases in trade
finance.
Asset tracking is one of the use cases that
can be implemented in many different
ways. Having an asset with a unique serial
number secured in a blockchain can
guarantee authenticity and origin of a
good. The buyer of a good can verify the
serial number against the immutable data
in the database and can be sure of having
a genuine product. Especially industries
in which counterfeits are common, such
as the medical sector, could strongly
benefit from the creation of a secure
product history. For industries with
opaque production and transportation,
like coffee, cocoa or textiles, blockchain
technology could assist end consumers
in making correct purchase decisions and
in distinguishing, for instance, between
fair and unfair labor practices. Combining
asset tracking with other technologies
and use cases like GPS, RFID or smart
contracts may lead to an advanced,
automated and secure flow of goods.
Smart contracts are a use case that
is likely to become an inherent part
of future trade finance products. The
idea of smart contracts pre-dates
blockchain technology and is simple in
its core. In combination with blockchain
technology, it becomes valuable as an
agreement between two parties and
can be secured in a distributed ledger.
The execution and fulfilment of contract
conditions can ultimately be automated.
Manual document scanning becomes
obsolete and legal conflicts can be
reduced. For a smart contract, a (legal)
condition is transferred into a query that
automatically checks the conditions’
fulfilment. In the case of fulfilment, a
predefined measure, like the transfer of
money or sending of a message, is taken.
Such a signal could be the entry of a
good’s serial number by a third party. For
example, the freight carrier taking over
the goods from the seller could enter this
information into the system and thereby
initiate the payment. An approach like
this could replace the process of sending
a paper B/L from one institution to
another.
Many blockchain use cases imply
that banks or other third parties
become obsolete in their function as
an intermediary or trustee. While the
technology is able to make processes
easier and flawless, in trade finance it is
not able to take over the role of financial
institutions. In cases of default, banks are
still needed to cover the buyer’s or seller’s
investments.
Figure 12: Trade nance products; source: Illustration slightly adapted from ‘BPO - a corporate prospect on supply chain nance’ by M. Diaz / SWIFT (2012)
Risk mitigation security
(payment delay and default risk)
[ HIGH ]
[ HIGH ]
[ LOW ]
[ LOW ]Processing cost (service fees)
Open account
SBLC/
Guarantees
Insurance on
open account
L/C
BPO
Blockchain
Solutions?
External Document © 2016 Infosys Limited16
Current projects:
collaboration is key.
Since blockchain technology becomes
valuable when it is adopted by many
participants, the attempts at collaboration
between start-ups, banks, consultancies
and authorities are promising. An analysis
of all the different projects that are
currently underway reveals that projects
concentrate either on improving a trade
finance product or on solving a specific
value chain problem. Some examples:
Singapore’s DBS Bank 8, for instance,
collaborates with Standard Char-
tered and Infocomm Development
Authority of Singapore (IDA). The
consortium conducted a proof of
concept (PoC) to reduce double fi-
nancing in trade finance (secure
invoicing).
Start-ups like Chronicled, Prove-
nance or Thingchain
9 are using
the idea of asset tracking to reduce
counterfeits, for example in the
sneaker, wine and medical industries.
The Singapore-based start-up Open
Trade Docs 10 aims at digitising trade
documents (e.g. invoices) and se-
curing them in the blockchain. At the
moment, the company is in the PoC
phase with financial institutions.
Wave, a FinTech in Israel and part of
the Barclays Accelerator, works on a
digital, blockchain-based B/L.
The London - based company
Everledger 11 is well advanced in asset
tracking (see Figure 13). The company
secures a unique serial number that
is laser-engraved in a diamond to
guarantee that the stone is conflict-
free. Moreover, origin and ownership
of the stone can be verified. Such a
fingerprint of an asset that is reliable
and secured in a blockchain provides
valuable data for buyers, traders,
insurors and authorities.
