Blockchain technology may well be the most transformative technology in a generation. And as the potential use cases have become mapped out, financial firms around the world have spent the past few years investigating how the technology can disrupt banking.
Banks playing around with blockchain—or distributed ledger—technology isn’t completely new. The World Economic Forum noted that the Bank of England published the first research report on blockchain by a central bank way back in 2014. And in 2015 Bank of New York Mellon Corp BK 0.97% created its own digital currency, BK Coins, as a reward system for its IT employees. That same year, UBS 1.35%, USAA and CBW Bank all began investigating the applications of blockchain.
But as more banks have dipped their toes in the blockchain waters, they’ve begun teaming up to test potential solutions together.
On the question of cross-border payments, 344 banks have signed an intent to join JPMorgan Chase & Co.'s JPM 0.31% Interbank Information Network (INN), a project launched in 2017 and powered by Quorum, a JP Morgan-developed variant of the Ethereum blockchain. Participants include some of the biggest banks in the world, and the Financial Times recently reported that 75 additional banks have signed on, including Societe Generale and Banco Santander SAN 0.34%.
According to JP Morgan, the project is trying to investigate how blockchain can solve the challenges in interbank information sharing, “from minimizing friction in the cross-border payments process to enabling payments to reach beneficiaries faster and with fewer steps.” INN is currently only working on payments denominated U.S. dollars, but is hoping to expand the program into other non-U.S. dollar currencies.
“The pilot programs of blockchain are still in the early innings of the game”, said Darren Conte, founder and CEO of Siftsort.com a secure documents and messaging platform. Conte, a former Goldman Sachs GS 0.75% executive, feels that there are huge benefits to reduce friction, add more security and lower operational costs when implemented across the banking network.
“Initially, banks will focus on the obvious use-cases that present common risks across the industry, for example payments that need to be sent inter-bank or cross-border, where the opportunity for fraud is relatively high. As blockchain adoption matures, you will see more integration into routine customer or backend functions that will focus on speed and accuracy while further reducing operational costs and even headcount.”
Central Bank Pilots
An analysis by the World Economic Forum found that 44 central banks are currently testing blockchain technology.
According to the WEF, more than 60 research papers on blockchain technology have been published by central banks since 2014. Among this group, The Bank of Canada, the Bank of England, and the Monetary Authority of Singapore stand out as having published multiple research reports or conducted multiple studies with blockchain technology.
These pilot programs run the gamut, including interbank securities settlement, bond issuance and lifecycle management, and cash money supply chain. The most notable study however could be the creation of a central bank digital currency (CBDC). As the WEF put it:
“CBDC is a potential application of blockchain and distributed ledger technology (DLT) where the central bank issues new money equivalent to – and redeemable for – its domestic currency, often simultaneously removing the equivalent amount of currency from the money supply. It may be issued for general use (“retail” CBDC) for peer-to-peer payments and payments from consumers to merchants, or for use by commercial banks and clearing houses (“wholesale” CBDC) for more efficient interbank payments that occur outside traditional correspondent banking and other payment systems.”
“One of the huge benefits of blockchain and its distributed ledger technology is that it significantly reduces the dependency on centralized legacy systems that are vulnerable to modern day cybersecurity threats," said Conte.
Other Pilot Programs
Bank of America BAC 0.18% and Mastercard MA 0.67% both recently joined Marco Polo, a consortium including major institutions such as BNP Paribas (OTCQX: BNPQY), Commerzbank (OTCQX: CZRBY) and ING working to reduce barriers to trade.
Wells Fargo WFC 0.14% has also begun a cross-border pilot of its own. The company recently announced its Wells Fargo Digital Cash program. Similar to JP Morgan’s INN, Wells Fargo Digital Cash will be using the bank’s internal blockchain to track payments sent between branches.
Infosys Finacle, a subsidiary of Infosys Ltd INFY 0.33%, announced at the end of September the completion of a five-week trial of its trade finance solution, which involved 18 banks using R3 blockchain technology to test domestic and cross-border trade finance transactions. According to a post-trial survey from the company, two-thirds of respondents believe blockchain can reduce trade finance operational costs by at least 20%.
“Implementing blockchain into the 'Know Your Customer' process would be very impactful from a compliance and regulatory standpoint," Conte added. “Allowing numerous institutions to access or contribute to a client verification journal performed by another institution would help to minimize money laundering or terrorism activities and reduce the exorbitant administrative costs generated within the compliance department."
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