Traditionally financial services industry is known for its extensive and substantial IT systems which some of them have been implemented 20 or 25 years ago. It is not surprising that financial firms have shown a lot of interest regarding the Blockchain technology, which could improve their outdated systems and allow them triggering savings.
Blockchain Added Value:
What is a Blockchain?
- A secure and decentralized information storage technology.
- A database shared by its various users, without intermediaries, allowing each of them to check the validity of the information stored in the chain.
- The data register thus constituted, by aggregating a series of information « blocks », has the property of being unalterable and time-stamped.
What the Blockchain technology will enable?
- To implement more open and secure business network.
- To share a single operating model between all business actors.
- To decrease operational cost.
- To launch new type of products and services.
What are the major benefits for the Banking industry?
- Transparency: It will be a single shared and secured source for network participants with the implementation of mutualized standards and protocols.
- Security: It will minimize the point of failure and reduce the need of data intermediaries (i.e Transfer Agent). The implementation of an application designed to be bulletproof against fraud or external hacking/ manipulation will increase the security of financial transactions.
- Trust: The set-up of a transparent and immutable ledger will help all actors of the business network to collaborate, manage data and reach agreements.
- Privacy: It will enable to select specific data to be shared across every layer of the software. It will allow maintaining a high level of privacy and confidentiality.
- High-Performance: The implementation of private and hybrid networks which will have the capacity to sustain hundreds of transactions per second and periodic surges in network activity
- Scalability: It will support interoperability between private and public chains.
- Programmability: It supports the creation and the execution of smart contracts.
Blockchain Key Concepts:
- Two types of Blockchain can be implemented with their own specific characteristics:
It is logical that the private Blockchain for which responsibilities are better defined has the preference of the banking ecosystem’ actors.
- Token and Smart Contracts are the core features to build a Blockchain based process flow :
What are Tokens?
They are digital assets that can be exchanged between actors in the Blockchain. More precisely, a token allows assigning a unique digital identity to any type of asset or object. The token is the mean by which an asset is represented in the crypto universe.
From a technical standpoint, the issuance of a token is carried out in two ways:
- On a newly developed Blockchain.
- Through a smart contract on an existing Blockchain.
From the moment when an asset exists as a token in the Blockchain, we know:
- That it exists.
- Where it comes from.
- Who owns it.
What are the different types of Tokens?
We can distinguish three types of token:
- Token for “Payment”: They are used as a mean of payment (crypto-money) between actors in the Blockchain but also as a store of value such as the Bitcoin for example. As of today, they are not recognized as a currency by legislators and their conversion is not guaranteed by central banks.
- Token for « Use »: These tokens are used as a mean of payment for specific platforms and applications. Open source communities such as the Ethereum generally develop them.
These two types of token described below are the most popular ones and are used with any contractual counterparty. Their value depends on supply and demand and the law does not limit their ownership and transfer.
- Token of « Asset »: These tokens will replace ownership certificates and titles in the future. The rights and obligations attached to them depend on the type of asset and the applicable legislation. Their possession and transfer are generally regulated and the use of a legal contract is necessary
What are the Smart Contracts?
- They are portions of stand-alone programs that automatically apply the terms and conditions of a contract defined prior to the creation of the channel (triggers), without the need for human intervention once they have been activated.
- This technology can become very useful to allow processes that require the participation and/or validation of several stakeholders to be smoother.
How the Smart Contracts are used?
- The smart contracts have been firstly used in 2015 with the Blockchain Ethereum.
- The “Ethereum smart contracts” are based on a computer language called: SOLIDITY.
- Once the different procedures and conditions of these contracts are coded, they are deployed on Ethereum and executed in the Ethereum Virtual Machine (EVM).
- The EVM is a kind of decentralized operating system in which smart contracts are executed in the Ethereum Blockchain.
Real Use Cases application of Blockchain Smart Contracts:
Overview of the financial activities that could benefit from the Blockchain technology:
The financial industry is recognizing the transformative impact of the Blockchain technology to generate new revenues, deliver process efficiency, improve end-user experience and reduce risks in business operations.
The creativity and disruption in the technological world and in the Fintech environment are sending the signal that a very strong transformation of the Banking industry is already underway. The dynamics of the evolution and the speed at which partnerships are created require the banks to be constantly monitoring and questioning their methods.
Moreover, it is important to notice that the Blockchain technology is still relatively new even if banks and other industries have already starting to invest on it. Besides, it is critical to research and understand what issues may arise before using the Blockchain technology for significant transactions (in terms of regulations and IT capabilities).