Digitising, securing and automating
the L/C are the goals of the company
Skuchain (see Figure 14, page 17). Its
product is called ‘Bracket’, which is an
acronym that stands for ‘blockchain-
based release of funds that are
conditionally key-signed and triggered
by signals’. A federated blockchain,
which is a private blockchain with
trusted external nodes, is the
platform on which all parties can
interact and use the bracket. The
bracket is basically the transfer
of the sales contract conditions,
especially delivery and payment, to
smart contracts. To guarantee high
security, the smart contracts are
additionally secured in the bitcoin
blockchain. The most remarkable
aspect of Skuchain is its collaboration
with banks for the automating of
payments.. The company established
an interface between the crypto
world of blockchain and the previous
world of fiat currencies. The verified
information (‘signal’) that is entered
into the database, like the B/L data,
causes real transactions between bank
accounts.
Although the currency may not have a
great future for trade finance, the bitcoin
blockchain is still the largest and thus the
Figure 13: Everledger’s diamond tracking process; source: Own illustration based on expert interviews (2015) and Everledger (2014)
ASSET TR ACKING PROVIDES VALUABLE DATA FOR
· Owners (proof of ownership)
· Wholesalers and retailers (provenance)
· Banks (in the case of nancing)
· Insurances and authorities (fraud/theft detection)
The diamond receives a non conict cer-
ticate (adhering to the Kimberly Process/
system of warranties).
After the extraction of the diamond about
40 data points are determined that make
the diamond unique.
A unique serial number is created and
laser engraved on the girdle.
The asset as well as its history is secured
in the bitcoin blockchain.
The principle is transferable to any kind of
asset with a serial number.
REVENUE CREATION
· Data access
· Finance and insurance
· Search/Recovery fees
· Licenses for developers
Antwerp, Belgium (diamond
capital where wholesalers and
retailers come together)
. Ownership
. Provenance
. Date of extraction
. 4 C‘s
[…]
Surat, India (90% of global
diamond processing)
DR Kongo (about 25% of
global diamond extraction)
External Document © 2016 Infosys Limited 17
Figure 14: Skuchain‘s Bracket 2) ; source: Own illustration based on skuchain (2015) and expert interviews (2015)
2) Bracket = Blo ckchain based Release of funds that Are Conditionally Key si gned and Triggered by signals
most secure distributed ledger. Therefore,
many FinTechs use it to secure their data
with bitcoin transactions. The sidechains
of the bitcoin blockchain or the colored
coin principle are favoured for consigning
contract conditions or tracking assets.
What’s next?
At the current stage, it is hard to predict
who of the different players will be
successful and whether it is possible to
establish an international blockchain
platform for the exchange of documents
and trade finance products. Success of
individual companies will strongly depend
on effective networking and openness
to collaboration. Most of the currently
promising projects are based in some way
on collaboration models, and banks will
have to accept that expertise and deep
technological understanding cannot
be found solely in-house. In contrast,
FinTechs are in need of the customer base
and the industry knowledge of financial
institutions.
At the moment, many banks are exploring
ways to make use of the technology and
its possibilities. Only a few presently
emphasize trade finance. Some financial
institutions have taken an observer
position, waiting for the right time
to invest. However, the wait and see
strategy appears risky as the know-how,
which is currently building, becomes
more valuable. The entire FinTech and
blockchain environment is fast-moving,
and according to several experts, block-
chain technology will reach mass
suitability within the next 5 to 10 years.
During the maturing of the technology,
a market entry could become costlier.
Current projects will stabilize and start to
generate revenues, leading to an increase
in investments in start-ups, infrastructure
and know-how. In addition, major trade
institutions like the ICC and the WTO
will approach blockchain technology
on a broader level. As a result, banks
should now closely monitor current
and future market developments. Each
institution must analyze whether and
how the technology can help or how it
could interfere with existing products and
processes. A successful implementation
will require combining technological
expertise with industry understanding
and critically analyzing potential
application areas.
Bitcoin blockchain
(public blockchain)
Sidechain
(public blockchain)
Securitization of the
contract conditions
(„Smart contracts“)
Asset tracking and automated, signal induced triggering of payments and
information-ow. A price advantage of 90% is possible (company statement)
Digitization
(„Bracket“)
Provision of trust
for many use cases
besides bitcoin
Federated blockchain
(private blockchain with trusted nodes)
Bank | bank account
Freight carrier
Bank | bank account
Importer
Exporter
B/L
Sales
contract
External Document © 2016 Infosys Limited18
BANKS: Back oce makeover and re-
duction of transaction costs related
with contracting
CUSTOMER: By shortening the settle-
ment time, liquidity risk is reduced and
thereby capital freed up
3) The over-the-counter
market.
Currently, a major business area on
which significant attention is focused
is investment banking, especially appli-
cations in the over-the-counter (OTC)
market. Implementation of the blockchain
technology within investment banking
would entail major changes for large
financial institutions and potentially make
several market participants obsolete.
Over-the-counter trading constitutes
a major business area of investment
banking departments and involves the
trade of all kinds of financial products
without any third parties, such as the
exchanges. In the next few years, the
global OTC derivatives market is expected
to shrink slightly, whereas the OTC trade
of traditional products such as shares and
fixed-income securities is expected to
grow steadily (Figure 15).
The recent financial crises forced regu-
lators in the United States and Europe
to increase market transparency and to
reduce the risk of market procedures.
Measures such as the Dodd-Frank Act
in the U.S. tightened regulations and
stipulated the involvement of the central
clearinghouse counterparty in a bulk
share of the trades. On the one hand, the
new regulations confer specific benefits
for the participants, but on the other
hand, they increase the complexity of
the OTC market. The value added along
the value chain of the OTC trading shifts
from the investment banks to the newly
implemented third parties. However,
reliance on trusted third parties for
validation increases the complexity of
the system and clients’ costs rise owing
to an extended number of market
participants that have to be rewarded.
To comply with the requirements,
banks and other financial institutions
have to maintain extensive back offices
to manage processes and to monitor
contracts. Even though the integration
of a Central Counterparty Clearing House
(CCP) transferred the counterparty credit
risk to the intermediary, customers still
face liquidity risks, as the settlement
time generally amounts to three days
maximum (“T+3”) and ties up large
amounts of capital. Moreover, financial
contracts can be subject to fraud or third-
party inference.
Efficient markets and
reshaped business models.
By implementing blockchain technology,
market participants could not only
eliminate inefficiencies but also reshape
business models by exploiting its main
potentials, as shown in Figure 16.
Besides simplifying the market, the
Figure 15: OTC trades of equities and FICCs (2015 F - 2018 F, in bn USD ; source: Illustration adapted
from ‘Wholesale & Investment Banking Outlook’ by Austen, M. et al (2013) / Morgan Stanley and
Oliver Wyman
Figure 16: Blockchain potential for OTC market participants; source: Own illustration based on Accenture (2015), H. Shadab (2014) and analysis results
Elimination of the credit and market risk
by requiring prefunding prior to trading
Computer protocols monitor the perfor-
mance of a contract and assess the need
for contractual clauses
Contracts without downtime, censorship,
fraud or third party interference
Execution is open to the internet and
automatic settlement
Decentralized exchange –
not reliant upon intermediaries for
validation or custodians
Virtual markets are independent from
the nancial hierarchy
+57%
6 8
3
20 15 F
Main potentials for market participants
Equities
FICC
2018 F
1
7
11
Elimination of
the trusted third
party (TTP)
Smart contract
Cost savings
Smart controls
External Document © 2016 Infosys Limited 19
technology enables the implementation
of smart contracts in the OTC markets as
well as already seen in trade finance. The
requirements for a mass implementation
and use can be distilled into three
broadly defined categories: legal aspects,
technological aspects, and institution-
specific aspects. The legal aspects present
the major hurdle for most participants.
Legal requirements: So far, regulators
and other judicial institutions have
reacted in a reserved manner concerning
the blockchain technology. Fundamental
measures in this field include the
adjustment of the current legal framework
to the distributed ledger framework and
the establishment of a legal environment
that regulates either the transition from
traditional contracts to smart contracts
or their coexistence. Besides the basic
framework, another major hurdle is the
implementation of financial contract
specifications as pre-trade agreements
and further individual contract conditions.
Technological requirements: Complex
market conditions impose high tech-
nological requirements. The examples
presented in the following discussion
are illustrative of the biggest current
challenges. First, the implementation
of non-digital native assets must be
based on standardized terms. Since the
introduction of a CCP allows a position
netting of a customer, the new technology
should also include the ability to operate
nettings among different customers.
Moreover, market participants want to
make use of margin finance and trade
assets without possession. Additionally,
the speed of confirmation has to be
aligned with the speed of the settlement.
Both processes should take place
simultaneously without one lagging
behind the other.
Institution-specific requirements: Each
institution faces individual challenges,
which require in particular a redesign of
the technological architecture. Internal
risk, price and capital models currently
do not align with the conditions imposed
by the implementation of the blockchain
technology.
The technology’s advantages can already
be observed in the form of first-use
cases. One example is Nasdaq 12, which
implemented the blockchain technology
Linq on its stock exchange for private
stocks in the field of pre-IPOs, making
Linq the first blockchain-based platform
for trading and managing private shares.
The implementation of the technology
simplifies the issuance, cataloguing and
recording of shares of privately held
companies.
Nasdaq also uses a more advanced bitcoin
protocol that enables the coloring of
bitcoins (Figure 17). Coloring bitcoins
turns them into tokens that represent
private shares.
The platform is based on the principle
of plain bitcoin transactions that satisfy
additional requirements of contract
details. This case constitutes an ideal
example of how investigators currently
operate. Linq can only be accessed by
a narrowly selected circle of investors
and therefore is classified as a private
blockchain. With this use case, Nasdaq
addresses especially customers that are
open to innovation.
Figure 17: Conception of NASDAQ’s Linq; source: Own illustration based on Rizzo, P. / Coindesk (2015), Kaminska, I. (2015), Nasdaq (2015), Rosenfeld
(2012), expert interviews (2015) and analysis results
Usage of the
„Coloring bitcoins“ protocol
Method
By coloring bitcoins, they will be
turned into tokens that represent
a private share
Displaying the information about the private shares
on the so called ExactEquity
Token Private
shares
Concept
Nasdaq Linq leveragesthe blockchainto facilitate the issuance, cataloging and
recording of transfers of shares of privately-held companies
IMPLEMENTATION
· Colored bitcoins is entirely built on
top of the infrastructure of bitcoin
· Tokens = bitcoins that can be traced
back to a particular output
· Transactions are recognized as normal
transactions (like bitcoins), but must
satisfy additional requirements of,
e.g. contract details
External Document © 2016 Infosys Limited20
Promising signs –
big revenues for FinTechs.
In the field of OTC trading, several FinTechs
are investigating protocols that are more
appropriate than the early versions of
the bitcoin protocol or are exploring the
adaptation of the technology in many
different areas. At present, Ethereum
seems to be the most suitable protocol
for future application in the OTC trading
market. 13 However, a more open protocol
than Bitcoin is exposured to higher
risks. Recently, the Ethereum protocol
was victim of a hacker attack with a
reported damage of around 50 million
USD . Besides searching for the most
appropriate protocol, the participants are
experimenting with various applications
on so-called ‘private chains. On private
chains, new applications are tested in
a delimited area with specific verified
participants. Besides following the trend
toward private chains, FinTechs are
concentrating on a lean enhancement
of the current system, for example to use
in the record-keeping of shares. These
institutions try to redefine the OTC trading
market step by step by following a bottom-
up approach rather than by seeking a big
bang revolution. The landscape is very
broad, and within the field of applications,
several startups are already going live
and operating successfully. Some of
the more than 40 promising FinTechs
are generating revenues. The urgency
for action is growing and it is generally
known that all big investment banks, such
as Goldman Sachs, UBS, and Credit Suisse,
are exploring ways of using blockchain
technology in the OTC market, which
clearly illustrates the importance of the
topic.
UBS acquired the start-up Clearmatics14
and is currently testing a platform
that would allow members to settle
their security trades and automate the
performance of derivatives and other
financial contracts with the decentralized
clearing-network technology. Deutsche
Bank announced recently that it will
undertake similar investigations in the area
of fixed-income products. Furthermore,
several leading banks have founded
research labs to investigate their own use
cases and gain a deeper understanding
of the subject matter. Especially the
big banks seem to concentrate on
investment banking and OTC market
applications. Besides pursuing their
individual aspirations, the world’s largest
banks have formed the blockchain
consortium R3 CEV, in which banks are
setting up a hermetically sealed market
and ecosystem to test-run products and
processes. At the moment, banks seem to
be seeking a competitive advantage by
building valuable networks, and financial
institutions as central clearinghouses
are keeping a low profile. Regulators are
aware of the blockchain’s potential to
solve problems within regulation itself
and strongly focus on requirements
within the OTC market in the course of
piloting and implementation. However,
restriction by regulation can significantly
diminish the dispersal of the technology.
What’s next?
The multiple benefits of the blockchain
technology are particularly attractive for
business models of players within the OTC
market. Besides transforming the market
infrastructure, the technology could
redefine the system of the OTC market
and the functionality of financial contracts
as a whole by introducing smart contracts.
To revolutionize the financial industry,
major limitations need to be overcome,
and the properties of the protocols have
to be further developed and improved to
ensure broad use. In the current stage, the
potential to fulfil all previously described
requirements is questionable. In particular,
legally binding statements are missing.
In this early stage in the design process,
participants should seek to form consortia
and work hand in hand with responsible
regulators, like the Bank of England, which
have partially signaled their openness to
the blockchain technology. However, if
the participants fail to collaborate with the
regulators, restrictions could significantly
diminish the dispersion of the technology.
Especially large investment banks require
favourable regulations for their operations
in the area of blockchain technology.
EDC 15 is a Toronto-based startup facili-
tating the creation and exchange of private
shares on a peer-to-peer platform. Hitfin 16,
a San Francisco-based startup, is building
a vertically integrated trading platform
that enables market participants to settle
complex customized financial contracts
without the need for intermediaries and
with limited counter-party risks.
Conclusion and outlook.
Distributed ledger and blockchain
technology has the potential to be
disruptive, as it could completely change
processes and systems within financial
services. The technology could remove
trusted third parties, decrease costs and
ultimately increase profits for various
players within the industry. However, it is
not a one-size-fits-all solution, as potential
use cases need to fit to the technology’s
specific characteristics and requirements.
Currently, research is discussing whether
public or private blockchain networks are
more appropriate for business use cases.
Although public blockchains provide
high data security and transparency,
they are relatively slow if a high
number of transactions needs to be
processed. Private blockchains instead
enable higher transaction speeds and
more privacy but often come along
with lower security standards. Since
both network architectures have their
unique advantages and disadvantages,
experts predict that private and public
blockchains are about to merge in the
future. Furthermore, the technology is
still in an early stage and has to prove
itself in practice. The time horizon for the
technology’s availability for broad use in
financial services is estimated to be 5-10
years.
The technology holds strong potential for
many areas of financial services. In the field
of payment transactions, it could reshape
the current correspondent banking
processes and lead to cost savings. In trade
finance, the blockchain could induce the
urgently needed digital transformation. It
improves the segment by providing trust,
security, risk mitigation and fast pro-
cesses at low costs. In over-the-counter
markets, the technology has the potential
to redesign the market infrastructure
and lead to the elimination of obsolete
market participants. Moreover, it could
enable the automation of contracts and
facilitate cost savings through lean back-
office processes. The presence of many
use cases in these areas substantiates
their high potential. Segments such as
External Document © 2016 Infosys Limited 21
the lending business, insurance, real
estate and factoring are further promising
areas, but research still needs to provide
concrete implementation concepts.
The near future will show whether market
participants will be able to draw on the
disruptive potential of blockchain
technology and create successful new
business models. One major requirement
and challenge while creating and
redefining these new business models
is to manage the transition phase from
old to new processes that incorporate
blockchain solutions efficiently. One
way of achieving this will surely be the
cooperation with regulators in order
to establish the legal framework that is
urgently needed.
Management
summary
Distributed ledger and blockchain
are about to cause major business
transformations in the financial
industry.
Three very promising fields of appli-
cation are payment transactions,
trade finance and the over-the-
counter market.
In all of these areas, first projects
and deployments can be seen.
However, all of them are in a very
early stage and have to prove their
benefits in practical use. Should
blockchain prevail in practice, it has
the potential to disrupt traditional
business models and make existing
players obsolete. This is especially
true for trusted third parties.
Besides technical challenges that
have yet to be overcome, the lack
of a legal framework for the use of
blockchain technology is currently a
major obstacle.
Many market participants are ex-
ploring ways of using blockchain,
among them established institutions
and start-ups alike.
Banks should now closely moni-
tor current and future market
developments.
According to several experts, block-
chain technology will reach mass
suitability within the next 5 to 10
years.
External Document © 2016 Infosys Limited22
Notes
1) Accenture. (2015). Distributed Consensus Ledger for Payments. Retrieved January 10, 2016, from https://www.accenture.com/t20151002T010405__w__/us-en/_acnmedia/
Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-Banking-Distributed-consensus-ledgers-payment.pdf
2) Greenwich Associates. (2015): Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets
3) McKinsey & Company. Global Payments 2015: A Healthy Industry Confronts Disruption
4) Ripple. (2015). http://www.ripple.com/.
5) ICC (2014). ICC Trade Register Support. Summary. Global Risks in Trade Finance. Retrieved from: http://www.iccwbo.org/News/Articles/2014/Global-trade-set-to-benefit-from-ICC-report/
6) Calculated on the basis of global trade volume of 16.5 trillion USD in 2015 and the trade finance coverage figure from ICC (80-90%). Global Trade Volume: World Trade
Organization (WTO).(2016). “Trade growth to remain subdued in 2016 as uncertainties weigh on global demand”. Retrieved August 16 2016, from https://www.wto.org/
english/news_e/pres16_e/pr768_e.htm
7) Bolero International. (2015). About Us / Solutions / Services / Customers. Retrieved December 5, 2015, from http://www.bolero.net/
8) Global Trade Review (GTR). (2015). Banks develop blockchain platform for trade finance. Retrieved from: http://www.gtreview.com/news/asia/banks-develop-blockchain-
based-platform-for-trade-finance/
9) See company websites: http://www.chronicled.com/, https://www.provenance.org/, https://www.skuchain.com/
10) See company website: http://otdocs.com/
11) See company website: http://wavebl.com/
12) See website: http://www.nasdaq.com/press-release/nasdaq-announces-inaugural-clients-for-initial-blockchainenabled-platform-nasdaq-linq-20151027-00986
13) Source: http://www.zeit.de/digital/internet/2016-06/the-dao-blockchain-ether-hack.
14) See website: http://www.clearmatics.com/
15) See website: http://equibit.org/
16) See website: http://www.hitfin.com/#settlement
Illustrations
Accenture. (2015). Distributed Consensus Ledger for Payments. Retrieved January 10, 2016, from https://www.accenture.com/t20151002T010405__w__/us-en/_acnmedia/
Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-Banking-Distributed-consensus-ledgers-payment.pdf
A.T. Kearney (2013); Winning the Growth Challenge in Payments
Austen, M., et al, (2013, April 11). Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications. Retrieved January 10, 2016, from http://www.oliverwyman.
de/content/dam/oliver-wyman/global/en/files/archive/2013/Outlook_for_Wholesale_and_Investment_Banking_2013.pdf
Bitcoin. (2015). Block hashing algorithm. Retrieved January 10, 2016, from https://en.bitcoin.it/wiki/Block_hashing_algorithm
Bolero International. (2015). About Us / Solutions / Services / Customers. Retrieved December 5, 2015, from http://www.bolero.net/
Diaz, M.-C. (2012). BPO - a corporate perspect on supply chain finance (Presentation at Eurofinance Monaco). SWIFT, Monaco.
ECB. (2015). Virtual currency schemes – a further analysis. Retrieved January 10, 2016, from https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf
European Payments Council. (2015). Ripple: an Internet Protocol for Inter-bank Payments.
Everledger. (2014). Insurance fraud is a global problem. Retrieved November 23, 2015, from http://www.everledger.io/
Goldman Sachs. (2014). All about Bitcoin. Retrieved January 10, 2016, from http://www.paymentlawadvisor.com/files/2014/01/GoldmanSachs-Bit-Coin.pdf
ICC International Chamber of Commerce. (2014). Bank Payment Obligation (BPO) Frequently Asked Questions for Banks. Paris.
Kaminska, I. (2015). Blockchain promises back-office ledger revolution . Financial Times.
Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved January 10, 2016, from https://bitcoin.org/bitcoin.pdf
NASDAQ OMX Newsroom - Press Release. (2015, May 11). Retrieved January 4, 2016, from http://www.nasdaqomx.com/newsroom/pressreleases/pressrelease?messageId=1361706
Ripple. (2015). http://www.ripple.com/.
Rizzo, P. (2015, November 21). Inside Linq, Nasdaq’s Private Markets Blockchain Project. Retrieved January 10, 2016, from http://www.coindesk.com/hands-on-with-linq-
nasdaqs-private-markets-blockchain-project/
Rosenfeld, M. (2012, December 4). Overview of Colored Coins. Retrieved January 10, 2016, from https://bitcoil.co.il/BitcoinX.pdf
Royal Bank of Scotland, Capgemini. (2015). World Payments Report 2015.
Santander. (2015). He Fintech 2.0 Paper: Rebooting financial services. Retrieved January 10, 2016, from http://santanderinnoventures.com/wp-content/uploads/2015/06/The-
Fintech-2-0-Paper.pdf
Shadab, H. B. (2014). Regulating Bitcoin and Block Chain Derivatives. Retrieved January 10, 2016, from http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/
gmac_100914_bitcoin.pdf
skuchain. (2015). Connect to the Commerce Cloud. Retrieved November 22, 2015, from http://www.skuchain.com/
SWIFT. (2015). Market adoption of BPO. Retrieved November 28, 2015, from https://www.tradefinance.training/library/files/BPO%20Market%20Adoption%20Aug2015.pdf
US Department of Treasury (2007). Fundamentals of the funds transfer process. Washington, D.C.
VISA (2006). The Inefficiencies of Cross Boarder Payments, Retrieved December 20, http://euro.ecom.cmu.edu/resources/elibrary/epay/crossborder.pdf.
Wolf, F. O. (2013, October). Die Bank Payment Obligation (BPO) im Außenhandel. Exportmanager-Online.
External Document © 2016 Infosys Limited 23
About the authors
Dr. Eric G. Krause
is a Partner with Infosys Consulting, the
global Management Consulting Firm of
Infosys. Eric is responsible for Financial
Services in Germany. He holds a doctoral
degree from Universität St. Gallen (HSG), CH.
Denny Nack
is a full-time Master in Management
student at HHL Leipzig Graduate School
of Management. He holds a Bachelor of
Science degree in Business & Economics
from the University of Technology
Dresden. Furthermore, he completed
exchange semesters at Shanghai Jiao
Tong University and The University of
Wolverhampton. Throughout his studies,
he majored in the fields of strategy,
supply chain management and IT.
He gained working experience in
strategy consulting, IT consulting as well
as auditing with an emphasis on the
automotive industry.
Jun.- Prof. Dr.
Vivek K. Velamuri
is the Schumpeter Junior Professor for
Entrepreneurship and Technology Transfer
at the HHL Leipzig Graduate School of
Management, Germany. He holds a doctoral
degree from Friedrich Alexander University of
Erlangen-Nuremberg, Germany.
Moritz Schmidt
is a full-time Master in Management
student of the HHL Leipzig Graduate
School of Management and has conducted
two semesters in the Master in Finance
program at EADA. Moreover, he holds a
Bachelor degree of the Cooperative State
University Mannheim with a major in
Banking and Finance.
He conducted his full-time study program
in combination with a vocational training
as a bank management assistant for
Deutsche Bank. During his master studies,
he gained experiences in the consultancy
sector for financial services.
Tobias Burghardt
is a full-time Master in Management
student at HHL Leipzig Graduate School
of Management with the focus on finance,
accounting and strategy. He did his
Bachelor of Arts in Business Administration
at the University of Applied Sciences in
Zwickau. In the course of his studies he
absolved an exchange semester at the
University of Borås and a term abroad at
the Indian Institute of Management in
Bangalore.
Tobias Burghardt has experience in the
fields of investment banking, strategy
consulting, restructuring and international
project management.
Tobias - Micha
Treder
is a full-time Master in Management
student at HHL Leipzig Graduate School
of Management with the focus on
finance, accounting and strategy. After his
bachelor studies he gained experience as
a financial controller in vehicle financing
and leasing at Société Générale Group in
Hamburg. Moreover he worked in project
management and business development
within automotive industry in Stuttgart.
He holds a B.A. in Business Administration
from HSBA Hamburg School of Business
Administration and is a management
assistant in wholesale and foreign trade
(IHK).
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August 2016
... The benefit would aid huge costs savings using smart contracts. The settlement risks can be eliminated by block chains to reduce the period of settlement (Krause et al., 2016). ...
... The revenue of large financial institutions are contributed by Over-the-counter which would involve the trading of financial products without any third parties, such as the exchanges (Krause et al., 2016). The disruptive impact of technology in investment advisory firms is least studied and with firms implementing superior technology, the other players in the industry must be competitive to sustain in the industry. ...
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Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications
  • M Austen
Austen, M., et al, (2013, April 11). Wholesale & Investment Banking Outlook Global Banking Fractures: The Implications. Retrieved January 10, 2016, from http://www.oliverwyman. de/content/dam/oliver-wyman/global/en/files/archive/2013/Outlook_for_Wholesale_and_Investment_Banking_2013.pdf
Insurance fraud is a global problem
  • Everledger
Everledger. (2014). Insurance fraud is a global problem. Retrieved November 23, 2015, from http://www.everledger.io/
Accenture-Banking-Distributed-consensus-ledgers-payment Winning the Growth Challenge in Payments
  • Accenture
Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Dualpub_22/Accenture-Banking-Distributed-consensus-ledgers-payment.pdf A.T. Kearney (2013); Winning the Growth Challenge in Payments
Banks develop blockchain platform for trade finance
Global Trade Review (GTR). (2015). Banks develop blockchain platform for trade finance. Retrieved from: http://www.gtreview.com/news/asia/banks-develop-blockchainbased-platform-for-trade-finance/
Overview of Colored Coins
  • M Rosenfeld
Rosenfeld, M. (2012, December 4). Overview of Colored Coins. Retrieved January 10, 2016, from https://bitcoil.co.il/BitcoinX.pdf Royal Bank of Scotland, Capgemini. (2015). World Payments Report 2015.
Die Bank Payment Obligation (BPO) im Außenhandel
  • F O Wolf
Wolf, F. O. (2013, October). Die Bank Payment Obligation (BPO) im Außenhandel. Exportmanager-Online.
He Fintech 2.0 Paper: Rebooting financial services
  • Santander
Santander. (2015). He Fintech 2.0 Paper: Rebooting financial services. Retrieved January 10, 2016, from http://santanderinnoventures.com/wp-content/uploads/2015/06/The-Fintech-2-0-Paper.pdf
Regulating Bitcoin and Block Chain Derivativescftc.gov/idc/groups/public/@aboutcftc/documents/file/ gmac_100914_bitcoin.pdf skuchain Connect to the Commerce Cloud Market adoption of BPO Fundamentals of the funds transfer process
  • H B Shadab
Shadab, H. B. (2014). Regulating Bitcoin and Block Chain Derivatives. Retrieved January 10, 2016, from http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/ gmac_100914_bitcoin.pdf skuchain. (2015). Connect to the Commerce Cloud. Retrieved November 22, 2015, from http://www.skuchain.com/ SWIFT. (2015). Market adoption of BPO. Retrieved November 28, 2015, from https://www.tradefinance.training/library/files/BPO%20Market%20Adoption%20Aug2015.pdf US Department of Treasury (2007). Fundamentals of the funds transfer process. Washington, D.C.